Underpricing is one of the most common reasons small businesses struggle. Here’s a straightforward way to set prices that cover your costs and leave real profit.
Step 1: Work out your true unit cost
Add up everything it costs to produce and deliver one unit:
- Materials or stock
- Packaging and delivery
- Labour: time per unit × your hourly rate (yes, your own time counts — work it out with the hourly rate calculator)
- A share of overheads: monthly overheads ÷ units you expect to sell per month
Step 2: Understand margin vs markup
These are easy to confuse, and confusing them costs money:
- Markup = profit ÷ cost
- Margin = profit ÷ selling price
A R60 item sold for R100 has a 66.7% markup but a 40% margin. If you want a 40% margin and add 40% to cost, you’ll only get 28.6%. Use the margin calculator or the markup calculator to convert between them.
Step 3: Include fees that scale with price
Card machines, payment gateways and marketplaces usually take a percentage of each sale. Because the fee grows with the price, you can’t just add it to cost. The correct price (excluding VAT) for a target margin is:
price = (unit cost + fixed fee per sale) ÷ (1 − fee % − target margin %)
If the fee is charged on the VAT-inclusive amount, the fee percentage is effectively multiplied by 1.15. The pricing calculator handles this for you.
Step 4: Add VAT (if you’re registered)
Price for profit on the VAT-exclusive amount, then add VAT on top. At 15%, a R318.30 price becomes R366.05 incl. VAT. Remember the VAT isn’t yours — it goes to SARS (less input VAT you can claim).
Step 5: Check your break-even point
Each sale contributes price − variable cost towards your fixed costs. Divide your monthly fixed costs by that contribution to see how many units you must sell to break even:
| Fixed costs | Price | Variable cost | Contribution | Break-even units |
|---|---|---|---|---|
| R30,000 | R150 | R70 | R80 | 375 |
If that number is unrealistic for your market, you need a higher price, lower costs or a different product mix. Test scenarios with the break-even calculator.
Step 6: Sense-check against the market
Compare your price with alternatives customers actually consider. If you’re more expensive, be clear about why — quality, service, speed, local support. If you’re much cheaper, ask whether you’re leaving money on the table.
Review regularly
Costs change. Re-run these numbers when supplier prices, fees or your volumes change — and at least once a year. The profit calculator gives a quick view of how a price change affects your bottom line.