How to Price Your Products and Services: From True Cost to Real Margin
Many business owners set prices by looking sideways: they check what a competitor charges and land slightly below it. Sometimes that works. Often it hides a loss that accumulates quietly, because the price never covered the real cost. The problem is rarely a lack of nerve to raise prices. It is that the number behind the decision was incomplete from the start.
Why prices come out wrong
Three causes repeat in small and mid-sized businesses:
- Counting only the purchase price, and ignoring freight, clearing, storage and damaged stock.
- Ignoring fixed overheads: rent, administrative salaries, subscriptions, payment-gateway fees.
- Confusing profit margin with markup, which are two very different numbers.
Start from the real cost
Before talking about price, split your costs into two types.
Direct cost
Every riyal spent because of this specific unit: purchase price or raw materials, inbound shipping, packaging, sales commission, last-mile delivery. This is the easy part, and most owners still forget two or three line items in it.
Indirect cost
Expenses that run the business as a whole and belong to no single unit: rent, electricity, the accountant's salary, software subscriptions, maintenance. Allocate them by dividing the monthly total by the number of units you typically sell in a month. The result is each unit's share.
An illustrative example with hypothetical figures for one item:
| Line item | Per unit | Type |
|---|---|---|
| Purchase price | 60 | Direct |
| Shipping and packaging | 8 | Direct |
| Sales commission and collection fees | 4 | Direct |
| Unit share of fixed overheads | 18 | Indirect |
| Total cost | 90 |
If the selling price is 100, the profit is 10, not 40. That gap is exactly what makes a business sell a lot and still run out of cash.
Margin is not markup
This confusion costs more than owners expect. The two formulas:
- Margin = (price - cost) ÷ price
- Markup = (price - cost) ÷ cost
| Cost | Price | Margin | Markup |
|---|---|---|---|
| 80 | 100 | 20% | 25% |
| 75 | 100 | 25% | 33% |
| 50 | 100 | 50% | 100% |
Someone who wants a 30% margin but adds 30% on top of cost actually earns roughly a 23% margin. Agree with your sales team on which number you are all speaking, and write it explicitly into your pricing policy.
Three pricing approaches
- Cost-plus: the simplest and clearest, and it suits repeatable goods and services. Its weakness is that it ignores what the customer is willing to pay.
- Value-based: the price reflects the time or money the solution saves the customer. Good for services and projects, and it requires knowing your customer well.
- Market-based: priced against competitors. Useful as a reference, dangerous as the only rule, because your competitor's cost is not your cost.
The practical combination: set the floor from cost, lift the price with value, and use the market as a final sanity check.
Tax is not part of your profit
VAT is collected on the authority's behalf and remitted to it, so it should never be treated as revenue. Note as well that prices displayed to end consumers are required to be VAT-inclusive. The applicable rates, rules and details are published by the Zakat, Tax and Customs Authority at zatca.gov.sa, and it is worth reviewing them, or checking with your accountant, before changing any price list.
Common mistakes
- Discounting the moment a customer objects, instead of discussing value.
- One price for every customer, despite different order sizes and cost to serve.
- Never revisiting prices after purchase or shipping costs rise.
- Valuing the owner's own salary at zero, which makes profit look larger than it is.
A checklist before approving any price
- Have you captured every direct cost, including delivery and commissions?
- Did you allocate overheads over a realistic unit count, not an optimistic one?
- Is the number you are quoting a margin or a markup?
- Is tax kept out of the profit calculation?
- When is the next scheduled price review?
A price is a decision built on data. If your cost is an estimate, your price is a guess.
The hard part of pricing is not the arithmetic, it is having a current cost figure at hand. When purchase invoices, inventory and expenses live in one system, pulling unit cost becomes a few minutes of work you repeat monthly, instead of an annual session that runs on memory.