Price your products so every sale makes you money

It is tempting to price by looking at what the shop next door charges and going a little lower. It feels safe. But the shop next door may pay less for its goods, pay no rent, or be losing money without knowing it. Your price has to start from your own costs. The examples below use plain numbers: they work the same in naira, cedis, shillings or CFA francs.

Work out what one item really costs

The cost of an item is not only what you paid the supplier. It is everything it took to get that item onto your shelf and into the customer's hands. Say you sell hair bundles:

If you priced from the 4,500 alone, you would lose 300 on every bundle before you started. Add any loss you expect too: if one bundle in twenty gets damaged, the other nineteen must pay for it.

Markup and margin are not the same

Both say how much profit is in a price, but they measure it against different things:

• Markup is profit as a share of the cost. Profit ÷ cost × 100.
• Margin is profit as a share of the selling price. Profit ÷ selling price × 100.

The same sale always has a higher markup than margin. Here is an item that costs 1,000, at four prices:

The trap You want 30% of every sale to be profit, so you add 30% to the cost. On the 4,800 bundle that gives 6,240. But the profit, 1,440, is only 23% of 6,240. Adding 30% to the cost gives you a 30% markup, not a 30% margin.

Set a price from the margin you want

To get the margin you want, divide the cost by what is left after the margin:

Selling price = cost ÷ (1 − the margin you want) For a 30% margin on the 4,800 bundle: 4,800 ÷ 0.70 = 6,857. Round it to a neat price, 6,900.

Cover your running costs

Your margin has to pay for everything that is not the item itself: rent, light and fuel, data, transport for errands, a helper's pay. Add up a normal month. Say it comes to 160,000. At 6,900 a bundle you make 2,100 on each. 160,000 ÷ 2,100 = 76.2, so you need to sell 77 bundles a month just to cover your running costs. Every bundle after that is profit.

If 77 a month sounds out of reach, you have three choices: raise the price, cut running costs, or sell more of something with a better margin. It is much better to know this now than at the end of a busy month with nothing left. Our guide on how to calculate your profit shows how to check it month by month.

Pricing services by time

If you sell a service, such as hair, tailoring, repairs or make-up, your time is the product. Price it by the hour first:

1. Decide what you need to earn

   What you want to take home in a month, plus your running costs. Say 150,000 + 90,000 = 240,000.

2. Count the hours you can really charge for

   You may be at the shop 200 hours a month, but some of that is waiting, cleaning and buying supplies. Say 120 hours are paid work.

3. Divide

   240,000 ÷ 120 = 2,000 an hour. That is your hourly rate.

4. Price each service

   Hours it takes × your rate, plus materials. Braids that take 5 hours with extensions costing 3,500: 5 × 2,000 + 3,500 = 13,500. Round it to 14,000.

Set a minimum charge for small jobs, so a ten-minute fix does not cost you an hour of setting up. If you go to the customer, add a travel fee.

Check the market, but do not just copy

Once you know your own floor price, look at what others charge. If you are far above them, ask why: is your cost too high, or is your product better? If you are far below, you may be leaving money on the table. You do not have to be the cheapest. Customers also pay for reliability, quick replies, good packaging, delivery and a proper receipt.

Bundles help too: three items at a small discount sell more and cost you less to serve than three separate sales.

When to raise your prices

Raise your prices when:

• Your costs went up. Your supplier's price, transport, rent or the exchange rate moved. Work out the new true cost and the new price at once.
• You are always fully booked or always sold out. Demand is telling you the price is low.
• Your profit is shrinking even though sales are steady.
• You have not changed your prices in a year while everything you buy has changed.

How to do it without losing customers: tell regulars before the change, keep any quote you have already given, raise in steps rather than one big jump, and update your price list and website the same day. A short message is enough:

If your business is registered for VAT, decide whether your prices include it and show it clearly on your invoices. Rules differ by country, so check with your tax office: the Nigeria Revenue Service, the Ghana Revenue Authority, the Kenya Revenue Authority or Cameroon's Direction Générale des Impôts.

How Nfelia helps

• Cost and price on every item. Type the Selling price and the Cost price, and Nfelia shows your margin: your profit as a share of the price. If an item sells for less than it costs you, the margin turns red. The cost is only for you; customers never see it.
• Options with their own prices. If an item comes in different lengths, colours or sizes, each option can change the price.
• One price, everywhere. Change a price once: your website shows it, and new quotes and invoices use it. Leave the price empty and your website shows "Ask for the price".
• See whether your prices work. Record your spending as expenses, and the Profit and loss report shows money in against money out for any month.

Nfelia shows margin, not markup, so compare it with the margin tables above. The screens are from Ivie Luxe Hair, an example business. See how to set prices and costs in the guide to adding your products, and how to read your month in the expenses and profit guide.

Questions people ask