How to Fix the Selling Price of a Product or Service

Step 1: Calculate the True Cost

Before thinking about the selling price or the value of a product or service, you need to start with a reliable foundation: the true cost.

What Is the True Cost?

The true cost corresponds to the total cost incurred by the organization to produce a good or deliver a service, expressed per unit sold. It includes all expenses required for the activity, whether they are directly related to producing the good or service, or indirectly related to the organization’s operations.

In other words, it is the minimum cost that must be covered before generating any profit margin.

True Cost: Product vs. Service

For a product, the true cost is based mainly on:

• Raw materials;

• Direct labour;

• Subcontracting;

• Manufacturing overhead, such as machine maintenance, factory supplies, rent, insurance, equipment depreciation, and other related costs;

but also on:

• Sales and marketing expenses;

• Administrative salaries;

• Other administrative and financial expenses.

For a service, the true cost is mostly related to:

• Work time, including salaries and payroll costs;

• Overhead;

• The tools and infrastructure required to deliver the service.

Unit Cost Formula

Unit cost = Direct costs + Indirect costs ÷ Quantity produced

The “quantity produced” may refer to:

• Units sold;

• Projects completed;

• Billable hours;

• Services delivered.

Step 2: Define a Coherent Profit Margin

Once the true cost has been clearly established, the key question becomes: what margin should be applied to ensure the company’s profitability?

A margin is not simply an “extra” added to the price. It is what allows the business to finance its operations, growth, and long-term sustainability.

What Is a Profit Margin?

Profit margin is the difference between the selling price and the true cost. It represents what the company keeps to:

• Cover all operating expenses;

• Invest;

• Absorb unexpected costs;

• Generate a profit.

There are two concepts to distinguish:

Gross Margin

Gross margin is the difference between the selling price and the direct or full cost, depending on the method used. It helps measure the immediate profitability of a product or service.

Net Margin

Net margin corresponds to the final result after all expenses have been deducted, including taxes, financial expenses, depreciation, and other costs. It is the indicator that reflects the company’s real profitability.

A high gross margin does not automatically mean a satisfactory net margin, which is why a comprehensive approach is important.

What Margin Should You Aim For?

There is no universal margin. The right margin level depends heavily on the company’s context.

By Industry

• Manufacturing or production: margins are often lower and offset by volume.

• Retail: margins vary depending on product ranges and competition.

• Professional services: margins are generally higher, since time represents the main cost driver and source of value.

Each industry has its own benchmarks, which should serve as references rather than rigid rules.

By Positioning

• Standard positioning: a balanced margin aligned with the market.

• Premium positioning: a higher margin justified by perceived value, expertise, or differentiation.

• Volume positioning: a lower unit margin offset by a higher number of sales.

The right margin level is the one that allows you to cover costs, secure profitability, and support the business strategy.

Selling Price: Basic Formula

The fundamental pricing formula remains simple:

Selling price = True cost + Profit margin

This formula serves as a decision-making foundation. It must then be adjusted based on:

• The market;

• The competition;

• The value perceived by the client;

• The company’s strategic objectives.

Step 3: Analyze the Market and Competition

After defining your true cost and target margin, it is essential to compare your price with market realities.

This step is often reduced to a simple price comparison, when it should primarily help clarify your positioning and value strategy.

Why Analyze Market Prices?

Positioning

Observed prices provide valuable insight into:

• The level of the offer, such as entry-level, standard, or premium;

• Clients’ implicit expectations;

• Industry norms.

The goal is not to copy the competition, but to consciously choose your place in the market.

The Acceptable Price Gap

Each market tolerates a larger or smaller price gap between offers.

• A narrower gap in highly standardized markets;

• A wider gap when differentiation is strong, such as expertise, service, or brand image.

Analyzing the competition therefore helps determine how far your price can differ without negatively affecting the buying decision.

A Higher Price Is Not Necessarily a Problem

A price that is higher than competitors’ prices is not an issue in itself. It only becomes a challenge if it is not understood or justified for the client.

A higher price can, on the contrary:

• Strengthen credibility;

• Signal superior expertise or quality;

• Attract a more committed clientele that is less price-sensitive.

Systematically aligning with a lower price often leads to margin erosion and a price war that is difficult to sustain.

Step 4: Integrate Psychological Pricing and Perceived Value

A price is not determined by numbers alone. Even if it is calculated perfectly, it must also be accepted by the client. This is where psychological pricing and perceived value come into play, as both directly influence the buying decision.

What the Client Is Willing to Pay

Psychological pricing refers to the amount the client considers acceptable based on the value they perceive in your offer.

This perception is influenced by several factors:

• The perceived quality of the product or service;

• The company’s reputation;

• The level of expertise or specialization;

• The overall customer experience;

• References and social proof.

A client does not buy a price; they buy a promise of value. If that promise is clear and credible, price becomes secondary.

The Effect of Psychological Thresholds

Psychological thresholds also play a role in price perception.

For example:

• A price of $99 is often perceived as significantly lower than $100;

• A “round” price can convey seriousness and quality in a premium context;

• Certain thresholds can unconsciously trigger a buying decision or create hesitation.

The final price should therefore take into account:

• The buying behaviour of your target audience;

• The type of offer, such as standard, premium, or expert service;

• The competitive context.

The Main Pricing Strategies

There is no single right pricing strategy. Several approaches can be used depending on your market, positioning, and business objectives.

1. Cost-Plus Pricing

Cost-plus pricing consists of adding a margin to the true cost to determine the selling price.

Selling price = True cost + Margin

Advantages

• Simple and quick to implement;

• Helps ensure costs are covered;

• Easy to understand and justify internally.

Limitations

• Does not take the client’s perceived value into account;

• May overlook market realities;

• Can lead to a price that is too low or too high.

This strategy is relevant as a starting point, but is rarely sufficient on its own.

2. Price Skimming

Price skimming consists of launching a product or service at a high price, then gradually adjusting it downward.

When to use it

• Innovative or differentiated products;

• High-value offers;

• Premium or expert positioning.

Advantages

• High margins at launch;

• Reinforces brand image and perceived quality;

• Faster profitability.

Risks

• Lower initial sales volume;

• Requires strong credibility and clear perceived value.

3. Penetration Pricing

Penetration pricing aims to enter the market with a deliberately low price in order to quickly capture market share.

Objectives

• Attract clients quickly;

• Build awareness;

• Accelerate sales volume.

Risks

• Low or even non-existent margins;

• Clients become accustomed to low prices;

• Difficulty increasing prices later.

This strategy must be temporary and controlled, otherwise it can weaken profitability.

4. Other Useful Strategies

Loss Leader Pricing

This involves applying a deliberately low price to a specific offer with the goal of attracting the client and then proposing more profitable offers. This strategy should be used carefully, as excessive use can devalue the offer and the company’s image.

Premium Pricing

This approach consists of setting a deliberately high price based on strong differentiation linked to expertise, brand, or the experience provided. It targets clients who are less price-sensitive and more focused on value, quality, and the credibility of the offer.

Differentiated Pricing

This strategy is based on variable prices depending on the client, volume, sales channel, or period. It helps optimize overall profitability by adapting to different segments and contexts, without applying a single price to all clients.