Of all the decisions a business owner makes, pricing has the greatest direct impact on profit. A small change in price can mean the difference between a thriving business and a struggling one. Yet many entrepreneurs set their prices almost randomly — based on a competitor, a gut feeling, or a fear of scaring customers away. This guide explains the principles of good pricing and gives you a practical method for setting prices that are both fair to your customers and profitable for your business.

Why Pricing Matters So Much

Consider a business with a 20 percent profit margin. If it raises prices by 10 percent and loses 10 percent of its sales, profit still increases significantly, because each sale is more profitable. Conversely, if it cuts prices by 10 percent to attract more customers, it would need to increase sales volume dramatically just to maintain the same profit. Price affects profit far more than volume does, which is why getting pricing right is one of the highest-leverage activities in any business.

Underpricing is the more common and more dangerous error. It attracts customers who value low prices above all else (the least loyal customers), leaves no margin for growth or investment, and makes the business fragile — any increase in costs immediately turns profit into loss. Many businesses fail not because they lack customers but because their prices are too low to sustain them.

Three Pricing Approaches

Cost-Plus Pricing

This is the simplest method: calculate your total cost per unit and add a markup for profit. For example, if a product costs 2,000 naira to make and you want a 50 percent markup, you price it at 3,000 naira. The advantage is simplicity and the guarantee that every sale is profitable. The disadvantage is that it ignores what customers are willing to pay — you might be leaving money on the table if customers would pay more, or pricing yourself out of the market if they would pay less.

Competitor-Based Pricing

This method sets prices based on what competitors charge. It is useful as a reference point, but dangerous as the sole basis, because your competitors may have different costs, different quality, or a different strategy. Simply matching a competitor can lead to unsustainable prices if your costs are higher, or to lost profit if your value is higher. Use competitor prices as one input, not the whole answer.

Value-Based Pricing

This is the most profitable approach: price based on the value your product or service creates for the customer, not on your cost or your competitor. If your service saves a customer 50,000 naira a month, charging 10,000 naira for it is a bargain to them, even if it costs you almost nothing to deliver. Value-based pricing requires understanding your customer deeply — what problem you solve, how much that problem costs them, and how your solution compares to alternatives. It is harder to do but far more rewarding.

A Practical Method to Set Your Price

  1. Calculate your full cost per unit, including materials, labour, overhead, and a share of your fixed costs. This is your floor — never price below it long-term.
  2. Research what competitors charge for similar offerings, as a reference point.
  3. Estimate the value your offering creates for the customer — money saved, time saved, problems avoided.
  4. Set a price between your cost floor and the value ceiling, considering where you want to position yourself in the market.
  5. Test the price with real customers and adjust based on their response.

Know All Your Costs

A common reason businesses fail is that they do not know their true costs. They calculate the obvious costs — materials and direct labour — but forget the hidden ones: rent, utilities, transport, packaging, payment processing fees, taxes, marketing, and their own time. Every cost must be covered by your prices, or the business slowly bleeds money without realising it. Sit down and list every cost, however small, that goes into making and selling your product. Divide your total monthly costs by the number of units you sell to find the overhead cost per unit. Add this to your direct costs to get your true cost per unit.

The Fear of Raising Prices

Many business owners are afraid to raise prices, worried that customers will leave. In practice, price increases usually cause far less customer loss than feared, especially if the business has built a reputation for quality and service. Most customers care about value, not just price, and a modest increase rarely changes their decision. If you have not raised prices in over a year while your costs have risen, you are effectively taking a pay cut every month. Raise prices modestly and regularly rather than dramatically and rarely, and explain the reason to loyal customers if appropriate.

Pricing for Services vs Products

Pricing a service is different from pricing a product, because a service is your time and expertise. Two approaches work well:

  • Hourly pricing: charge a rate per hour that covers your costs, your non-billable time, and your desired profit. Remember that not every hour is billable — time spent marketing, administering, and learning is unpaid.
  • Value or project pricing: charge a fixed price for a defined outcome, based on the value to the client. This is usually more profitable than hourly pricing, because you are paid for results, not time, and efficient work earns you more.

Whichever you choose, avoid the trap of pricing too low to "get clients." Low prices attract the most demanding, least loyal clients and make it very hard to raise rates later. Start at a price that respects your expertise and the value you provide.

Psychology of Pricing

How you present a price affects how it is perceived. Charm pricing — ending a price in 9 or 99 (e.g., 4,999 instead of 5,000) — can increase sales because the price feels lower. Offering three tiers (good, better, best) often drives customers to the middle option, which is usually the most profitable. Anchoring — showing a high price first — makes subsequent prices feel more reasonable. These techniques are not tricks but reflections of how people naturally evaluate prices. Use them honestly, in service of a fair price.

Conclusion

Pricing is too important to leave to guesswork. Understand all your costs, research your competitors, estimate the value you create for customers, and set prices that are both fair and profitable. Avoid the common trap of underpricing, which attracts disloyal customers and starves your business of the margin it needs to grow. Do not be afraid to charge what your offering is worth, and review your prices regularly as your costs and value change. A well-priced business is a sustainable business — one that can serve its customers well for years to come, because it can afford to.