Many small businesses are busy every day and still struggle to pay rent at the end of the month. Sales are coming in, so what is wrong? Very often, the answer is the price. It was set by looking at what the shop next door charges, or by adding a little on top of what the goods cost, without counting everything else the business pays for.
Here is a simple way to price your products so that every sale actually helps the business.
Step 1: Know your full cost per item
There are two kinds of cost.
- Direct costs go into each item: the goods themselves, materials, packaging and transport to bring them in.
- Running costs (overheads) are what you pay to keep the business open, whether you sell or not: rent, electricity, data, staff, permits, transport around town, mobile money charges.
To find the running cost per item, add up a normal month’s running costs and divide by how many items you usually sell in a month. Add that to the direct cost. That is your full cost, and any price below it loses money.
Do not forget your own time. If you work in the business every day, pay yourself a fixed amount and count it as a running cost. Otherwise you are working for free and calling it profit.
Step 2: Understand markup and margin
These two words are often mixed up, and the mix-up costs money.
- Markup is how much you add on top of cost, as a share of the cost.
- Margin is how much of the selling price is profit, as a share of the price.
If an item costs GHS 100 and you sell it for GHS 150, your markup is 50% (50 ÷ 100) but your margin is only about 33% (50 ÷ 150). If you tell yourself “I make 50%”, you are overestimating what you keep.
To hit a target margin, use this formula: price = full cost ÷ (1 − target margin). For a 30% margin on an item with a full cost of GHS 70: 70 ÷ 0.7 = GHS 100.
Step 3: Check the market, but do not just copy it
Competitors’ prices tell you what customers are used to paying. They do not tell you whether that price works for your costs. A competitor may buy in bulk, pay less rent, or simply be losing money.
Compare on value, not just price. Do you deliver? Do you give credit to trusted customers? Is your quality more reliable? Customers will pay a little more for something that saves them time or worry. Our article on building a strong brand explains how trust supports better prices.
Step 4: Leave room for the real world
- Discounts and bargaining: if customers always ask for something off, build that into your starting price.
- Waste and losses: items that spoil, break or go missing are a cost. Spread them across what you do sell.
- Price changes: if your goods are imported, price from what it will cost to restock, not what you paid last time. See protecting your prices when the currency falls.
A worked example
Example (figures for illustration): Abena makes and sells bottled sobolo in Cape Coast. Each bottle costs her GHS 5.50 in ingredients, bottle and label. Her monthly running costs are GHS 2,400: a market stall, gas, transport, a helper and GHS 900 she pays herself. She sells about 1,200 bottles a month.
- Running cost per bottle: 2,400 ÷ 1,200 = GHS 2.00
- Full cost per bottle: 5.50 + 2.00 = GHS 7.50
- She was selling at GHS 8, a margin of only about 6%. Any slow week meant a loss.
For a 25% margin she needs 7.50 ÷ 0.75 = GHS 10. Other sellers nearby charge GHS 8 to GHS 10. Abena moves to GHS 10, explains that her drink is made fresh each morning with no added colouring, and starts a “buy 5, get 1” deal for offices. She sells a little less at first, but every bottle now pays its way.
Common pricing mistakes
- Pricing only from the cost of goods and forgetting rent, transport and your own pay.
- Confusing markup with margin and believing you keep more than you do.
- Racing to be the cheapest: there is always someone willing to lose more money than you.
- Never reviewing prices: costs move. Check your numbers at least every three months, or monthly when prices are rising fast.
- Giving the same discount to everyone: save discounts for bulk orders, loyal customers or slow stock.
Start this week
- Add up last month’s running costs, including a fixed amount for yourself.
- Divide by the number of items sold to get running cost per item.
- Work out the full cost of your five best sellers.
- Calculate the margin you are really making on each one.
- Raise any price that is below full cost, and decide a target margin for the rest.
Want help with your numbers? The EDOKAN Academy covers pricing and basic finance in plain language.
