Blend the three methods
Most healthy small businesses don't pick just one pricing method.
Volume 07, Chapter 6
Pricing Policy
Every sale must first cover its share of fixed costs before it adds to profit. Sales below the break-even point are still paying off fixed costs; only sales above it are genuinely profit.
The Golden Rule
Every price should be checked against one hard floor: break-even.
Cost-plus, competitive, and value-based pricing are three honest starting points. Most healthy small businesses blend all three, but none of them replace the break-even check.
Fixed costs ÷ (price − variable cost)The exact volume where revenue equals cost.
Below itLosing money, no matter how busy it looks.
Above itEvery extra sale is pure profit.
Cost isn't the whole picture
A margin that beats cost alone can still lose money once expenses are included.
Discounts raise your break-even
A lower price raises the volume needed just to break even.
Know your own costs first
A competitor's price may reflect a completely different set of costs.
1
Definition
Imagine a well-meaning sales push offers a 20% discount to boost slow-season volume. It feels harmless, a modest cut to bring in more customers. Nobody recalculates what that discount does to the numbers underneath it, and it turns out the business would now need to sell almost double its usual volume just to break even. A price that looks generous can quietly turn every sale into a loss.
A pricing policy is a documented, repeatable method for setting prices, so that "what should we charge?" has a consistent answer, instead of being decided fresh, by feel, for every single order.
In One Sentence
There are three honest starting points for a price: what it costs you to make (cost-plus), what similar options charge (competitive), and what it's genuinely worth to the customer (value-based). Most healthy small businesses blend all three, but every price should be checked against one hard floor: the break-even point, the exact number of sales below which the business loses money no matter how busy it looks.
2
Three Pricing Methods
Cost-Plus
Price = total cost per unit + a target margin. Simple, defensible, hard to underprice by accident.
Competitive
Price = what similar businesses charge, adjusted for how your business compares. Best for visible, comparable markets.
Value-Based
Price = what the specific benefit is worth to this customer. Best for bespoke or brand-driven work.
| Method | How It Works | Best For |
|---|---|---|
| Cost-plus | Price = total cost per unit + a target margin | Simple, defensible, hard to underprice by accident |
| Competitive | Price = what similar businesses charge, adjusted for how your business compares | Markets with visible, comparable alternatives |
| Value-based | Price = what the specific benefit is worth to this customer | Bespoke, differentiated, or brand-driven work (Volume 01's competitive advantage) |
Worked example, cost-plus, MANIAC MINDZ:
| Amount | |
|---|---|
| Fabric, thread, trims (cost) | ₦8,000 |
| Direct labour (cost) | ₦4,000 |
| Total cost per garment | ₦12,000 |
| Target margin (50%) | +₦6,000 |
| Price | ₦18,000 |
Warning
Cost-plus pricing that only counts cost (per Chapter 5's definition) and ignores a fair share of expenses (rent, admin) will look profitable per garment and still lose money overall once expenses are included. The margin must be big enough to cover expenses too, not just costs, that's exactly what break-even checks.
3
The Break-Even Point
Break-even is the number of units that must be sold, at a given price, for total revenue to exactly equal total costs, the point where profit turns from negative to positive.
Break-even units = Fixed Costs ÷ (Price per unit − Variable cost per unit)
Worked example:
| Amount | |
|---|---|
| Fixed costs (rent, admin salaries, etc.) | ₦2,000,000/month |
| Price per garment | ₦12,000 |
| Variable cost per garment | ₦8,000 |
| Contribution per garment (Price − Variable Cost) | ₦4,000 |
| Break-even units | ₦2,000,000 ÷ ₦4,000 = 500 garments/month |
Below 500 garments a month, the business loses money even though every single sale looks individually profitable. Above 500, every additional garment adds pure profit, since fixed costs are already covered. Full worked template: Break-Even Calculator.
Memory Trick
Every sale must first cover its share of fixed costs before it adds to profit. Sales below the break-even point are still paying off fixed costs; only sales above it are genuinely profit.
4
Example Story: The Discount That Crossed the Line
Here's the full version of the discount story from the start of this chapter.
A well-meaning sales push at MANIAC MINDZ offered a 20% discount to boost slow-season volume. Nobody had recalculated break-even at the new, lower price, and the new contribution per garment fell so far that the business would have needed nearly 900 garments a month just to break even, almost double the usual volume. The discount was quietly capped and re-costed before it ran a full month, once the math was actually checked.
5
Across Industries
MANIAC MINDZ
MethodCost-plus, blended with value-based for bespoke work
WhyPredictable costs, but unique designs justify a premium
Golden Crust Bakery
MethodCompetitive
WhyBread is a visible, easily compared product
Nimbus Labs
MethodValue-based
WhyThe software's benefit to the customer, not its cost to build, drives what they'll pay
| Business | Primary Pricing Method | Why |
|---|---|---|
| MANIAC MINDZ | Cost-plus, blended with value-based for bespoke work | Predictable costs, but unique designs justify a premium |
| Golden Crust Bakery | Competitive | Bread is a visible, easily compared product |
| Nimbus Labs | Value-based | The software's benefit to the customer, not its cost to build, drives what they'll pay |
6
Common Mistakes
Common Mistake #1: Pricing From Cost Alone, Ignoring Expenses
A margin that only beats direct cost, without covering a fair share of fixed expenses, can look profitable per unit and still lose money overall. Always check against break-even.
Common Mistake #2: Discounting Without Recalculating Break-Even
As in the example story, a discount changes the contribution per unit, which changes how many units are needed just to survive.
Common Mistake #3: Copying a Competitor's Price Without Knowing Your Own Costs
A competitor's price may reflect a completely different set of costs. Competitive pricing should inform, not replace, your own cost-plus and break-even math.
7
Quiz Yourself
Quiz 1
Fixed costs ₦3,000,000/month, price ₦15,000/unit, variable cost ₦9,000/unit. What's the break-even volume?
Contribution = ₦6,000. Break-even = ₦3,000,000 ÷ ₦6,000 = 500 units.
Quiz 2
Why is cost-plus pricing risky if it only accounts for direct cost, not expenses?
Because a margin that beats cost alone may still be too small to cover the fixed expenses like rent and admin, the business can lose money despite every sale "looking" profitable.
Quiz 3
Why must break-even be recalculated after a price discount?
Because a lower price shrinks the contribution per unit, which raises the number of units needed to cover the same fixed costs.
8
Practice Exercise
- Calculate your true cost per unit for your main product (materials + direct labour).
- Choose a pricing method (or blend) and set a price, using the Pricing Worksheet.
- Calculate your break-even volume using the Break-Even Calculator. Is it realistic given your actual monthly sales?
9
Quick Summary
Quick Summary
- Three pricing methods: cost-plus, competitive, value-based, most businesses blend them.
- Pricing from cost alone, without covering a fair share of expenses, can quietly lose money.
- Break-even = Fixed Costs ÷ (Price − Variable Cost per unit), the volume below which the business loses money regardless of how busy it looks.
- Recalculate break-even every time price changes, especially for discounts.
Related Topics