Setting a Price You Can Defend Out Loud

A defensible price is built as a ladder, from the floor upward, and the rungs are not opinions. Rung one is what one unit costs to make. Rung two is the share of the monthly costs that a unit has to carry. Rung three is the slice a payment processor takes, and it is the one that has to be solved for rather than added. Above those three is a decision that belongs to you and to nobody else. On the practice product below, a sale must carry $44.10 before anything is left, and the break-even tag is $43.36.

The worked example: the price ladder

The monthly costs on this practice bench are two table fees at $45.00 each, $12.00 for a website and a card reader, and $18.00 of fuel and parking, which is $120.00 a month. Spread across a planned 24 sales that is $5.00 per unit.

The rung you cannot simply add

A processing charge of a percentage plus a flat amount lands on the whole amount a buyer hands over, so it grows whenever the tag grows. That means it cannot be added to the cost before the tag exists, because it depends on the tag.

The move is one division. Take what must be left, divide by the share of a dollar that survives the percentage, and you get the tag that breaks even exactly.

1. The floor: $36.80.
2. The month's share: $5.00. Running total $41.80.
3. The flat part of the fee: $0.30, which does not move with the price.
4. Divide, do not add: that total, over the share of a dollar that survives, gives $43.36.
5. Check it backwards: the practice fee on $43.36 is $1.56, which leaves exactly $41.80.

That check is the part worth doing. If the backwards run does not land on the running total, the division was wrong, and staring at the tag will not reveal it.

What the same ladder says at three tags

The first row is the important one. At $35.00 every sale takes $8.12 out of the household, and volume makes that larger rather than smaller. A business selling below its floor gets busier and poorer at the same time, and it can run that way for a long while because the receipts look like money.

The month's share rests on a guess

Spreading $120.00 across a planned 24 sales gives $5.00 each. That 24 is a plan rather than a result. Sell fewer and the same $120.00 lands harder on every sale that did happen.

So the share is an assumption wearing a dollar sign, and the assumption gets written beside it. When the volume proves different, recompute the rung rather than pretending the plan was a fact. On the practice venture the first real month made ten and sold seven, against a plan of 24, which is exactly the kind of gap that has to be visible rather than hidden.

What sits above the ladder

The ladder said a sale must carry $44.10. The tag on the practice product is $69.00. Everything between those two numbers was a decision about the work, the town, the buyer and what the maker was willing to stand behind, and this page has no opinion about it whatsoever.

That is not evasion. A price is a claim about value, and value is not a computation. What the arithmetic can do is tell you where the line is, so that whatever you choose above it is a choice rather than an accident.

What a margin is actually for

$24.90 on a $69.00 sale is 36.09% of the price, and it is easy to read that as profit in the everyday sense. It is not.

• The slow months, when the monthly costs still arrive.
• The remakes, because some things go wrong and have to be done twice.
• The next tool, because the current one has a finite number of units left in it.
• The yearly costs nobody has found yet, and there are always some.
• Eventually, a raise for the person doing the work.

Price with nothing left over and every one of those lands on the household instead. That is the honest reason a margin exists, and it is a much better argument than any story about what a thing is worth.

Raising a price later

Easier than most people expect and harder than it should be, for one reason: the maker knows the old price and the new customer does not. A price rise is a change in a number that only one person in the conversation was attached to.

What makes it defensible is the ladder. A maker who can say, out loud, what the thing costs, what the month costs, and what the fee takes, is having a different conversation from one who is apologising. The arithmetic is not a script and it is not a justification. It is the reason you are not guessing.

Before you set a price, know your floor

Everything on this page rests on rung one being right, and rung one is where most costing goes wrong, because the receipt total is not the cost. Costing one unit to the cent shows the three shapes that belong in it and the one line everybody forgets.

And once a price is set, the check that tells you whether the whole arrangement works is not margin per sale, it is what a year of hours actually paid. The real hourly rate runs that division on a closed practice year, and the answer is usually the most useful number a small venture ever computes. If the answer points at hours rather than price, pricing one paid day is the next arithmetic.

Volume changes one rung and only one

It is worth being precise about which part of the ladder moves when sales move, because people often assume the whole thing does.

So the whole sensitivity of the ladder to volume lives in one rung. Halve the planned volume and that rung roughly doubles, which pushes the break-even tag up. Double the volume and it halves. That is the single strongest argument for writing the planned volume down beside the number: it is the assumption the price is most exposed to.

The questions a price has to survive

1. What does one unit cost to make, including my hands?
2. What do the monthly costs come to, and across how many sales am I spreading them?
3. What does the payment method take, as a percentage and as a flat amount?
4. What must a sale carry before anything is left?
5. What am I choosing above that, and why?

Five questions. The first four have arithmetic answers. The fifth is yours, and it is the only one anybody will ever ask you about.

Going further

The Business Builder track follows one invented practice venture across three years and thirty-six lessons, from a first costing card to a closed third year, with all three books included. It recommends no business, no price, no entity and no supplier, and it routes every legal and tax question to a CPA, an attorney or a state filing office.

For free advice, small business development centers and similar programs exist to help new ventures, and sba.gov explains what is available.