Ask most small business owners how they set their prices and you’ll get one of two answers: “I looked at what competitors charge” or “I picked a number that felt fair.” Both are guesses. Neither one guarantees you’re making money on what you sell, and plenty of businesses only discover they’ve been pricing at a loss after a full year of solid-looking revenue and a suspiciously thin bank balance.
Pricing for profit means starting from your costs and your margin target, then checking that number against the market, not the other way around. It’s a different starting point than most owners use, and it produces a very different number. Here’s how to build a price that actually holds up.
Start with your real costs, not just the obvious ones
Most owners price around direct costs: materials, or the wholesale price of a product they resell. That’s only part of the picture. A price also needs to cover the costs that don’t attach cleanly to any single sale: rent, software subscriptions, your own time, insurance, and a share of every other fixed expense the business carries whether you sell one unit or a hundred.
Owner labour is the cost that gets skipped most often. If you’re spending fifteen hours a week fulfilling orders or delivering a service and not paying yourself a wage for that time, the price is relying on your unpaid labour to look profitable. Put a real hourly rate on your own time, even a modest one, and price accordingly. Otherwise the business only looks sustainable because you’re the one absorbing the gap.
A simple way to check this: take your total monthly fixed costs, divide by your expected monthly sales volume, and you get the fixed-cost amount that has to be baked into every single unit before you’ve made a dollar of profit. Skip this step and you can hit your sales targets all year and still lose money.
A bakery selling loaves for $6 might look profitable if flour, butter, and packaging cost $2.50 a loaf. But once you divide $4,800 in monthly rent, insurance, and equipment lease payments across an expected 1,600 loaves a month, that’s another $3 per loaf that has to come out of the same $6 price before anything counts as profit. Suddenly a loaf that looked like it was earning $3.50 is barely clearing fifty cents, and that’s before paying the baker.
Undercharging to win against a competitor’s price only works if your cost structure can absorb it. Businesses that price to match a competitor without checking their own margin often find out the competitor has lower costs, a bigger volume, or is quietly losing money too.
What margin should you actually be targeting
There’s no single right number, it depends heavily on the industry. But a few benchmarks are useful starting points for Canadian small businesses:
| Business type | Typical gross margin target |
|---|---|
| Retail (resold goods) | 30-50% |
| Restaurants and food service | 60-70% (before labour and overhead) |
| Service-based businesses | 50-80%, since labour is the main cost |
| Manufacturing or handmade goods | 40-60% |
These are starting points, not rules. What matters is knowing your own number and pricing to hit it consistently, rather than discovering your actual margin at tax time when it’s too late to adjust anything.
It’s also worth separating gross margin from net margin in your own head. Gross margin looks at the product or service alone, price minus direct cost. Net margin factors in everything else: rent, salaries, marketing, software. A business can carry a healthy 60% gross margin and still lose money overall if operating expenses eat through the rest, which is exactly why pricing decisions need to be checked against both numbers, not just the one that looks best.
Three pricing approaches, and when each makes sense
- Cost-plus pricing: calculate your full cost per unit, then add your target margin on top. Simple, reliable, and a good default for products with clear, countable costs.
- Value-based pricing: price according to what the outcome is worth to the customer, not what it costs you to deliver. Works well for services where the result (time saved, revenue generated, a problem solved) matters more to the buyer than your hourly cost.
- Market-based pricing: set your price relative to competitors, then adjust up or down for what makes you different. Useful in crowded markets, risky if you don’t know your costs well enough to know how much room you have to move.
Most businesses end up blending all three: a cost-plus floor you won’t price below, adjusted by what the market will bear and what your value justifies.
Signs your prices are already too low
- You’re busier than ever but your bank balance isn’t reflecting it.
- Raising prices feels terrifying because you’re not confident customers will accept it, which usually means you haven’t tested it.
- You’re the cheapest option in your market and you’re not sure why that doesn’t feel like an advantage.
- A slow month puts you in the red immediately, with no cushion built into your normal pricing.
Test a price increase on new customers only before rolling it out to your entire base. It’s a lower-risk way to learn what the market will actually bear.
Why constant discounting erodes more than the sale itself
A discount here and there, for a loyal client or a slow week, is normal business. The problem shows up when discounting becomes the default rather than the exception, a seasonal sale that runs eleven months of the year, or a “special rate” every new customer somehow gets. At that point the discount isn’t special anymore, it’s your actual price, and your listed price is just a number nobody pays.
Frequent discounting also trains customers to wait for one before buying, which pushes revenue toward your lowest-margin moments instead of spreading it evenly. If a promotion is working well enough to run constantly, that’s usually a sign the regular price needs a second look, not that the discount needs to become permanent.
Revisit pricing on a schedule, not just when costs spike
Costs creep up steadily: rent renews higher, suppliers raise rates, software subscriptions tick up a few dollars a month. Prices set two years ago rarely account for two years of steady cost inflation. Build a habit of reviewing pricing at least once a year, comparing your current margin against your target rather than assuming last year’s price is still doing its job.
A useful trigger point: any time a major supplier or landlord raises your costs, treat it as a scheduled prompt to revisit your own pricing, rather than absorbing the increase silently and hoping the margin sorts itself out later.
Pricing well starts with knowing your numbers
Every pricing decision above depends on knowing your real costs and margins in the first place, which is exactly where a lot of small businesses lose the thread, buried in receipts and separate spreadsheets instead of one clear picture. Our guide to the financial numbers every Canadian small business owner must track is a good companion to this one.
Nikmani’s Gold plan includes breakeven analysis and project costing built directly from your transaction data, so you can see your real margin on a product or client relationship without rebuilding the math from scratch every time you’re deciding whether a price still makes sense.
Pricing isn’t a decision you make once and leave alone. It’s a number that should move as your costs move, checked against real data instead of a gut feeling from two years ago that never got revisited.