How to Price Your Products: Markup, Margin, and Break-Even

Setting the right price for your products means understanding three fundamental concepts: markup, profit margin, and break-even point. Get these right, and you cover your costs with room for profit. Get them wrong, and you're working for free. Here's how to price products so your business actually makes money.

Understanding Markup vs Margin

Markup and margin sound the same but measure profit differently — and that difference matters.

Markup is the percentage increase you add to your cost price to get your selling price. Profit margin is the percentage of your selling price that's actual profit.

Here's a concrete example. You buy a product for £100 and sell it for £150.

Markup = (£150 − £100) ÷ £100 = 50%
Margin = (£150 − £100) ÷ £150 = 33%

Same £50 profit, two different percentages. This matters because:

If your supplier quotes you "50% markup", you're working on 33% margin.
If you want "30% margin", you need roughly 43% markup.
Most business people think in margin; cost-based pricing talks in markup.

Get this backwards and you'll either undercut yourself or overprice and lose sales.

Calculating Your Break-Even Point

Your break-even point is the number of units you need to sell to cover all your costs — fixed and variable — with zero profit or loss. It tells you the absolute minimum to stay in business.

Break-even units = Total fixed costs ÷ (Selling price per unit − Variable cost per unit)

Imagine you're selling handmade candles:

Fixed costs (monthly): £1,000 (rent, insurance, website, utilities)
Variable cost per candle: £3 (wax, wick, packaging, labor)
Selling price per candle: £12

Break-even units = £1,000 ÷ (£12 − £3) = £1,000 ÷ £9 = 111 candles per month

Once you sell your 111th candle, every sale after that is profit. Before that, you're covering overhead.

You can also calculate break-even in revenue:

Break-even revenue = Fixed costs ÷ Contribution margin %

Where contribution margin % = (Selling price − Variable cost) ÷ Selling price

In the candle example: (£12 − £3) ÷ £12 = 75%, so break-even revenue = £1,000 ÷ 0.75 = £1,333/month.

Use our break-even calculator to run your own numbers instantly. It removes the guesswork and shows you exactly where you stand.

How to Price Your Products

There are three pricing methods. Which you choose depends on your market, competition, and business model.

Cost-plus pricing (markup-based) starts with what you know: your cost per unit and a target markup percentage. It's simple but risky—it assumes the market will pay what you're asking.

Selling price = Cost per unit × (1 + Markup %)

If your candle costs £3 and you want 100% markup, your price = £3 × 2 = £6. But if the market pays £15, you're leaving money on the table. If it pays £4, you're unprofitable.

Margin-based pricing flips the logic. You decide what profit margin you want, then work backward to find your selling price.

Selling price = Cost per unit ÷ (1 − Desired margin %)

If your cost is £3 and you want 50% margin: Selling price = £3 ÷ 0.50 = £6

Value-based pricing (best practice) asks what the market will bear, then checks if it's profitable. This requires research—what are competitors charging? What's your unique value? What will customers actually pay?

If your market research shows people will pay £12 for a quality candle, and your cost is £3, you're working with 75% margin (£9 profit on £12 sale). Much better than £6.

Pricing Strategy Examples

Retail product (handmade goods): You sell handmade jewellery online. Fixed costs: £600/month. Cost per piece: £8. Selling price: £25.

Break-even units = £600 ÷ (£25 − £8) = 35 pieces/month
Profit margin = (£25 − £8) ÷ £25 = 68%

At 35 pieces, you cover costs. At 68% margin, you're healthy.

Service business (freelance copywriting): You charge £75/hour and work 30 billable hours/month. Fixed costs: £300/month.

Monthly revenue = 30 × £75 = £2,250
Profit = £2,250 − £300 = £1,950
Margin = £1,950 ÷ £2,250 = 87%

Services have much higher margins. Break-even is just 4 billable hours. Everything after that is profit.

Product with inventory: You sell t-shirts in bulk. Cost per shirt: £4. Selling price: £14. Monthly fixed costs: £800 (Shopify, ads, packaging).

Break-even units = £800 ÷ (£14 − £4) = 80 shirts/month
Profit margin = (£14 − £4) ÷ £14 = 71%

Sell 200 shirts and your profit is (200 × £10) − £800 = £1,200. As a sole trader, you'll owe income tax at 20–45% plus National Insurance. As a limited company, Corporation Tax at 19% applies. If you hire staff, see our guide to calculating payroll tax for small businesses. After tax, your take-home is typically £660–£960.

Common Pricing Mistakes

Underpricing because you're worried about losing customers

The #1 mistake. You set a low price to "be competitive" and end up with high volume and zero profit. Do market research instead. If you're undercut, it's usually not price—it's positioning, quality, or brand.

Forgetting to include all costs

You calculate variable cost but forget fixed costs (rent, insurance, software, accountant fees). Your spreadsheet shows 50% margin, but after overhead, you barely break even. Always include fixed costs in your break-even calculation.

Ignoring tax

Your £1,950 monthly profit looks great until HMRC sends a bill. The effective tax rate is 25–40% depending on your business structure and income level. Gov.uk's guidance on business tax outlines your obligations. Price your products assuming you'll give up at least 25% of profit to tax.

Competing only on price

If your only differentiator is a lower price, you'll lose to anyone with lower costs. Compete on quality, speed, convenience, or brand. These justify higher margins. A luxury candle brand charges £25; a bulk supplier charges £3. Same product category, completely different pricing.

Not reviewing prices regularly

When your costs go up, your margin shrinks if you don't raise price. Review quarterly. If costs are up 5%, raise your price 5% (or cut costs elsewhere). Many business owners adjust prices once every three years and then wonder why they're struggling.

Frequently Asked Questions

Q: What's a "good" profit margin?

A: It depends on your industry. Retail typically runs 20–40%. Services often run 50–80%. Luxury goods can hit 80%+. SaaS can be 70%+. What matters is whether it covers your costs and pays you a living wage after tax. If you're on 30% margin and it covers everything, that's good. If you're on 50% margin and still struggling, you have a cost problem, not a pricing problem.

Q: Should I use cost-plus or value-based pricing?

A: Start with cost-plus (you must know your costs), but move toward value-based. Cost-plus tells you the floor (you must price above this). Value-based tells you the ceiling (what the market will pay). Your actual price should be somewhere between, ideally closer to the ceiling. Value-based pricing is more profitable.

Q: How do I know if I'm pricing too low?

A: If you're always busy but never have enough profit, you're too cheap. Raise prices 10% and watch. You'll lose some customers, but if the math works, you'll make more profit overall. Most discover the market will happily pay more.

Q: What about discounts and bulk pricing?

A: Discounts work only if they increase volume enough to offset lower margin. If you sell 100 units/month at £10 (margin £5), you make £500 profit. A 20% discount to £8 (margin £3) needs to get you to 167 units just to match that profit. Do the math before you discount.

Q: Should I use dynamic pricing?

A: Only if your business model and customers expect it. Airlines and hotels do this well. Most other businesses confuse customers if prices change weekly. Stick with fixed pricing unless you have a specific reason to shift. If you're selling out every month, raise your price once and see what sticks.

Q: How often should I review prices?

A: At minimum quarterly, or whenever costs change significantly. If a supplier raises prices 10%, raise yours too (perhaps not the full 10%, but some). If you're getting more demand than you can handle, raise prices to slow demand or increase profit. If you're struggling to sell, you might have a pricing problem—or a marketing/product problem. Fix the real issue first.

Q: What's the relationship between price and perceived quality?

A: Strong. If you price too low, customers assume low quality. If you price too high, they assume overpricing. You're looking for the "Goldilocks" price—high enough to signal quality, low enough to actually sell. This is why market research and competitor analysis matter.

Q: How do I handle competitor price wars?

A: Don't compete only on price. If a competitor drops price and you have higher costs, you'll lose. Instead, segment the market and serve quality-conscious customers. Remind them why you're worth it: faster delivery, better quality, premium support, or brand reputation. The Federation of Small Businesses offers guidance on competitive strategy for small firms.

Running Your Numbers

The break-even calculator takes the guesswork out of pricing. Enter your fixed costs, variable cost per unit, and selling price to see:

Break-even units and revenue
Profit at different sales volumes
How margin changes with price or cost adjustments

Model a few scenarios. See what happens if you raise price 10%, cut costs 5%, or increase volume 20%. Numbers show what actually moves the needle.

For strategic context on when to adjust, pivot, or hold pricing, see the entrepreneur's guide to break-even analysis.