Advice and tips for entrepreneurs

Start by understanding your costs

Before deciding on a price, you need to clearly understand what it actually costs to produce the product or service. Costs can be divided into three main categories:

• Variable costs: These are costs that increase as production volume grows, such as raw materials, ingredients, packaging, and labels.
• Fixed costs: These costs stay the same regardless of production volume. Examples include rent for business premises, insurance, machinery, marketing, and administration.
• Labour costs: Remember to also take into account your own working time or the work contribution of employees. Labour costs should be based on a realistic hourly wage and the time used for production.

When all costs are added together, you get the product’s cost price, meaning what it actually costs to produce one unit.

Two common ways to calculate a price

• Cost-based pricing
  In this model, you start from the costs and add your desired profit margin.
  This method ensures that all costs are covered and that the business generates profit.

Example:
If the cost price is €4 and the target margin is 30%, the price may be around €5.20 excluding VAT.

• Reverse calculation
  In this model, you start from the market price – what the customer is willing to pay – and work backwards to see whether the product can be produced cheaply enough to generate profit. This method is often used when the product is sold through retailers or when competition in the market is intense.

In pricing, it is important to distinguish between markup and margin.

• Markup is based on cost and shows how much is added on top of the cost.

• Margin is based on the selling price and shows how much of the price remains after costs.

Margin is often a more practical measure because it shows how much money is left to cover the company’s other expenses and generate profit.

Sales channels affect the price

The way a product is sold also affects pricing.

• Direct sales: When you sell directly to the customer – for example at a market, farm shop, or event – you keep the entire margin yourself.
• Sales through a store or retailer: Stores add a margin of around 30–50%, which means the producer’s selling price must be lower than the shelf price in the store.
• Wholesale: In broader distribution channels, wholesalers add their own margins.

Companies usually calculate prices excluding VAT, while consumers see prices including VAT. VAT belongs to the state and is not company income, but it must be taken into account when determining the final price.

Price communicates value

Pricing is not based on costs alone, because price also communicates the quality and value of the product. Higher prices for small-scale or handmade products can often be justified by highlighting, for example:

• the product’s origin
• the quality of the raw materials
• the production method
• the company’s story and values

When customers understand the value behind the product, their willingness to pay increases.

Checklist for sustainable pricing

Before setting the final price, it is worth considering the following questions:

• Have I taken all costs into account?
• Is labour cost included in the calculation?
• Is there enough room in the price for waste and unexpected expenses?
• Do I know what margins retailers require?
• Does the price match the image I want my brand to convey?