Pricing your product: cost, margin and profit explained

Price is not just a number you copy from the next stall. It decides whether your business survives. If your price is too low, you work hard and make no profit. If it is too high without reason, customers walk away. Understanding three terms helps you decide.

Cost, margin and profit

• Cost is what it takes to make or buy one item, including packaging and transport.
• Margin is the difference between your selling price and your cost.
• Profit is what remains after you subtract all business expenses, such as rent, data, wages and loss from unsold goods.

A worked example

Suppose you sell bottled zobo drinks.

• Ingredients and bottle for one drink: ₦200
• Transport, gas and packaging share per drink: ₦50
• Total cost per drink: ₦250

If you sell each drink for ₦400, your margin is ₦150, which is 37.5% of the selling price. If you sell 100 drinks in a week, the margin is ₦15,000. But if you also pay ₦3,000 for a stall and lose ten drinks that spoil (₦2,500 of cost), your real profit is lower: ₦15,000 minus ₦3,000 minus ₦2,500, which equals ₦9,500.

Steps to set a price

1. Add up all costs for one unit.
2. Decide how much margin you need to cover your expenses and pay yourself.
3. Check what similar sellers charge and what customers can afford.
4. Choose a price that is competitive but safe.

Do not forget your time

If a job takes you four hours and you earn ₦2,000, you are paid ₦500 an hour. Is that fair for your skill? Counting your time prevents you from undervaluing your work.

Think about volume

Sometimes a small margin on many sales beats a large margin on a few. Other times, a premium product sold to fewer people is better. Test both and see what your customers prefer.

Change prices carefully

When your costs rise, adjust your price slightly and explain honestly. Customers usually understand if you communicate clearly. Avoid sudden big jumps.

Offer value, not only discounts

Quality, speed, friendly service and reliability allow you to charge fairly. Constant discounting trains customers to wait for sales.

Review monthly

Check your costs and sales each month. If your profit is shrinking, look at costs first, then your price.

Good pricing is not guesswork. It is arithmetic plus knowledge of your customers.

Written by the EarnNaija team at EarnNaija Digital Technologies. Tips are general guidance, not financial or legal advice.

This article is general information, not financial or legal advice. Earnings are never guaranteed. See our fees page for the exact costs.