You’re busy. Sales are up on last year, the team is flat out, and the bank balance looks the same as it did twelve months ago. Before you blame costs, look at your prices.
Most owners I talk to set their prices once, years ago. They added a percentage to what something cost, or checked what the competitor down the road charged. Then wages went up, rent went up, suppliers put through two increases, and the price stayed where it was.
Working out how to price a product or a service properly isn’t hard, but you do need your real numbers. A profitable price covers four things: the direct cost of the sale, a share of your overheads, a market wage for you, and the profit you’re aiming for. Leave one out and you’re funding your customers from your own pocket.
This guide covers the selling price formula with two worked examples (one product, one service), where GST fits, how to test a price rise before you make it, and the mistakes I see most.
Why do busy businesses still make so little profit?
Usually because the price was built on only part of the cost. The common method is to take what the item or the labour costs you, add 50% or 60%, and call it done.
That markup has to pay for everything else. Rent, admin wages, vehicles, insurance, software, marketing and your own pay all come out of it. If overheads take 32 cents of every sales dollar and you’re left with 37 cents after direct costs, you keep 5 cents. One slow month wipes that out.
If you don’t know what share of each sales dollar goes to overheads, you don’t know whether your price is profitable.
Then there’s drift. Modern award minimum wages rose 4.75% from 1 July 2026 (Fair Work Commission, Annual Wage Review 2026), and the super guarantee has been 12% since 1 July 2025 (ATO). If labour is 35% of your revenue, that wage rise alone costs about 1.7% of revenue. On a 10% net margin, a sixth of your profit is gone and nothing on your price list has changed.
What does it really cost you to deliver?
There are three layers. Most pricing errors come from stopping at the first.
Direct costs
For a product, this is the supplier price, freight, duty, packaging, and anything else that only exists because you made the sale. For a service, it’s the full cost of the person doing the work, which is a lot more than their hourly wage.
Overheads
Everything you pay whether you sell one unit or a thousand. Pull the last 12 months from Xero, MYOB or QuickBooks and divide total operating expenses by total revenue. If you’re not sure how to read the report, our guide to what your profit and loss statement is really telling you goes through each line.
Your own wage
If you take drawings or dividends instead of a salary, your P&L is flattering you. Add a market wage for the job you do (what you’d have to pay someone else to do it) into overheads before you price anything. I see this one skipped more than any other.
What is your break-even price?
Your break-even price is the lowest price that covers the direct cost and your overheads, with nothing left over.
Think of every dollar you charge as being split up. Say overheads take 32 cents of each dollar. That leaves 68 cents to pay for the product itself.
If the product costs you $24, that $24 has to fit inside the 68 cents: $24 ÷ 0.68 = $35.29. Charge less and you’re paying to make the sale, and selling more only makes it worse. As a formula: break-even price = direct cost ÷ (1 − overhead %).
How to price a product: the selling price formula
The selling price formula is direct cost ÷ (1 − target gross margin). A product that costs $24 with a 44% target margin is priced at $24 ÷ 0.56 = $42.86 before GST.
Where does the 44% come from? It’s your overheads plus the profit you want, both as cents in each sales dollar. With 32 cents going to overheads and 12 cents kept as profit, 56 cents is left for the product. So the cost has to fit inside 56 cents.
The formula assumes your overheads grow in line with sales. When they don’t, you keep the difference.
Divide the cost. Multiplying it by a markup gives you a lower margin than you planned.
Worked example: pricing a product
Mia runs an online homewares store turning over $1.4 million. Her best-selling planter range sells about 9,000 units a year, at an average landed cost of $24.00 each (supplier, freight, duty and packaging).
She’d always used a 60% markup, which gave a price of $38.40 before GST. Overheads, including a wage for herself, take 32 cents of every dollar she sells. Here’s where the money goes at her old price and at the formula price:
| Old price | Formula price | |
|---|---|---|
| Price before GST | $38.40 | $42.86 |
| Cost of the planter | $24.00 | $24.00 |
| Overheads per planter | $12.29 | $12.29 |
| Left as profit | $2.11 | $6.57 |
At $38.40 she was keeping $2.11 a planter, not far above her break-even price of $35.29.
Her rent and wages don’t rise because her price did. The overheads stay at $12.29 a planter, so the whole increase lands as profit, and what she keeps on each one triples.
She listed the range at $47 including GST ($42.73 before). That’s an extra $4.33 a unit, or roughly $39,000 a year across 9,000 units if volume holds. Whether it holds is a separate test, covered further down.
How do you price a service?
Same formula, but the “cost” is the cost of one billable hour, and almost everyone gets that number wrong.
Dan owns an electrical contracting business with three electricians on the tools. He pays $48 an hour and charges $110, and assumed he was making $62 an hour on each of them. Here’s the real cost of one electrician:
| Item | Amount |
|---|---|
| Annual wage ($48 × 38 hours × 52 weeks) | $94,848 |
| Super at 12% | $11,382 |
| Workers comp and other on-costs (5%, illustrative) | $4,742 |
| Total employment cost | $110,972 |
| Weeks worked (52 less leave and public holidays) | 44 |
| Hours available (44 × 38) | 1,672 |
| Billable hours at 75% | 1,254 |
| Cost per billable hour | $88.49 |
A $48 an hour employee costs $88 for every hour you can bill. (Yes, nearly double.) Travel, quoting, callbacks and training are all paid hours that nobody invoices.
Dan’s overheads (vehicles, insurance, the office, his own wage) take about 30 cents of each dollar, and he wants to keep 12. That leaves 58 cents for labour: $88.49 ÷ 0.58 = $152.57 an hour before GST.
| At $110 an hour | At $152.57 an hour | |
|---|---|---|
| Cost of the electrician | $88.49 | $88.49 |
| Overheads per billable hour | $33.00 | $33.00 |
| Left as profit | −$11.49 | $31.08 |
He was losing $11.49 on every hour billed and making it back on materials. Just to break even on labour he needed $121.49 an hour.
He didn’t jump to $152 in one step, and I wouldn’t tell anyone to. But he now knows the gap, which jobs to stop quoting, and where his rate needs to be in 12 months. If you’re in the trades, our bookkeeping guide for tradies covers job costing in more detail.
Want to know what your prices should be?
Send us your last 12 months of numbers. We’ll work out your true cost per unit or per billable hour, your break-even price, and what you’re really keeping on each sale. Book a free 30-minute pricing review.
Margin vs markup: which one should you price with?
Margin. Markup is profit as a percentage of cost, and margin is profit as a percentage of the selling price. Your overheads and profit targets are measured against sales, so margin is the one that lines up with your P&L.
Take a product that costs $24 and sells for $38.40. The $14.40 profit is 60% of the cost (the markup) but only 37.5% of the price (the margin). Markup always looks bigger.
If you’re not sure which one your current prices are built on, run them through our gross profit margin calculator.
Which pricing method fits your business?
There are three main methods, and most businesses end up with a blend.
| Method | How it works | Works best when | The risk |
|---|---|---|---|
| Cost-plus | Full cost plus target margin | Costs are known and stable; trades, manufacturing, wholesale | Ignores what customers would pay |
| Competitor-based | Price set relative to the market | Products are similar and customers compare | You inherit your competitor’s mistakes and cost base |
| Value-based | Price set on the outcome for the customer | Specialist services, urgent work, clear results | Hard to measure; needs a confident sales process |
My view: treat cost-plus as your floor. It tells you the number you can’t go below. Then look at the market and at what the result is worth to the customer to decide how far above the floor you can sit. business.gov.au has a useful overview of pricing strategies if you want the longer list.
You’ll also read a lot about psychological pricing ($47 versus $50). It matters less than people think. Get the cost right first.
Should your price include GST?
Work out your price before GST, then add 10% on top. The GST you collect goes to the ATO on your BAS and was never your revenue, so run every margin calculation on the GST-exclusive figure.
How you display the price depends on who buys from you. If you sell to consumers, the ACCC requires you to show the total price as a single figure, GST included. If you only show prices to other businesses, you can quote before GST.
Not registered for GST? Then you can’t charge it. You also can’t claim credits on what you buy, so your costs are the GST-inclusive amounts. Registration is compulsory once your GST turnover reaches $75,000 (ATO).
How much volume can you lose after a price rise?
When I have this pricing conversation with clients, the first question is nearly always the same: what if my customers leave? So we run a price sensitivity analysis, which shows how much volume you can lose after a price rise before you’re worse off.
The answer is usually more than they expect.
Say you do 100 jobs at $100 each and keep $40 from every job after direct costs. That’s $4,000. Raise the price to $110 and each job now leaves $50, so you only need 80 jobs to make the same $4,000.
As a formula: break-even volume loss = price increase % ÷ (gross margin % + price increase %).
| Current gross margin | 5% price rise | 10% price rise |
|---|---|---|
| 30% | 14.3% | 25.0% |
| 40% | 11.1% | 20.0% |
| 50% | 9.1% | 16.7% |
At a 40% gross margin, you can raise prices 10% and lose one customer in five before your gross profit falls. In my experience a 10% rise rarely loses anything close to that.
Discounts work in reverse, and the maths is brutal. A 10% discount at a 40% gross margin needs 33% more sales just to stand still.
One caution. Fewer sales at a higher price is good for profit, but it can change your cash position, stock levels and staffing. Check the effect on cash before you commit; our post on cash flow mistakes explains why profit and cash move differently.
When should you raise your prices?
Review prices at least once a year, and straight away when any of these happen:
- Award wages or super rise (check the Fair Work decision every 1 July)
- A main supplier lifts prices by more than 3%
- Your gross margin falls two quarters in a row
- You’re booked out more than four weeks ahead
- You haven’t changed prices in over 12 months
Small and regular beats large and rare. Customers absorb 3% to 5% a year without much comment. A 15% correction after four years of nothing starts conversations you’d prefer to avoid.
Give a month’s notice in a short email, state the new price plainly, and don’t apologise for it.
Five pricing mistakes that cost the most
- Pricing on direct cost only. Overheads and your wage have to come from somewhere.
- Confusing markup with margin. A 50% markup is a 33% margin.
- Using the hourly wage as the labour cost. The cost per billable hour is often close to double.
- Matching a competitor you know nothing about. They may be losing money too.
- Discounting to win volume. The table above shows how much more you’d have to sell.
There’s no perfect price, and you won’t get every product or job right. Know your floor, and choose your price on purpose.
Need a second set of eyes on your pricing?
Pricing is one of the first things we look at in a financial review, because it’s usually the fastest way to lift profit without adding sales. If you’d like someone to work through the numbers with you each month, see our Virtual CFO services, or get in touch for a free 30-minute review.
This article provides general information only and does not constitute financial, legal, or tax advice. The information is current as at October 2026. For advice specific to your circumstances, please consult a qualified professional.
