How to Price Products as a Small Business in the UK

Price too high and customers walk past. Price too low and you work hard for nothing, or worse, you lose money on every sale. For a small business, pricing is not a guess and it is not a copy of whatever competitors charge. It is a method: know your true costs, choose a margin deliberately, account for VAT, and review regularly. This guide walks you through that method with worked £ examples.

Here is the short answer: to price products as a UK small business, calculate your full unit cost (materials, labour and overheads), then convert your target margin to a price with price = cost / (1 – margin). Add 20% VAT if VAT registered, factor in the £90,000 registration threshold, benchmark competitors, and review prices yearly as costs change.

The sections below cover the full process: why pricing matters more than any other decision, how to find your true unit cost, the markup vs margin maths with a £ worked example, cost-plus vs value-based pricing, VAT-inclusive vs VAT-exclusive pricing, the £90,000 VAT threshold cliff edge, psychological pricing, and how to test and raise prices. Figures are current as of 2026. This article gives general information only and is not financial advice.

Why Pricing Is the Highest-Leverage Decision You Make

A small change in price has a bigger effect on profit than almost anything else you control. Cutting costs by 5 percent is hard work. Raising prices by 5 percent, where the market allows it, drops straight to your bottom line because your costs do not change.

Consider a product that costs you £40 to make and sells for £60. Your profit is £20 per unit. Raise the price by just 5 percent to £63 and profit rises to £23, a 15 percent increase in profit from a 5 percent price rise. To get the same extra £3 of profit by selling more units at £60, you would need to sell 15 percent more units, which means 15 percent more work, materials and customer service.

Most small business owners underprice. The reasons are familiar: fear of losing customers, guessing instead of calculating, copying a larger competitor whose costs are completely different, or forgetting hidden costs like packaging, payment processing fees and their own time. Underpricing feels safe because orders keep coming, but it starves the business of the profit it needs to survive shocks, invest and pay you properly.

Pricing well does not mean pricing high. It means pricing deliberately, with full knowledge of your costs and a clear-eyed view of what customers will pay.

Know Your True Unit Cost Before You Price Anything

You cannot price sensibly until you know what each sale truly costs you. Many beginners count only materials and forget everything else. The full unit cost has three layers.

1. Direct costs. Everything spent to make or buy one unit: materials, components, the wholesale cost of goods you resell, packaging, and delivery to the customer if you offer free shipping.

2. Direct labour. The time it takes to make, pack or deliver one unit, costed at a realistic hourly rate. If you do the work yourself, use the wage you would pay someone else to do it, not zero. Your time is a cost even when no cash changes hands.

3. Allocated overheads. A fair share of the costs that keep the business running: rent, utilities, insurance, software subscriptions, accounting fees, marketing and payment processing fees. Add up monthly overheads, divide by the number of units you expect to sell per month, and add that figure to each unit’s cost.

Example: you sell handmade candles. Wax, wick, jar and packaging cost £4.50 per candle. Making and packing takes 20 minutes; at £15 per hour that is £5.00 of labour. Monthly overheads are £900 and you sell 300 candles a month, so overhead per candle is £3.00. Your true unit cost is £4.50 + £5.00 + £3.00 = £12.50, not the £4.50 the materials suggest.

Once you know your unit cost, decide the net margin the business needs to earn, for example 20 percent, and price backwards from there. The next section shows you how, and where most beginners go wrong. Tracking these figures over time is part of basic financial control, which our how to read and analyse financial statements guide explains.

Markup vs Margin: The Maths Most Beginners Get Wrong

Markup and margin sound interchangeable. They are not, and confusing them is one of the most expensive mistakes in small business pricing.

Markup is profit expressed as a percentage of your cost. Margin is profit expressed as a percentage of the selling price. Because the selling price is always higher than the cost, a margin percentage is always worth more pounds than the same markup percentage.

The formulas:

• Price from markup: price = cost x (1 + markup)
• Price from margin: price = cost / (1 – margin)

A £ worked example

Take the handmade candle with a true unit cost of £12.50. You decide you want 50 percent.

With a 50 percent markup: £12.50 x 1.50 = £18.75. Profit is £6.25, which is 33 percent of the selling price, not 50 percent.

With a 50 percent margin: £12.50 / (1 – 0.50) = £12.50 / 0.50 = £25.00. Profit is £12.50, which is genuinely half the selling price.

The same “50 percent” gives you £18.75 one way and £25.00 the other, a £6.25 difference on every single candle. Scale that across hundreds of units and the confusion costs thousands.

The practical rule: decide which one you mean before you calculate. Suppliers and wholesalers usually talk in markup. Your accounts, your accountant and your profit targets usually talk in margin. If you tell yourself “I want a 40 percent margin” but use the markup formula, you will underprice by £3.33 on every £12.50-cost candle and never understand why the business feels tight.

Cost-Plus vs Value-Based Pricing: Which Method Suits You?

Once you know your unit cost, you still need a method for turning it into a price. The two main approaches are cost-plus and value-based pricing.

Cost-plus pricing starts with your cost and adds a fixed markup or margin. It is simple, consistent and guarantees a known profit on every unit. Its weakness is that it ignores the customer completely. It can price you out of a competitive market, and it can leave money on the table when customers would happily pay more.

Value-based pricing starts with what the product is worth to the customer and works backwards. A candle that makes a £30 gift feel special can sell for £25 even if it costs £12.50 to make. This method captures more profit, but it demands real knowledge of your customers: what problem you solve, what alternatives exist, and what they currently pay. It is harder and riskier, especially for new businesses without sales history.

Most small businesses do best with a hybrid. Use cost-plus to set your floor: the lowest price that still earns your target margin. Use value-based thinking to set your ceiling: the most the market will bear. Then price somewhere in between, informed by competitor prices and your positioning. Check what direct competitors charge, but never copy blindly: a larger rival may have costs half of yours, and matching their price can mean trading at a loss.

VAT and Pricing: VAT-Inclusive vs VAT-Exclusive Explained

If your business is VAT registered, you must charge VAT at the standard rate of 20% on most goods and services (correct as of 2026). That creates two different prices for everything you sell, and you need to know both.

• VAT-exclusive price (also called net or ex-VAT): the price before VAT is added. A £100 exclusive price is the figure your accounts use.
• VAT-inclusive price (also called gross or inc-VAT): the price the customer actually pays. A £100 exclusive price becomes £120 inclusive.

The conversions:

• Exclusive to inclusive: multiply by 1.2 (£100 x 1.2 = £120)
• Inclusive to exclusive: divide by 1.2 (£120 / 1.2 = £100)

The common mistake is adding 20% to the inclusive figure when working backwards, or subtracting 20% from it. £120 minus 20% is £96, not £100. Always divide by 1.2 when stripping VAT out.

Who sees which price matters too. Prices advertised to consumers must include VAT, so a shop or website shows the £120 figure. Business-to-business quotes conventionally show the exclusive price with “plus VAT”, because a VAT-registered customer reclaims the VAT and the £100 is their real cost.

For your own records, always know the exclusive figure: that is the revenue your business actually keeps, and it is the figure you report on your VAT return. If you are unsure how VAT affects your wider tax position, our tax planning strategies for small business owners guide covers the planning side.

The £90,000 VAT Threshold: The Pricing Cliff Edge

The UK VAT registration threshold is £90,000 of taxable turnover in a rolling 12-month period (in place since 1 April 2024 and unchanged at the Autumn Budget on 26 November 2025, so it applies through the 2026/27 tax year). Cross it and you must register and start charging 20% VAT. For a business selling to consumers, this creates a pricing cliff edge that catches many growing businesses by surprise.

Imagine you sell a product for £100 and you are not VAT registered. Every £100 sale puts £100 in your till. Then your rolling turnover crosses £90,000 and you must register. You now face an uncomfortable choice:

Option 1: absorb the VAT. Keep the price at £100. Your real revenue per sale is now £100 / 1.2 = £83.33, and £16.67 goes to HMRC. Your margin shrinks by £16.67 on every unit overnight.

Option 2: pass it on. Keep your £100 revenue by raising the price to £120. Customers see a 20% price rise overnight, which can cost you sales, especially if competitors are still below the threshold and charging £100.

There is a third option worth knowing: voluntary registration below £90,000. This can be smart if most of your customers are VAT-registered businesses, because they reclaim the VAT and your effective price to them does not change, while you can reclaim VAT on your own purchases. It is usually painful if you sell mainly to consumers, who cannot reclaim and simply see higher prices.

The practical lesson: when your turnover approaches £70,000 to £80,000, model both scenarios in advance so the decision is planned rather than panicked. Decide which option your customer base can bear, and consider whether voluntary registration earlier would smooth the transition.

Psychological Pricing: What Works and What Is Overused

Beyond the maths, how a price is presented influences buying decisions. These tactics are widely used in UK retail, and they work best as a complement to sound pricing, never as a substitute.

Charm pricing. Ending prices in .99 or .95 (£9.99 instead of £10) is the oldest trick in retail. It works because shoppers read left to right and register the first digits. But it is overused, and for premium or handmade products it can cheapen the brand. A £95 price tag can feel more confident than £94.99 for the same product.

Anchoring. Show a higher-priced option first and the option you actually want to sell looks reasonable by comparison. This is why three-tier pricing is everywhere: the top tier exists partly to make the middle tier feel like the sensible choice.

Price framing. Break a price into smaller units to make it feel manageable: £120 a year becomes “£10 a month”, and a £600 course becomes “less than £2 a day over a year”. The maths must be honest, but the reframe helps customers compare cost against benefit.

Reference pricing. Showing a “was £80, now £60” discount only works if the original price was genuine and recent. Inflated reference prices destroy trust when customers notice, and they are the fastest way to turn a pricing tactic into a complaint.

Use these tactics sparingly and consistently with your brand. A discount retailer can lean on .99 endings and was/now labels. A premium brand usually does better with round numbers, quiet confidence and fewer, more meaningful promotions.

How to Test Your Prices and When to Raise Them

Pricing is not a one-time decision. Costs move, competitors move, and your own position in the market changes. Build a review habit:

Review at least once a year. Put a pricing review in your calendar alongside your annual accounts. Check every product’s current unit cost, because supplier prices, wages and overheads drift upward silently.

Raise prices in small, regular steps. A 3 to 5 percent annual increase is usually absorbed without complaint. Waiting three years and then imposing a 15 percent jump shocks customers and invites them to shop around.

Test before you commit. Try a new price with new customers first, or on one sales channel, while keeping existing customers on the old price for a grace period. If conversion holds, roll it out fully. If it drops sharply, you have learned something cheaply.

Watch your margins, not just your sales. Rising revenue with shrinking margins means your prices are not keeping up with costs. This is exactly the kind of trend your management accounts should reveal each quarter.

Grandfather strategically. Letting loyal customers keep an old price for a limited time softens increases and rewards loyalty. Just set a clear end date so the concession does not become permanent.

Price rises are also one of the cleanest ways to improve cash flow: unlike selling more, a price rise brings in extra cash with no extra work, materials or customer service load. Our cash flow management for small business guide shows how that extra margin compounds across the business.

Pricing Mistakes That Quietly Kill Small Businesses

• Pricing from materials only. Forgetting labour, overheads and your own time is the classic route to working hard for nothing.
• Copying a bigger competitor. Their costs, volumes and strategy are different. Matching their price can mean trading at a loss.
• Confusing markup with margin. As the worked example showed, the same percentage gives very different prices. Know which one you mean.
• Setting prices once and forgetting them. Costs rise every year. Prices that never move are prices that slowly strangle your margin.
• Discounting too readily. Every discount trains customers to wait for the next one. Discount with a clear reason and a clear end date, or not at all.
• Ignoring the VAT threshold until it hits. Discovering the £90,000 cliff edge after you have crossed it forces a panicked choice between absorbing VAT or shocking customers.
• Pricing to be the cheapest. There is always someone willing to go lower. Compete on value, service or niche instead of racing to the bottom.
• Not knowing your break-even point. If you cannot say how many units you must sell to cover costs, your prices are guesses, not decisions. (See our guide to break-even analysis for small businesses for the full worked method.)

Frequently Asked Questions

What is the difference between markup and margin?

Markup is profit as a percentage of your cost; margin is profit as a percentage of the selling price. With a £12.50 cost, a 50% markup gives a price of £18.75, while a 50% margin gives £25.00. Always confirm which one you are using before calculating.

How do I calculate a selling price from a target margin?

Use the formula price = cost / (1 – margin). For a £12.50 unit cost and a 40% margin target: £12.50 / (1 – 0.40) = £12.50 / 0.60 = £20.83. For a markup target instead, use price = cost x (1 + markup).

Should my product prices include VAT?

If you are VAT registered and sell to consumers, advertised prices must include VAT at 20%. If you sell to other businesses, quotes conventionally show the VAT-exclusive price with “plus VAT”, since VAT-registered customers reclaim it. If you are not registered, you simply do not charge VAT.

What happens to my prices when I cross the £90,000 VAT threshold?

You must register for VAT and add 20% to your prices or absorb it. Absorbing keeps the customer price the same but cuts your revenue per sale to five-sixths of the price (a £100 price becomes £83.33 of revenue). Passing it on means a 20% price rise for customers. Model both options before you cross the threshold.

Can I register for VAT voluntarily below £90,000?

Yes. Voluntary registration lets you reclaim VAT on purchases and can look more established. It usually makes sense when your customers are VAT-registered businesses who reclaim the VAT themselves. It usually hurts when you sell to consumers, who cannot reclaim and just see higher prices.

Is cost-plus or value-based pricing better for a small business?

Cost-plus is safer and simpler, and it guarantees a known margin. Value-based pricing can earn far more but needs real customer insight. Most small businesses should use cost-plus to set a price floor, then adjust upward toward what the market will bear based on competitor prices and perceived value.

How often should I review my prices?

At least once a year, and additionally whenever a major cost changes, such as a supplier increase or a wage rise. Small annual increases of 3 to 5 percent are absorbed far more easily than rare large jumps.

How do I price against cheaper competitors?

Do not try to beat them on price alone. Compete on value: better quality, faster delivery, stronger guarantees, or a narrower niche where you are the specialist. If you must match a lower price, first confirm your unit cost still leaves an acceptable margin at that price.

What is psychological pricing and does it work?

Psychological pricing presents prices to influence perception: charm prices like £9.99, anchoring with a premium option, and framing costs per day or per month. These tactics are widely used in UK retail and can lift conversion, but they work best on top of sound cost-based pricing, never instead of it.

How do I know if my prices are too low?

Warning signs: you are busy but the bank balance never grows, you cannot afford to pay yourself properly, a 10% rise in costs would wipe out your profit, or customers never query your prices. If raising prices slightly would terrify you, that fear is often the clearest signal they are too low.

Should I offer discounts to win new customers?

Discounts can win initial orders but train customers to expect lower prices. If you discount, give it a clear reason (launch offer, bulk order, end of line) and a clear end date. A small free extra often protects your price position better than a straight price cut.

Do I need an accountant to set my prices?

No, but an accountant can sanity-check your margin calculations and VAT position, especially around the £90,000 threshold. If the language of margins and accounts is new to you, start with our business finance for beginners UK guide.

Conclusion: Price Deliberately, Review Regularly

Pricing is a method, not a guess. Know your true unit cost, choose margin or markup deliberately and calculate it correctly, account for VAT and the £90,000 threshold before it surprises you, and review your prices at least once a year. Small, regular, well-calculated price decisions compound into a healthier business.

Pricing also feeds directly into the rest of your numbers, which is why it sits under budgeting in our content structure. Once your prices are set, plug them into your sales forecast so your budget reflects reality, not hope. Our pillar guide, how to create a business budget, walks you through that next step. For keeping the extra margin flowing through the business, see our cash flow management for small business guide.