Pricing a product means choosing an amount customers are willing to pay while still allowing the business to earn money. A good price helps cover costs, compete with other products, and show the value of what is being sold. If the price is too low, the business may lose money even when sales are high.
If the price is too high, customers may choose a different option.
Key Facts
- Profit = Revenue - Total Cost
- Revenue = Price per Unit × Units Sold
- Total Cost = Fixed Costs + Variable Costs
- Unit Cost = Total Cost ÷ Number of Units Produced
- Markup Price = Unit Cost × (1 + Markup Rate)
- Break-even Units = Fixed Costs ÷ (Price per Unit - Variable Cost per Unit)
Vocabulary
- Price
- Price is the amount of money a customer pays to buy one unit of a product or service.
- Cost
- Cost is the money a business spends to make, buy, market, and deliver a product.
- Revenue
- Revenue is the total money a business earns from selling products before subtracting costs.
- Profit
- Profit is the money left after a business subtracts all costs from its revenue.
- Break-even Point
- The break-even point is the number of units a business must sell so that revenue equals total cost.
Common Mistakes to Avoid
- Ignoring all costs, including packaging, shipping, fees, and time, is wrong because it can make a product look profitable when it is actually losing money.
- Copying a competitor's price without checking your own costs and value is wrong because two businesses may have different expenses, quality levels, or target customers.
- Setting the lowest possible price to attract customers is wrong because high sales do not help if each sale earns little or no profit.
- Forgetting to test customer demand is wrong because a price that works on paper may not match what real customers are willing to pay.
Practice Questions
- 1 A student business sells handmade keychains for $6 each. If it sells 80 keychains, what is the total revenue?
- 2 A product costs $4 per unit to make, and the business wants a 50% markup. What selling price should it charge per unit?
- 3 A small business can charge 15 and sell fewer units. Explain what information the owner should compare before choosing the better price.