How to Price a Product: Three Pricing Methods and Two Worked Examples

How to price a product is one of the hardest decisions a small-business owner makes, because getting it wrong is costly in both directions. A price that is too low means working hard for little profit, and you may find months later that every customer was being subsidised from your capital. A price that is too high without a reason drives customers away before they try you. Many owners settle it the easy way: they look at the nearest competitor's price and knock a little off, without knowing whether that price even covers their own costs.

This article explains what a price has to cover, then the three main pricing methods: cost-based, competitor-based and value-based. It shows the difference between markup and margin, and how VAT and online payment fees fit into the price. We then apply all of this to two illustrative, fully calculated examples, a product sold online and a service priced by the hour, and finish by working out what discounts and inflation do to your pricing decision.

What does a price have to cover?

Before any method, know what the price is made of. Every pound the customer pays has to cover four things, in this order:

1. The direct cost of each unit: also called the variable cost, this is what you pay with every unit you sell: materials, packaging, labels, the payment-gateway or platform fee, and delivery if you pay for it. An everyday example: a sandwich seller pays for the bread, the filling and the wrapping with every sandwich, and would pay none of it if he sold nothing.
2. Each unit's share of fixed costs: fixed costs are what you pay every month whether you sell or not: rent, wages, the employer's social-insurance share, utilities, ongoing advertising, subscriptions. If they come to EGP 20,000 a month and you expect to sell 1,000 units, each unit's share is EGP 20.
3. Your own pay: if you work in the business yourself, your time has a price. Put a monthly wage for yourself into fixed costs. Otherwise your profit will look bigger than it is, and you will find the business cannot afford to appoint someone to replace you. If your own social-insurance contribution as an employer applies to you, add it too, and check your case with Maher Consulting Firm.
4. Profit: what is left after all of the above, your return on the money you put in and the risk you took.

This leads to an important term: the contribution margin, which is the unit selling price minus its direct cost, in other words the amount each unit contributes towards fixed costs and then profit. Divide it by the selling price and you get the contribution margin ratio. These two numbers are what you will use later to work out break-even and the effect of discounts, and we explain them in detail in our article on break-even and working capital.

Three ways to price a product

There are three main pricing methods. Each has a strength and a weakness, and the best approach, as we will see, is to use them together.

Method 1: cost-based pricing

This is one of the simplest and most widely used methods. The open textbook Principles of Marketing describes it as setting prices based on the costs of doing business, with the example of a company that sets a smartphone's price to include its costs plus a profit of 10 percent². The idea: work out the full cost of each unit, then add a percentage on top.

The basic formula: price = full unit cost + (full unit cost × markup percentage). The markup amount is the markup percentage multiplied by the cost³. If the full cost is EGP 80 and the markup is 25%, the price is 80 + 20 = EGP 100.

Its strength: it ensures each unit covers its cost, provided you actually sell the volume on which you based the fixed-cost share. Its weakness: it ignores the customer and the competitor entirely. It may give you a price higher than the market will accept, or far lower than the customer was willing to pay. That is why we use it to set the floor, not the final price.

Markup and margin: the difference that costs you money

This is the most common arithmetic mistake in pricing. Markup is calculated on cost; profit margin is calculated on the selling price. Example: you buy an item for EGP 100 and sell it for EGP 150. The markup is 50% (50 ÷ 100), but the margin is 33.3% (50 ÷ 150). If your target is a margin of 50% of the price, you need a 100% markup on cost, that is, to sell at EGP 200, not 150.

To convert between the two: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin). The table shows the most common values:

A practical rule: when someone tells you "I make 30%", ask: 30% of what, cost or price? The gap between the two answers can be the business's entire profit.

Method 2: competitor-based pricing

Here a company sets its prices according to the prices of its competitors². It makes sense in markets where products are similar and customers compare easily, such as groceries, everyday supplies and products listed side by side on online marketplaces.

It comes with two conditions. First, compare a genuinely similar product: the same quantity, the same quality, the same way of selling, and check whether the competitor's price includes delivery and tax. Second, know your own cost first. A competitor may sell cheaply because it buys materials in larger quantities, pays lower rent, or is losing money without realising it. Copying its price without knowing your cost is the fastest way to repeat its losses.

How do you collect competitors' prices? Pick 3 to 5 competitors targeting the same customer and record, for each, the price, the quantity or size, what the price includes (delivery, gift wrapping, a guarantee) and customer ratings if available. Then place your product in the same table honestly: where are you better, and where are you weaker? This comparison is part of testing the idea before you spend, and we cover practical ways to do it in how to test your business idea before spending your capital.

Method 3: value-based pricing

Here you start from the customer, not the cost: the company has a good understanding of the value-added benefits of its product and sets the price accordingly². The question is not "what did it cost me?" but "what is it worth to the customer?".

An everyday example: a technician repairs a broken air conditioner on a hot day in August. The spare part may be cheap, but having the AC working again the same day is worth a lot to the customer. Or a designer creates a visual identity for a new shop: its value to the owner is tied to the customers it brings in, not to the hours the designer spent.

How do you gauge value in practice without expensive market research?

• Ask about the alternative: what would the customer do if they did not buy from you? What they pay for the alternative, or what they lose without it, is a reference for value.
• Quote a real price and ask for a commitment: a small deposit or a pre-order tells you more than a hundred answers to "would you buy?".
• Try more than one level: a basic package and a full package, and see which customers choose.

Value-based pricing usually gives you the highest possible price, but it needs a clear advantage the customer can see, and a level of trust a new business does not always have. That makes it the ceiling.

How to price a product in 6 practical steps

The three methods are not alternatives to choose between but tools to use together. Principles of Marketing sets out a five-step procedure for establishing pricing policy: determine pricing objectives, estimate demand, estimate costs, analyse the external environment, then select pricing strategies or tactics². Here is a simplified, practical version for a small business:

1. Decide what the price is for: do you want to enter the market quickly and win early customers, or earn a high margin from a small segment? The objective decides where you sit between the two limits.
2. Calculate the direct cost of each unit line by line, including packaging and fees. Do not estimate it "roughly".
3. Calculate each unit's share of fixed costs at a realistic volume, not an optimistic one, with your own pay included. This gives you the floor.
4. Collect competitors' prices and compare like with like.
5. Estimate the value to the customer using the questions above. This gives you the ceiling.
6. Choose a price and test it: work out the contribution margin and break-even at that price, and check that the volume you need to break even is achievable.

In step six, remember the basic rule of demand: all other factors being consistent, an increase in price will result in a decrease in demand². How big that decrease is, is called the price elasticity of demand, derived from the percentage change in quantity demanded divided by the percentage change in price². A product with many substitutes loses customers quickly if you raise its price; a distinctive or essential product loses them slowly.

VAT and online payment fees in the price

Value added tax

Under VAT Law No. 67 of 2016, the general VAT rate on goods and services is 14% from the 2017/2018 financial year⁴. Anyone whose sales of taxable and exempt goods and services reach EGP 500,000 after the law came into force, in any financial year or part of one, must apply for registration within 30 days of reaching that threshold, and the minister may change the threshold by decree, so check the one in force⁴. The law requires importers, exporters and distribution agents to register whatever the size of their transactions⁴.

What this means for pricing:

• The tax is not your revenue. If you sell for EGP 114 including VAT at the general rate, your revenue is EGP 100 and EGP 14 is collected for the state. Calculate all your margins on the price before tax. The tax = price before tax × 14%; if you start from a tax-inclusive price, the tax = inclusive price × 14 ÷ 114, not inclusive price × 14%. Some goods and services are exempt or taxed at a different rate, so check where your product stands.
• Plan your consumer price as VAT-inclusive: consumers compare the final price they pay, so plan for it from the start and keep pre-VAT prices for business clients. If you start at EGP 100 before registering and then register, you either raise the price to EGP 114 or keep it at 100, in which case your revenue becomes only about EGP 87.72.
• You can deduct after registering. The law lets a registered business deduct from the tax due on its sales the tax already charged on its inputs, up to the amount due, with any undeducted balance carried forward to later periods⁴. So if you are registered, cost your purchases before VAT. The conditions and exclusions need an accountant, or Maher Consulting Firm, to apply them to your activity.

Payment-gateway and platform fees

If customers pay electronically through a payment gateway, the fee is deducted from the amount you collect, not added to it. For example, Paymob advertises standard pricing for startups and small and medium enterprises of 2.75% + EGP 3 per transaction, with no monthly or subscription fees⁵. These are one company's figures, quoted for illustration, not a recommendation. Every gateway, marketplace and delivery app has its own terms. Read the pricing page of whoever you will use, check whether the fee includes VAT and whether it varies by payment method, then put the numbers into your calculation.

Note that the fixed part of the fee (EGP 3 in this example) is paid on every transaction, however small. On an EGP 50 order it equals 6% of the order; on an EGP 300 order, only 1%. So encouraging customers to buy more than one item per order genuinely raises your margin.

Illustrative example 1: pricing a product sold online

A small-business owner in Cairo makes handmade natural soap and sells it through an online store and social media, with customers paying electronically. This is an illustrative example: the costs, volumes and competitor prices are assumptions to explain the method, not documented market prices, and the payment fee is taken from one gateway's published page⁵. Every result was calculated with code.

Assumptions

• Direct cost per bar: oils and materials EGP 38, box and label EGP 12, total EGP 50.
• Payment fee: 2.75% of the price + EGP 3 per order; the average order is 3 bars, so EGP 1 of the fixed part per bar.
• Delivery: paid by the customer at cost, so it is left out. If your customers pay cash on delivery, replace the gateway fee with the collection fee your courier charges.
• Monthly fixed costs of EGP 22,500: workshop room rent 4,000, advertising 6,000, utilities and internet 1,500, online store subscription 1,000, and the owner's pay 10,000.
• Expected volume: 900 bars a month (300 orders).
• Competitors' prices for a similar product: EGP 95, 120 and 150 a bar.
• All prices are before VAT; we come back to it at the end of the example.

Step 1: the cost floor

Each bar's share of fixed costs = 22,500 ÷ 900 = EGP 25. The full cost per bar before the payment fee = 50 + 25 = EGP 75.

If she wanted a 25% margin on price and ignored the fee, she would calculate the price as 75 ÷ (1 − 0.25) = EGP 100. But the fee is deducted from the price itself, so the correct calculation is: price × (1 − 0.0275 − 0.25) = 75 + 1, giving a price of 76 ÷ 0.7225 = EGP 105.19. That is the floor that meets the target at 900 bars a month. Note the common mistake: if she added a 25% markup on cost instead of a 25% margin on price, the price would be EGP 93.75 and her actual margin before the fee only 20%.

Step 2: competitors and value

Competitors charge between EGP 95 and 150. A price of 105 would put her close to the cheapest competitor, yet the product is handmade, carefully packaged, and the first reviews from trial customers are positive. So she chose EGP 110: above the floor, below the competitors' average (about EGP 121.67), with room to raise it later once the value is proven.

Step 3: testing the price

• Payment fee per bar = 2.75% × 110 + 1 = EGP 4.025.
• Contribution margin per bar = 110 − 4.025 − 50 = EGP 55.975, about EGP 55.98 or about 50.9% of the price.
• Break-even = 22,500 ÷ 55.975 = 401.97, or 402 bars a month.
• Margin of safety = (900 − 402) ÷ 900 = about 55.3%: sales could fall more than half short of expectations before the business starts losing money.
• Revenue at 900 bars = EGP 99,000, and monthly net profit before income tax = 55.975 × 900 − 22,500 = about EGP 27,878, after the owner's pay, or about 28.2% of revenue.

The table shows how break-even moves with price, with costs unchanged:

Had she copied the cheapest competitor and sold at EGP 95, she would need 544 bars a month to break even, 142 more than at EGP 110, for a price difference of just EGP 15.

Step 4: the effect of VAT

At revenue of EGP 99,000 a month, cumulative sales reach EGP 594,000 in month six, passing the EGP 500,000 registration threshold, assuming the six months fall in the same financial year. This is a real pricing decision: EGP 110 before tax becomes EGP 125.40 including VAT. If she chose a round advertised price of EGP 125 including VAT, her revenue per bar would be 125 ÷ 1.14 = about EGP 109.65, the VAT about EGP 15.35, and the payment fee is charged on the full amount the customer paid (about EGP 4.44), so the contribution margin becomes about EGP 55.21 instead of about 55.98. The difference is small because she planned for it. Had she started at EGP 110 all-inclusive and then had to take the VAT out of it, her revenue per bar would drop to about EGP 96.49.

Illustrative example 2: pricing a service by the hour

Services are priced a little differently, because what you sell is time and expertise. The example: a small design studio producing visual identities and social media designs for small shops, made up of the owner and one designer. This is an illustrative example and the figures are assumptions, except the employer's social-insurance rate.

Step 1: monthly fixed costs

• The designer's pay is EGP 12,000. Under Social Insurance Law No. 148 of 2019, the employer pays 18.75% of the insurable wage and the employee 11%, with a minimum insurable wage of EGP 2,700 and a maximum of EGP 16,700 a month from 1 January 2026⁶. The rate applies to the insurable wage within those limits, not to any salary however high. The designer's EGP 12,000 falls between the limits, so the employer's share is 18.75% × 12,000 = EGP 2,250.
• The owner's pay is EGP 15,000.
• Co-working space 3,500, design software subscriptions 2,500, internet and phone 800, marketing 2,000, accountant 1,000.

The total is EGP 39,050 a month.

Step 2: billable hours

This is where service pricing most often goes wrong: assuming every working hour is sold. Two people × 22 working days × 8 hours = 352 available hours a month. But part of that goes on meetings, unpaid revisions, marketing and admin. Assuming only 60% is billable, the hours sold come to 211.2.

Step 3: cost per hour and the rate

• Cost per billable hour = 39,050 ÷ 211.2 = about EGP 184.90.
• For a 25% margin on price: 184.90 ÷ 0.75 = about EGP 246.53 an hour. (A 25% markup on cost would give about EGP 231.12 and a margin of only 20%.)
• The studio set an internal rate of EGP 250 an hour, a profit of about EGP 65.10 an hour, or about 26% of the price.
• At 211.2 hours: revenue EGP 52,800 and profit EGP 13,750 a month before income tax and after the owner's pay.
• Break-even: 39,050 ÷ 250 = 156.2 billable hours, only about 44.4% of available hours.

Step 4: from an hourly rate to a package price

Customers do not like buying hours; they buy results. So the studio uses the hourly rate internally to price packages. A monthly design package for a shop's page takes an estimated 18 hours, plus EGP 300 of direct costs for images and client-specific subscriptions: 18 × 250 + 300 = EGP 4,800 a month before VAT. Then it checks this against value: what does the shop owner pay a freelancer, and how many orders does the page bring in? If the value is clearly higher, the package can be priced higher; if the market will not accept 4,800, the answer is not a lower rate but fewer hours per package or a narrower scope.

Watch two things. First, if billable hours fall to 45% of available hours (158.4), profit at EGP 250 an hour drops to just EGP 550 a month: the share of hours you bill matters as much as the rate. Second, at EGP 52,800 a month, sales pass EGP 500,000 in month ten, assuming the ten months fall in the same financial year, after which the package becomes EGP 5,472 including VAT, and since the studio's clients are businesses and shops, agree with them in writing from the start that prices are quoted before VAT.

Discounts and price rises: calculate before you decide

A discount looks like an easy way to boost sales, but it comes straight out of the contribution margin. The discount amount is the discount percentage multiplied by the original price³, while the direct cost does not fall at all. The right question before any discount: how much must volume rise for total contribution to stay the same?

The table answers that for the soap example (original price EGP 110, 900 bars a month, total contribution of about EGP 50,378):

The bottom line: a 20% discount means selling 1,457 bars instead of 900 just to stand still, and production capacity or the advertising budget may not stretch that far. In the other direction, a 10% price rise keeps profit the same even if you lose 16% of volume. The lower your contribution margin ratio, the more dangerous a discount becomes.

Smarter alternatives to a straight discount

• Bundles: bundle pricing is a popular strategy to promote purchasing multiple products at once⁷. A box of 3 bars priced slightly below the three separately raises the average order and spreads the fixed part of the payment fee and the packaging cost over more units.
• Conditional discounts: a discount on orders above a set amount, or on the first order only, rather than a blanket discount on everything.
• Price endings: one popular form of psychological pricing is odd-even pricing, ending a price with a figure such as 19.95 or a round figure such as 50.00⁷. There is no ideal ending for every market, so test both formats on your customers and compare the results.

Pricing under inflation: when and how to review your prices

Annual urban headline inflation was 13.9% in September 2026, down from 14.5% in August, as reported by Daily News Egypt, and the nationwide annual rate was 12.8% in the same month, as reported by Maspero, both citing the Central Agency for Public Mobilisation and Statistics (CAPMAS)¹. That means your materials, wages and rent move during the year, and a price that worked in January may not cover your costs by December.

An illustrative example using the soap from example 1: if oils and materials rose by 15%, they would cost EGP 43.70 instead of 38, and the direct cost would be EGP 55.70. At the same price (EGP 110), the contribution margin falls to about EGP 50.28 and monthly profit from about EGP 27,878 to about EGP 22,748. The owner has two options:

• Keep the same contribution in pounds (about EGP 55.98 a bar): this needs a price of about EGP 115.86, a rise of about 5.3%.
• Keep the same contribution margin ratio (about 50.9% of the price): this needs a price of about EGP 122.29, a rise of about 11.2%.

The first protects your current profit; the second keeps the same share of every pound of sales and leaves headroom for your other costs to rise. The decision depends on what your customers will accept and what your competitors do. Three habits help:

1. Set fixed review dates, every three months for example, rather than waiting for profits to disappear.
2. Know your warning number: work out in advance at what materials cost your margin drops below a level you accept, and check it against every purchase invoice.
3. Raise in measured, announced steps: compare one large rise with two smaller ones over the year, tell your regular customers before the change, and consider pairing the rise with a small addition in value.

Rising costs hit cash as well as profit, because every batch of materials needs more money for the same quantity. We explain how to build that into your monthly table in cash flow for small business.

8 common pricing mistakes

1. Copying a competitor's price without knowing your cost, so you repeat its losses or leave profit on the table.
2. Confusing markup with margin, so you sell at a lower margin than you think.
3. Forgetting your own pay, so the business looks profitable while paying you less than a job would.
4. Spreading fixed costs over an optimistic volume, so the price floor looks lower than it really is.
5. Ignoring payment, platform and packaging costs, small items that come out of every sale.
6. Not planning for VAT in the consumer price, then taking the tax out of your margin after you register.
7. Discounting without working out the volume needed to keep the same profit.
8. Fixing prices for a whole year in a market where costs change every month.

Where pricing shows up in a feasibility study

Price is not just one number in a study; it is the input that almost every result depends on:

• Expected revenue: price × volume for each product or service, month by month.
• Break-even: it moves directly with the contribution margin, as the price table in example 1 shows.
• Cash flow and required capital: a lower price means more time below break-even, a deeper cash need and more capital. The start-up costs that come on top are covered in startup costs in Egypt.
• Scenarios: a good study tests what happens if you have to cut your price or cannot raise it with inflation, not just one optimistic case.

To see how price fits together with demand estimates, costs and capital in a complete study, read our guide to feasibility studies in Egypt in 2026.

How Kleverz helps

Kleverz is an AI-powered platform for feasibility studies. If you are still at the idea stage, the free idea check takes about 5 minutes and gives you a verdict (proceed, adjust, validate first or avoid), a Kleverz Score out of 100 across five dimensions, the top 3 risks, and a first step to take in the next 48 hours.

Once you have a provisional price and want to see its effect on the whole business, the detailed study is built on the numbers you enter: price, direct cost, expected volume, team, city and capital. It calculates start-up costs and fixed monthly costs including the employer's social-insurance share; a month-by-month cash flow for the first 12 months and a yearly summary over three years; monthly break-even revenue and the units needed per product or service; the operating break-even month, payback month, the deepest cash need and a recommended capital that adds a two-month reserve; optimistic, realistic and pessimistic scenarios; and the main risks, indicators to track and a week-by-week plan for the first month. It is delivered within 24 hours of payment confirmation, in Arabic or English. When you decide to go ahead, Maher Consulting Firm, the human consulting arm, handles company formation.

Frequently asked questions

Sources

1. Daily News Egypt. Egypt's annual urban inflation eases to 13.9% in September (2026-10-10) — secondary source; Maspero. التضخم السنوي في مصر يسجل 12.8% خلال سبتمبر الماضي (in Arabic) (2026-10-10) — secondary source. Checked 19 October 2026.
2. OpenStax. Principles of Marketing — 12.3 The Five-Step Procedure for Establishing Pricing Policy (2023-01-25). Checked 19 October 2026.
3. OpenStax. Contemporary Mathematics — 6.2 Discounts, Markups, and Sales Tax (2023-03-22). Checked 19 October 2026.
4. FRA. القانون رقم 67 لسنة 2016 بإصدار قانون الضريبة على القيمة المضافة وفقًا لآخر تعديل (المواد 3 و16 و22) (in Arabic). Checked 19 October 2026.
5. Paymob. Pricing. Checked 19 October 2026.
6. NOSI. رفع الحدين الأدنى والأقصى لأجر الاشتراك اعتبارًا من 1 يناير 2026 (in Arabic) (2025-11-30); Andersen Egypt. Social insurance in Egypt (contribution rates under Law 148/2019) (2026-06-30) — secondary source. Checked 19 October 2026.
7. OpenStax. Principles of Marketing — 12.5 Pricing Strategies and Tactics for Existing Products (2023-01-25). Checked 19 October 2026.