What should you charge?
Price is the single most powerful lever in your business — and the one most owners set by guesswork. Before you can cost a coffee, it helps to see what a price is actually made of. Start with the anatomy of a price, then build one from scratch.
Every price is a tiny P&L.
A customer sees one number. Inside that number are the costs of making the sale, the costs of keeping the doors open, and — if you priced it well — profit. It’s the same lines as an income statement — here is a simple $100,000 year, traced from two product lines down to profit.
Which line should you push?
Revenue alone is a trap. Product A brings in more than twice the sales of Product B — but size isn’t the same as worth. What matters is contribution margin: the share of each sale that survives its variable costs and goes on to cover overhead and profit.
Product A
Product B
Product B keeps 83¢ of every dollar; Product A keeps just 50¢. So even though B is the smaller line today, each extra dollar of B is worth far more to the bottom line than a dollar of A. The rule follows directly: grow the line with the highest contribution margin. Push B, lift A’s price or trim its variable costs — and profit climbs faster than revenue does.
The mix itself is a lever. Shifting sales toward your highest-contribution product lifts profit with no change in total revenue — the same dollars, simply earned in a better order.
Supply, demand, and the price you can actually charge.
Costs set the floor — never sell below what a sale costs you. But the ceiling is set by the market, where two forces meet: how much buyers want a thing (demand) and how much of it is available (supply). Price settles where they cross.
Demand pulls price up
When buyers want more than is available — a sought-after product, a quiet competitor, a busy season — you have room to charge more, and most of the increase drops straight to contribution margin.
Supply pushes price down
When the shelf is full or demand softens, the market pulls price back toward your cost floor. Competing on price alone is a race nobody wins.
Price clears where they meet
Read both sides. Hold the line above your variable-cost floor, and price as close to the demand ceiling as the market will bear.
Think of your business as a vehicle.
Two systems keep a car moving. The engine generates power; the chassis holds everything together so that power goes somewhere. Your pricing works the same way — and confusing the two is how good businesses quietly run out of road.
The engine — Price, COGS & gross profit
This is what generates power. Your price minus the direct cost of the sale (COGS) is your gross profit — the horsepower the rest of the business runs on. A weak engine (thin margin) means you’re barely moving, no matter how busy you are.
The chassis — operating cost
Rent, software, admin, insurance, base wages: the frame that keeps the vehicle intact and on the road. It costs the same whether you’re parked or flat-out. A heavy chassis needs a stronger engine to pull it.
The fuel gauge — cash flow
A strong engine and a sound chassis still strand you if the tank runs dry. Cash flow is the fuel gauge: it tells you whether there’s enough in the tank to keep moving — to make payroll, buy stock, and cover the bills — long before the engine sputters. Profit on paper means nothing if you can’t fuel the next mile.
A powerful engine bolted to a broken chassis goes nowhere; a perfect chassis with a weak engine never moves; and an empty tank strands them both. Healthy pricing needs all three — enough gross margin to power the business, enough discipline to keep overhead from weighing it down, and enough cash flow in the tank to keep going.
What each piece actually means.
Cost of goods sold
The costs that exist only because you made the sale — ingredients, materials, the labour to produce it, packaging. Sell twice as much, and these roughly double.
Gross profit
What’s left of each sale to run everything else. It’s the clearest read on whether the product itself makes money before overhead enters the picture.
Operating cost (overhead)
The cost of being open — rent, software, admin, insurance, base salaries. You pay it whether you sell one unit or one thousand. It doesn’t move with sales.
Contribution margin
What each individual sale contributes toward covering fixed overhead — and, once overhead is paid, toward profit. The single most useful number in a pricing decision.
Price is the most powerful lever you have.
Revenue is simply price × units sold. You can grow it by selling more, cutting costs, or raising price — but they are not equal. A price increase, if your volume holds, flows almost entirely to the bottom line, because the costs of that sale don’t change.
On this $100,000 year, profit is $20,000. Raise prices just 10%, to $110,000 of revenue, and — with the same COGS and overhead — profit jumps to $30,000. A 10% price move became a 50% profit move. Few cost-cutting projects come close. That’s why pricing deserves real thought, not a guess or a “cost plus a bit.”
Costs stay at $40,000 variable + $40,000 fixed. Because they don’t move, the whole price change lands on profit — a 10% price rise becomes a 50% profit jump.
Contribution margin is the number to protect.
Gross profit tells you if the product works. Contribution margin tells you if the price works, because it counts every cost that rises with a sale — not just COGS, but payment fees, shipping, and commissions too.
It answers the question every pricing decision hinges on: how much does this one sale put toward keeping the lights on? Add up your fixed overhead, divide by the contribution per unit, and you have your break-even — the number of units before profit even starts.
It’s also why discounting is so dangerous. Knock 10% off a $100 price and you don’t lose 10% of profit — you lose it straight out of contribution margin, where profit lives. A discount that looks small at the till can erase the profit on the sale entirely. Price with that in mind, and you protect the engine.
Break-even = fixed costs ÷ contribution per unit. Below it you’re funding overhead; above it, every unit is profit.
Next: see these lines on real businesses. The “Costed examples” tab breaks a coffee, a landscaping job, an HVAC install, an event, a hotel night and a framing job into every cost — each rolled up into the very same categories you just met.