How to build a price list without guesswork
Why is the price list often wrong?
In many SMEs, the price list is built in one of these ways: copying competitors, adding a percentage to material cost, or "by feel." The problem is that none of these methods accounts for the real costs — and the result is a price list that may look profitable but isn't.
Building a price list that works requires three ingredients: the full product cost, the desired contribution margin, and the company's break-even point.
Where do you start?
1. Calculate the full cost per product
The selling price must cover the full cost and generate a margin. If the full cost isn't known, the price is a gamble.
The full cost includes:
- Variable costs: materials, direct labor (at the real hourly cost, not the net salary), subcontracting
- Indirect production costs: energy, depreciation, maintenance
- Overhead allocation: administration, sales, logistics
For calculation details, how to calculate the true cost of a product explains the method step by step.
2. Define the target margin
Once the full cost is known, the price is calculated as:
Price = Full cost / (1 – Target margin %)
If the full cost is €43 and the target margin is 25%:
Price = 43 / (1 – 0.25) = 43 / 0.75 = €57.33
The target margin isn't arbitrary. It must be sufficient to cover the company's fixed costs and generate profit. This is where the break-even point comes in.
3. Verify with the break-even point
The break-even point is the minimum revenue to cover all fixed costs:
Break-even = Annual fixed costs / Average contribution margin (%)
If fixed costs are €400,000 and the average contribution margin is 30%, the break-even is €1,333,000.
This figure serves as a check: does the proposed price list, multiplied by expected volumes, generate revenue above the break-even? If not, prices or volumes need revision.
How to structure the price list
An effective price list isn't just a list of prices — it's a commercial tool that reflects the company's strategy:
| Element | What it includes |
|---|---|
| Base price | Full cost + target margin |
| Discount tiers | Volume discounts, defined by residual contribution margin |
| Minimum threshold | The price below which you won't go, regardless of the client |
| Payment terms | Standard terms and variations (with impact on cash flow) |
| Validity | Expiration date — a price list should be reviewed at least once a year |
Discount tiers
The contribution margin is the tool for defining discount tiers. The article on how to respond to a discount request explains the formula for calculating how much extra volume is needed to compensate for a discount.
Example tiers for a product with a 35% contribution margin:
| Volume | Discount | Residual margin | Extra volume needed |
|---|---|---|---|
| Standard | 0% | 35% | — |
| > 100 units | 5% | 30% | +17% |
| > 500 units | 10% | 25% | +40% |
| > 1,000 units | 15% | 20% | +75% |
The most aggressive tier (15%) requires 75% more volume than standard to generate the same total margin.
What mistakes should you avoid?
1. Basing the price only on materials. Materials are only part of the cost. Ignoring labor, energy, and indirect costs leads to prices that seem profitable but aren't.
2. Copying competitors. The competitor has different costs, volumes, and structure. A price that works for them could be a loss for you.
3. Not updating the price list. Costs change — raw materials, energy, personnel costs. A two-year-old price list probably doesn't reflect current costs. This is why revenue can grow while profit doesn't.
4. Not having a minimum threshold. Without a defined minimum price, every negotiation becomes a race to the bottom. The floor is the variable cost: below that price, every unit sold is a loss.
How do you keep the price list current?
A price list isn't a static document. It should be revised when:
- Raw material costs change (beyond ±5%)
- Personnel costs change (contract renewals, regulatory changes)
- The fixed cost structure changes (new hires, new leases)
- A competitor significantly changes their pricing
The review doesn't need to be complex: update the full cost of the top 10 products and recalculate the margin. With the 5 weekly numbers, margin trends are visible in real time.
Want to build a price list based on real numbers? Get in touch for a no-commitment conversation, or learn about our strategic consulting.