How to Set Your Product Price: A Complete Guide

“This comprehensive guide explains how to systematically calculate the selling price of a product—from determining production and operational costs, setting profit margins, to choosing pricing methods such as cost-plus, value-based, and competitive pricing.”

One of the most frequently asked questions I hear from aspiring entrepreneurs—whether selling iced coffee, pre-order t-shirts, or offering design services—is:

“How do I set the right selling price so I don’t end up at a loss?”

At first glance, this may seem like a simple concern. But in truth, it strikes at the very heart of any business. Get your pricing wrong, and your business will struggle to stay afloat. Price it too low, and you’ll be working for nothing. Price it too high, and customers might walk away before they even try.

Forget complex and convoluted economic theories for now. Here, we’ll break down a practical, step-by-step guide to calculating a selling price. Think of this as your foolproof recipe to avoid loss—ready to be applied directly in your entrepreneurial kitchen. Ready? Let’s begin.

Why Selling Price is the Bedrock of Your Business

Before diving into the calculations, we must first agree on one thing: your selling price is more than just a number. Setting your price is like plotting a GPS coordinate before starting a journey—if it’s wrong from the start, you’ll never reach your destination (i.e., profit).

Mistakes in pricing can have serious consequences:

1. Persistent Losses – You’re making sales and seeing cash flow, but somehow, you end each month with nothing left—or worse, needing to dip into your own funds to buy more materials. A classic problem.
2. Poor Sales – Your price may be too high for your target market, who then opt for more reasonably priced competitors.
3. No Room for Growth – With profits too thin, there’s no capital left for innovation, marketing, or inventory expansion. You stay stuck.
4. Draining Price Wars – Without a solid pricing foundation, you’re likely to slash prices whenever a competitor appears—without knowing if your cost structure can support it.

Our goal is clear: find a price point that covers your costs, delivers reasonable profit, and remains acceptable to the market.

Step 1: Understand Your “Cost of Goods Sold” (COGS)

Let’s ditch the jargon. Think of COGS (Cost of Goods Sold) as the total cost incurred to make one unit ready for sale. This is your true cost. Sell below this, and you’re guaranteed a loss.

Many beginners mistakenly think “cost” only means raw materials. In reality, it includes other often-overlooked components. Let’s dissect them one by one.

What Are the Components of HPP?

HPP generally consists of three major components. Let’s use the example of producing one screen-printed t-shirt:

1. Raw Materials (Direct Costs)
   These are the physical items that make up your product.
   Example:
   • Plain T-shirt: IDR 35,000
   • Screen printing ink (allocated per shirt): IDR 5,000
   • Packaging + hang tag: IDR 2,000
     Total raw material cost: IDR 42,000
2. Direct Labor Cost
   This refers to wages paid to those directly involved in production. Many solo entrepreneurs ignore this.
   Important: Your time is not free. Value it.
   Example: You do the printing yourself. You can make 4 shirts per hour, and you value your time at IDR 20,000/hour.
   • IDR 20,000 / 4 = IDR 5,000 per shirt
3. Factory Overhead (Indirect Costs)
   These are the necessary background costs to keep production running.
   Example:
   • Electricity: IDR 100,000/month
   • Rent: IDR 500,000/month
   • Internet: IDR 100,000/month
   • Equipment depreciation: IDR 100,000/month
     Total overhead per month: IDR 800,000
     If you produce 200 shirts per month:
   • IDR 800,000 / 200 = IDR 4,000 per shirt
     Total HPP per shirt =
     Raw Materials (IDR 42,000) + Labor (IDR 5,000) + Overhead (IDR 4,000) = IDR 51,000

This is your sacred number. Selling below it is strictly forbidden.

Step 2: Decide on Your Desired Profit (Markup)

Now that you know your cost, it’s time to decide how much profit—or “salary”—you want per item sold. In business terms, this is called markup or margin.

The difference:

• Markup is calculated as a percentage of cost (HPP). Ideal for beginners.
• Margin is calculated as a percentage of the final selling price. Useful for deeper analysis.

Example:

• HPP = IDR 51,000
• Desired markup = 100%
• Profit = 100% × IDR 51,000 = IDR 51,000
• Selling Price = IDR 51,000 + IDR 51,000 = IDR 102,000
• Margin = IDR 51,000 / IDR 102,000 = 50%

Pro Tip:
If you’re just starting out, stick to markup. It’s simple and effective. Just ask: “What percentage of profit do I want from my cost?”

Common markups:

• Food & Beverage: 50–100%
• Fashion: 100–200% or more
• Digital Products/Services: Can go higher due to low cost base

Step 3: The Core Formula – Calculating Selling Price

Here’s the simplest formula you’ll ever use:

Selling Price = HPP + (HPP × % Markup)

Insert your numbers:

• HPP = IDR 51,000
• Markup = 100%

Selling Price = IDR 102,000

Done! Every shirt sold at this price covers all costs and delivers a neat IDR 51,000 in profit.

But hold on—we’re not done yet. One more step is essential.

Step 4: Don’t Live in a Bubble – Do Market Research

The IDR 102,000 is your internal “ideal price.” Now it’s time to validate it in the real world.

Two Scenarios:

A. Market Price = IDR 125,000

• Your price (IDR 102,000) is too low! You can safely raise it to, say, IDR 119,000 and enjoy more profit. This is value pricing—charging based on perceived worth.

B. Market Price = IDR 95,000

•  Your price seems high. Now ask: is your cost too high? Can you find cheaper suppliers without compromising quality?
  Or—does your product offer superior features (e.g., better material, longer-lasting print) that justify the premium?

Practical Ways to Do Market Research:

• Browse marketplaces (Tokopedia, Shopee)
• Check food delivery apps if in F\&B
• Visit local bazaars or shops
• Ask target customers: “How much would you pay for a shirt like this?”

Bonus: Psychological Pricing & Discounts

Once your base price is strong, you can explore advanced strategies:

• Psychological Pricing: IDR 119,900 feels cheaper than IDR 120,000—use that.
• Discount Strategy: Always calculate discounts from the final price, not the cost.
• Value-Based Pricing: Set price based on customer-perceived value, not just costs.

All these are strategic pricing tools. For more on this, watch out for our article: 5 Pricing Strategies Beyond Just Calculating Costs.

Conclusion: A Simple Recipe for Smart Pricing

Pricing is not sorcery—it’s a practical, essential skill every entrepreneur must master. Let’s recap the recipe:

1. Break Down Your Costs (COGS): Track every expense—materials, labor, overhead.
2. Set Your Profit (Markup): Decide your profit percentage.
3. Apply the Formula: Selling Price = COGS + (COGS × Markup %)
4. Validate with Market: Compare with competitors to ensure your price makes sense.

Stop guessing. Grab a pen or open a spreadsheet—start calculating. With a strong pricing foundation, your business won’t just survive, it will thrive.

Frequently Asked Questions (FAQ)

1. What is COGS?
Cost of Goods Sold is the total cost to produce one unit, including materials, direct labor, and production overhead.

2. How do I price my product to avoid loss?
Use the formula: Selling Price = COGS + (COGS × Markup %). Ensure COGS is complete and markup aligns with your desired profit margin.

3. What is a good markup for small businesses?
It depends on your industry:

• F\&B: 50–100%
• Fashion: 100–200%
• Services: can be much higher due to low cost base

Adjust according to your market and value proposition.