Running a business involves more than making sales. You also need to understand how much money you actually earn after covering the cost of your products and other expenses.
Many small business owners in Nigeria struggle with pricing because they focus mainly on how much competitors charge without calculating their own costs.
Whether you sell clothes, food, electronics, cosmetics or other products, understanding profit and pricing can help you make better business decisions.
Here is a simple guide to getting started.
Table of Contents
1. Understand the Difference Between Revenue and Profit
Revenue is the total amount of money your business receives from selling products or services.
Profit is what remains after deducting the expenses involved in running the business.
For example, imagine you sell 10 bags for ₦15,000 each.
Your total revenue is:
10 × ₦15,000 = ₦150,000.
However, if purchasing those bags and covering other business expenses costs ₦110,000, your profit is:
₦150,000 − ₦110,000 = ₦40,000.
This means your business made ₦40,000 in profit, not ₦150,000.
2. Calculate the Total Cost of Each Product
Before setting a selling price, calculate how much it costs you to get each product ready for sale.
Depending on your business, these expenses may include:
- Purchase or production cost.
- Transportation.
- Packaging materials.
- Delivery expenses paid by your business.
- Importation charges, where applicable.
- Other expenses directly related to preparing the product for sale.
For example, if you purchase a pair of shoes for ₦12,000 and spend ₦1,000 on transportation and packaging, your total cost is ₦13,000.
Knowing this figure helps you avoid setting a selling price that is too low.
3. Choose a Suitable Selling Price
Once you know your total product cost, you can decide how much to charge customers.
One simple approach is cost-plus pricing. This involves adding a markup to the cost of a product.
For example:
- Product cost: ₦13,000.
- Desired markup: ₦5,000.
- Selling price: ₦18,000.
Your gross profit before other business expenses would be ₦5,000.
However, do not choose a price based only on your desired profit. Consider customer demand, competitors’ prices and the value your product offers.
4. Understand Profit Margin
Profit margin shows what percentage of your sales revenue remains as profit after the relevant costs have been deducted.
The basic formula is:
Profit Margin = (Profit ÷ Revenue) × 100
For example, if you sell a product for ₦20,000 and make ₦5,000 in profit:
(₦5,000 ÷ ₦20,000) × 100 = 25%.
Your profit margin is 25%.
Understanding this figure helps you compare products and determine which ones contribute more to your business.
5. Consider Your Business Expenses
Some business owners calculate product costs but forget about regular operating expenses.
These may include:
- Shop rent.
- Electricity.
- Staff salaries.
- Internet subscriptions.
- Advertising.
- Business transportation.
- Payment processing charges.
For example, if your business makes ₦60,000 in gross profit but spends ₦20,000 on operating expenses, your remaining profit is ₦40,000.
Keeping records of these expenses gives you a more accurate picture of your business performance.
6. Review Your Prices Regularly
Prices in Nigeria can change because of inflation, transportation costs, exchange rates and supplier adjustments.
A product you purchased for ₦10,000 several months ago may cost more today.
Review your costs regularly and adjust your selling prices when necessary.
You should also compare prices from different suppliers and avoid making sudden price changes without considering how they may affect your customers.
Final Thoughts
Understanding profit and pricing is essential for running a sustainable business in Nigeria.
Calculate your product costs, include relevant business expenses and choose selling prices that allow you to earn a reasonable profit.
Most importantly, keep proper financial records and review your prices regularly. Making many sales is good, but understanding how much your business actually earns is what helps you make informed decisions.
Frequently Asked Questions
How do I calculate profit in a small business?
Subtract your total business costs and expenses from your total revenue. The amount remaining is your profit.
What is the difference between markup and profit margin?
Markup is the amount added to a product’s cost to determine its selling price. Profit margin is the percentage of revenue that remains as profit.
Should I copy my competitors’ prices?
Competitors’ prices can help you understand the market, but you should calculate your own costs before setting your prices.
How often should I review my product prices?
Review prices whenever supplier costs, transportation charges or other important business expenses change. Regular checks can also help you identify pricing problems early.
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Author: AbdulBasit Odurinde
I am a passionate sports and game lover. I write for Haba Naija on sports, games and other exciting events
