The cellular origin of the most common form of human skin cancer, basal cell carcinoma, remains controversial. However, there is evidence suggesting that the magnitude of Hedgehog pathway signalling activity plays an important role in determining tumour potential. We have recently shown that the combined loss of both Patched 1 and Patched 2 receptor activity during early epidermal development does not result in the characteristic BCC tumorigenic activity of Ptch1-deficient epidermis, indicating that tumour potential may be limited to a certain threshold of pathway activity. Here, we applied highly quantitative single molecule FISH methodology to determine the transcriptional activation of downstream target genes in both Ptch1-deficient and Ptch1;Ptch2-deficient epidermis. As a result, our analyses have uncovered a hitherto unsuspected endogenous Hh signalling gradient in wild-type developing hair follicles. Moreover, we show that the magnitude of pathway activity in Ptch1;Ptch2-deficient keratinocytes represents physiological signalling, and directly recapitulates the amplitude of Hh signalling at the proximal base of the hair follicle gradient. These data suggest an adjustment to the currently accepted model of Hh pathway activity and further define the BCC cell of origin debate by indicating the threshold of Hh pathway activity attributable to BCC formation in basal cell lineage committed cells.