Key takeaways
- Start from your full cost per unit sold: product, inbound shipping, packaging, outbound shipping you pay for, and fees.
- Price for a target margin with Price = Cost ÷ (1 − Margin), and include percentage fees in the margin.
- Markup and margin are different: a 100% markup is only a 50% margin.
- Check the cost-based price against competitors and what buyers will pay, then round to a sensible price point.
- Test any discount before running it; in the worked example, a 20% discount cuts profit per unit by almost half.
Step 1: find your true unit cost
Most underpriced products are underpriced because the cost was wrong, not the margin. The supplier price is only the start. Add everything you pay to get one unit into a customer's hands.
Landed cost is the product plus everything to get it to you: freight, duties, customs brokerage and inbound handling, divided by the units in the shipment. For products you make, include materials and the time to make each one at an hourly rate you would accept.
- Product or materials cost per unit
- Inbound freight, duties and handling per unit
- Packaging, labels and inserts
- Outbound shipping, if you offer free shipping or charge less than it costs
- Payment processing and marketplace fees, usually a percentage of the price plus a fixed amount
- An allowance for returns, damage and shrinkage on items where they are common
Step 2: choose a margin, not just a markup
Markup is profit as a share of cost. Margin is profit as a share of price. The same sale always shows a higher markup than margin, and mixing them up is a common pricing mistake.
Margin is the better target because it tells you how much of each sale is left to pay for overheads such as rent, software, advertising and your own pay. Decide what margin the business needs, then work back to a price.
Price = Cost ÷ (1 − Target margin) Markup % = (Price − Cost) ÷ Cost × 100 Margin % = (Price − Cost) ÷ Price × 100
| Markup on cost | Margin on price | Price for a $10 cost |
|---|---|---|
| 25% | 20.0% | $12.50 |
| 50% | 33.3% | $15.00 |
| 100% (keystone) | 50.0% | $20.00 |
| 150% | 60.0% | $25.00 |
| 200% | 66.7% | $30.00 |
Step 3: build fees into the price
Percentage fees grow with the price, so you cannot simply add them to cost. Subtract them from the margin instead. If fees take 3% of the price and you want 40% left after fees and costs, divide your cost by 1 − 0.40 − 0.03 = 0.57.
Fixed per-order fees, such as a payment processor's fixed charge, belong in the unit cost from step 1. Marketplace fees vary widely by platform and category, so use the current rate card for the place you sell, or a fee calculator for that platform.
Price = (Unit cost + Fixed fees) ÷ (1 − Target margin − Percentage fees)
Free toolRetail price calculatorWorked example: an online store product
A shop imports ceramic mugs. The supplier charges $12.00 each and freight and duty add $1.50, for a landed cost of $13.50. Packaging costs $0.80 and the shop offers free shipping, which costs $4.50 per order. Total variable cost per unit is $18.80. Assume payment fees of 3% of the price, and a target of 40% left after all of that.
Price = $18.80 ÷ (1 − 0.40 − 0.03) = $18.80 ÷ 0.57 = $32.98.
Similar mugs sell for $30 to $36, so the shop lists at $34. At $34, fees are $1.02, and profit per unit is $34.00 − $18.80 − $1.02 = $14.18, a 41.7% margin.
If the shop has $2,000 a month in fixed costs, it needs to sell $2,000 ÷ $14.18 ≈ 141.04, so 142 mugs a month to break even.
| Line | Amount |
|---|---|
| Selling price | $34.00 |
| Product cost | −$12.00 |
| Freight and duty | −$1.50 |
| Packaging | −$0.80 |
| Outbound shipping | −$4.50 |
| Payment fees (3%) | −$1.02 |
| Profit per unit | $14.18 |
| Margin | 41.7% |
Step 4: check against the market
A cost-based price is your floor. The market sets the ceiling. Look at what buyers pay for comparable products in the places you sell, and note how yours differs in quality, size, brand, reviews, shipping speed and return policy.
If your cost-based price is well below the market, you may be leaving money on the table; test a higher price. If it is well above, either find a way to justify the difference to buyers, lower your costs, or choose a different product or channel.
Round the result to a price that fits the market. Prices ending in 9 or 5 are common in consumer retail; round numbers are common for premium and handmade goods and for business buyers.
- Cost-plus: unit cost plus a set markup. Simple and safe, but ignores what buyers will pay.
- Keystone: double the wholesale cost, a common starting point for retail stores buying from wholesalers.
- Competitive: price near similar products and compete on something else.
- Value-based: price on the benefit to the buyer. Works for unique, branded or problem-solving products.
Step 5: test discounts and wholesale before offering them
Discounts come straight out of profit. In the mug example, a 20% discount drops the price to $27.20. Fees fall to $0.82, but every other cost stays the same, so profit per unit falls to $7.58, a 27.9% margin. The shop would need to sell about 264 mugs a month instead of 142 to cover the same fixed costs.
Wholesale is similar. Retailers commonly expect to double your wholesale price, so if the retail price is $34, a wholesale price around $17 may be expected. That is below the $18.80 cost per online sale, though wholesale orders skip the per-order outbound shipping and payment fees. Work out the wholesale cost separately before agreeing to it.
Free toolProfit margin calculatorReview prices regularly
Supplier prices, shipping rates, duties and platform fees change. Recheck your costs whenever a supplier invoice changes or a platform updates its fees, and at least once a year. A product that earned 40% last year can quietly fall to 25% without a single price change.
