Setting a price is part arithmetic and part judgement. The arithmetic tells you the lowest price that works. The judgement tells you how much more customers will pay. This guide walks through both, with a worked example for a small product business.
Step 1: work out the full cost of one unit
Start with everything it costs to produce or buy and deliver one unit. For something you buy, that is the purchase price plus inbound freight, duties and packaging. For something you make, include materials, packaging, your own labour and a share of overheads. Take a handmade candle. Materials cost 3.20, packaging 0.80 and labour is 15 minutes at 18 an hour, which is 4.50. Add 1.00 for equipment, workspace and tools, and the cost is 9.50 per candle.
Step 2: choose a margin and allow for fees
Decide the margin you need. This must cover the costs of running the business that are not in the unit cost, such as advertising and software, and leave a profit. Include any selling fees that are a share of the price. If the candle sells on a marketplace that takes 8%, and you want a 40% margin after the fee, the price is 9.50 ÷ (1 − 0.40 − 0.08), which is 18.27.
Step 3: round to a price that works
You can now round to a price that looks right. At 18.95, the fee is 1.52 and profit is about 7.93, a margin of roughly 42%. Rounding up gave you a little extra. If you rounded down to 17.99, check that the margin still holds. Our markup vs margin guide explains why the calculation divides rather than multiplies.
Step 4: check the market
Look at what similar products sell for and how they are presented. A price far above the others needs a reason customers can see: quality, brand, convenience or a story. A price far below may signal poor quality or leave money on the table. Your calculated price is the floor. Where you sit above it depends on the value customers perceive.
Step 5: test it against discounts and wholesale
This is where many prices fail. If you sell wholesale at half the retail price, the candle goes for 9.48, less than the 9.50 it costs you. You would lose money on every order. If you plan to sell wholesale, build the wholesale price first and set the retail price above it. For promotions, work out the margin at the sale price, using our discount calculator, and decide how much volume would make it worthwhile.
Step 6: think about price presentation
Presentation affects how a price is read. Prices ending in .95 or .99 are common in consumer products, while premium or professional goods often use round numbers. Bundles can lift the average order, and a good, better, best range lets customers choose a level. None of this changes the maths, but it changes how people respond to it.
Step 7: watch your overheads
A margin that looks healthy per unit can still lose money if you do not sell enough. Use a break-even calculation to see how many units cover your fixed costs, as explained in our guide on break-even analysis. If the volume you need is unrealistic, the price, the costs or the model has to change.
Step 8: review regularly
Costs, exchange rates, fees and competitors change. Review your prices at least twice a year, and whenever a supplier raises theirs. A product that was profitable at launch can quietly slip into losing money. Keep a simple list of products with cost, price, margin and the date of the last review.
Common mistakes
Pricing from the supplier's invoice instead of the landed cost, ignoring your own time, forgetting fees, copying a competitor without knowing their costs, and treating the price as fixed. Small changes in price tend to affect profit much more than people expect.
Pricing digital products and services
When the cost of delivering one more unit is close to nothing, as with an ebook or a template, cost-plus pricing makes no sense. Price by the value to the customer and by what comparable products charge. Do remember your time. If a product took 60 hours to create and your time is worth 25 an hour, that is 1,500. At a price of 15 you need 100 sales just to recover your time, before platform and payment fees. It is a useful reality check before you launch.
Raising prices
Review prices regularly and raise them when costs rise. Existing customers will accept a modest increase more easily if you give notice and explain it briefly, and new customers can simply see the new price. A small, regular increase is usually easier than a large jump after years of the same price.
Try it
Our retail price calculator works out the price from your cost and target margin, and the wholesale margin calculator checks what you earn on wholesale orders. This guide is general information, not financial advice.
