How to Price a Product for Profit: A Step-by-Step Method With Real Costs
The safest way to price a product is to work backward from your full cost: start with everything one unit costs you to get sold, then add the percentage you pay out of each sale (fees, commission) and the profit you want to keep, and divide. A price copied from a supplier's suggested retail price or a competitor's shelf tells you what customers will tolerate. It does not tell you whether you make money at that price.
This guide gives a seven-step method, one worked example with every cost shown, and the checks that stop a "good" price turning into a loss after a discount or a slow month.
The pricing formula
Many price formulas stop at "cost + profit". That works only when no cost depends on the price. In practice, payment fees and marketplace commissions are a percentage of the selling price, so the price appears on both sides of the equation. The version that handles this:
Selling price = full cost per unit ÷ (1 − fee % − target profit %)
- Full cost per unit = what you pay for the item + what it costs to get it ready to sell + its share of your running costs.
- Fee % = any percentage taken from each sale (card fee, marketplace commission, sales commission).
- Target profit % = the share of the price you want left over (a net margin, see how to calculate profit margin).
If you have no percentage fees, the formula is the margin formula you may already know: price = cost ÷ (1 − margin). Markup vs margin explains why dividing is not the same as adding a percentage to cost.
7 steps to price a product for profit
Step 1: Find the landed cost
The landed cost is what the item costs once it is in your hands: the supplier's invoice price plus freight, import charges and anything you must add before it can be sold (packaging, labels, assembly). Spread bulk costs across the units. A $60 freight bill on 60 units is $1.00 per unit.
Step 2: Add your share of running costs
Rent, wages, electricity, the phone bill and subscriptions exist whether you sell one item or a thousand. To put them into a price, divide a month of running costs by the number of items you expect to sell that month. Many small shops skip this step, which is one way a product with a nice-looking markup still leaves them short at month-end. The list of costs to include is in small business expenses you should track.
The number of items you expect to sell is a guess, so treat the result as a planning figure and re-check it against real sales (more on that below).
Step 3: List the percentages taken out of each sale
Card and wallet fees, marketplace commission, sales commission for staff. Look up the real rates in your own payment statements. The 3% used in this guide is only an example.
Step 4: Choose a target profit
Pick a net margin you are aiming for, as a percentage of the price. If you are unsure, work out what your business needs: add up the monthly running costs plus the income you want it to produce, and compare it with your expected monthly sales. How to calculate profit for a small business walks through the layers.
Step 5: Calculate the price
Apply the formula, then round to a price your customers will see as normal ($19.99, $20.49, $20.99). Rounding down loses margin; rounding up gains it. Check the margin at the rounded price rather than assuming.
Step 6: Compare with the market
Look at what similar sellers charge, in the same channel, for the same quality. If you are far above, ask what justifies it (quality, brand, location, delivery, service). If you are below, you may be leaving profit behind. If the market price is below your calculated price, do not simply match it. Go back to Steps 1 to 3 and see what you can change.
Step 7: Test, then re-check
Sell at the price, then compare the profit you planned with the profit your records show. Adjust when the cost changes, not only when sales drop.
Worked example: a $12 item
This is a made-up example. A shop buys a product at $12.00 on the supplier's invoice.
| Cost per unit | Amount |
|---|---|
| Invoice price | $12.00 |
| Freight ($60 spread over 60 units) | $1.00 |
| Packaging | $0.50 |
| Landed cost | $13.50 |
| Share of running costs ($1,800 a month ÷ 600 items) | $3.00 |
| Full cost per unit | $16.50 |
Assume a 3% payment fee and a target net margin of 15%.
Price = $16.50 ÷ (1 − 0.03 − 0.15) = $16.50 ÷ 0.82 = $20.12
Now check three rounded prices:
| Selling price | Payment fee (3%) | Profit | Margin |
|---|---|---|---|
| $19.99 | $0.60 | $2.89 | 14.5% |
| $20.49 | $0.61 | $3.38 | 16.5% |
| $20.99 | $0.63 | $3.86 | 18.4% |
$19.99 looks natural but gives up half a point of margin. $20.49 clears the target.
The two checks that catch most pricing mistakes
What if the volume is lower than planned? If the shop sells 400 items a month instead of 600, the $1,800 of running costs is $4.50 per item, not $3.00. The full cost becomes $18.00, and at $20.49 the profit is $1.88 per item, a 9.2% margin. The product still makes money, but about 44% less per item than planned ($1.88 instead of $3.38).
What if there is a discount? A 10% sale price is $18.44. After the 3% fee ($0.55), the profit is $1.39, a 7.5% margin. A 10% price cut took the margin from 16.5% to 7.5%. The same effect is why the discount table in how to calculate profit margin matters before you run a promotion.
Want to test your own numbers? The free profit margin calculator shows profit, margin and markup from a cost and a price, and a marketplace seller calculator adds platform fees and shipping.
Three ways prices are set, and when each works
| Method | How it works | Watch out for |
|---|---|---|
| Cost-based (this guide) | Full cost + fees + target profit | Ignores what customers will pay; high cost does not justify a high price |
| Competitor-based | Match or sit slightly above or below similar sellers | Their costs and goals are not yours; a price war can leave both with no profit |
| Value-based | Price by what the product is worth to the customer (urgency, convenience, quality) | Needs real knowledge of your customers, not a guess |
A practical way to combine them: use the cost-based price as your floor, the competitor range as your reference, and decide where in between your product belongs. If the market ceiling is below your floor, the problem is the cost or the product, not the price.
One popular rule of thumb is "double the cost". For a $10 item that gives $20, a 50% margin before fees, which may be plenty for some products and too little for a slow-moving one that carries a lot of overhead. Use it as a first guess only.
Pricing a service or your own time
If you sell your time (repairs, design, cleaning, tutoring), the same logic applies with hours instead of units.
- Add up your monthly business costs.
- Add the pay you need to take home.
- Divide by the hours you can realistically bill in a month (not all hours you work).
Example (made-up): $600 of costs + $3,000 of pay = $3,600. If you can bill 80 hours a month, you need $45 an hour to cover your costs and your pay. Quote jobs with the free quotation maker so the price and scope are written down.
Common pricing mistakes
- Using the supplier's price as your cost. Freight and packaging are part of the cost.
- Leaving out running costs. The business needs them paid from somewhere; the price is the only place they come from.
- Adding a percentage to cost and calling it margin. Markup and margin are different numbers.
- Ignoring fees that depend on the price. A fixed amount of profit shrinks when a percentage fee comes off a higher price.
- Never updating. A supplier raising the price by a dollar changes your margin on every unit until you change yours.
- Discounting without checking the margin first. A small discount can remove a large share of the profit.
Pricing checklist (save or screenshot)
- Landed cost per unit (invoice + freight + packaging)
- Share of running costs per unit (monthly costs ÷ expected units)
- Percentage fees and commissions on each sale
- Target net margin
- Calculated price = full cost ÷ (1 − fees − margin)
- Margin re-checked at the rounded price and at a 10% discount
- Compared with similar sellers; reviewed whenever a cost changes
Keep the cost and the price next to each other
Pricing only works if the cost behind it is right and stays current. If you record costs in a notebook or spreadsheet, they go out of date as soon as a supplier changes a price and nobody updates the sheet.
In Daily Sales Record each product has a purchase cost and a selling price, and the app works out profit from the cost on file. The Business Report shows sales, profit, expenses and net income for the dates you choose, so you can compare the profit you planned with the profit you got. The Stock Report shows Stock Cost, Expected Sale Value and Sell Profit, which is what you would earn if you sold all your current stock at today's prices.
If a product shows a profit that looks wrong, the usual cause is a missing or zero purchase cost, and Cost Settings (the gear icon at the top right of Purchase Orders) let you choose whether the cost used when you record a sale is the last, maximum or average purchase cost.
The app does not choose a price for you. It shows you what your prices are doing.
Frequently asked questions
What is the formula for the selling price of a product?
Start from your full cost per unit and the percentages you want to keep or must pay out of each sale. Selling price = full cost per unit ÷ (1 − fee % − target profit %). Example: a full cost of $16.50, a 3% payment fee and a 15% target profit give $16.50 ÷ 0.82 = $20.12.
Is it enough to double the cost price?
Doubling gives a 50% margin before your other costs, which is a fine starting point for some products and too little or too much for others. It ignores freight, packaging, payment fees, your overhead and any discounts, so check the result against your full cost per unit before you use it.
How do I price a product when competitors are cheaper?
First check that their price is not simply below what the product costs to sell. Then look at what you can change: a lower cost from a different supplier, a larger pack size, a bundle, a service or delivery they do not offer. If the market price leaves you no profit at your full cost, the product is not worth stocking at that price.
How much profit should I add to a product?
There is no single right figure. It depends on how much you sell, your overhead and your goals. Work backward: add up what the business must cover each month, divide by the units you expect to sell, and add the profit you want per unit. Shops with low volume usually need a higher margin per item than shops with high volume.
Should I include my own labour in the price?
Yes, if you make the product or sell a service. Put a fair hourly wage for your time into the cost. If you leave it out, the business may look profitable while you work for nothing.
Final takeaway
A price is a cost with a margin on top, and the cost is bigger than the supplier's invoice. Build the full cost per unit, add the fees and the profit you want, divide, then check the rounded price against a lower volume and a discount. Keep your costs current and compare planned profit with actual profit.
Next, learn how to calculate profit margin or see how the two percentages differ in markup vs margin.
Examples use made-up figures. Fee rates, costs and margins differ by business and country. This article is general information, not accounting or tax advice.