From cost to price: five ways to work it out and the mistakes that cost the most.
Key findings
- A 50% markup on cost leaves only a 33% margin.
- For a 40% margin: price = cost ÷ 0.6.
- If you sell on marketplaces, fees are charged on the final price: you cannot just add them on.
The starting point: your full cost
Before setting a price you need to know what each unit really costs you: purchase or production, shipping, packaging and its share of your fixed costs. Say a product costs you 12.
Five ways to arrive at a price
- Markup on cost. You add a percentage to the cost: with 50%, 12 becomes 18. It is quick, but your margin on the price is only 33%.
- Margin on price. You decide what share of the price you want to keep: for 40%, price = cost ÷ (1 − 0.40) = 20. It is the right way to guarantee a margin.
- Including sales fees. If you sell on a marketplace that charges 15%, plus 0.30 per order and 3 for shipping, keeping a 30% margin means charging 27.82. Fees are charged on the final price, so you cannot just add them on.
- From the break-even point. Check how much you need to sell: with 3,000 of fixed costs a month, a price of 20 and a variable cost of 12, you need 375 units (7,500 in sales) to avoid a loss. If selling that much is unrealistic, the price or the costs do not work.
- Looking at the market. What similar products cost and what your customer is willing to pay set the ceiling. Your costs set the floor.
Common mistakes
- Confusing margin and markup, and thinking you make 50% when you make 33%.
- Forgetting per-sale costs such as shipping, fees or returns.
- Cutting prices without doing the numbers: a discount comes entirely out of your margin and can force you to sell far more to earn the same.
Work out your price with the margin and markup calculator, and check your unit cost, sales fees and break-even point.