How to price a product

Cost plus a percentage is where pricing starts and it is not where it should end. First, know the real cost.

Pricing badly is one of the few mistakes that can make a business fail while it is busy. Two things go wrong: the cost is understated, and margin is confused with markup.

Step-by-step

1. Enter direct costs — materials, packaging, direct labour, shipping.
2. Allocate a share of overheads.
3. Set your target margin.
4. Read the price, with markup and margin shown separately.

Margin and markup are not the same

An item costing £60 sold at £100 carries a 40% margin and a 67% markup. Same transaction, two figures.

Margin is profit as a share of the selling price; markup is profit as a share of cost. Confusing them is the single commonest pricing error, and it always errs in the same direction — a business aiming for a 50% margin and applying a 50% markup gets 33%, which can be the difference between profit and loss.

Include the costs that hide

• Payment processing, a few per cent of every sale.
• Returns and breakage.
• Shipping, where it is not fully recovered.
• Marketplace or platform fees.
• Your time, if you make the thing yourself. Unpaid labour is a cost that shows up as exhaustion instead of on the accounts.

Cost tells you the floor, not the price

Cost-plus tells you what you must not go below. What customers will pay is a separate question, answered by what alternatives cost and what the product is worth to them.

If the market price is far above your cost-plus figure, cost-plus is leaving money on the table. If it is below, you have a problem that discounting will not solve.

Frequently asked questions

What is the difference between margin and markup?

Margin is profit as a percentage of the selling price; markup is profit as a percentage of cost. A 50% markup gives only a 33% margin, which is why the confusion is so costly.

Should I include my own labour?

Yes, at what you would pay someone else. Leaving it out makes the product look profitable while the business quietly depends on you working for nothing.

What margin should I aim for?

It varies enormously by sector — grocery runs on a few per cent, software on very high margins. Compare against your own industry rather than a general figure.