How to Price a Product

1. Start with the real unit cost

Do not price from materials alone. Start with the full unit cost of getting one sellable product ready: product cost, raw materials, packaging, direct production labor, and any direct fulfillment cost that happens because one more order exists. For sellers with inventory, cost of goods sold logic matters because the item itself has to be carried into the price before you think about profit.

• Physical goods usually include product cost, materials, packaging, and direct labor.
• Digital products may have low delivery cost per order, but royalties, contractor work, or license fees can still belong in unit cost.
• If an item cannot be sold without that cost, it belongs in the pricing model somewhere.

2. Add variable selling costs that change with each order

Many products look profitable until channel costs are added. Payment processing, marketplace fees, fulfillment supplies, shipping subsidies, referral fees, and sale-linked ad spend often rise with each order. These variable costs should be visible before you decide what margin you want.

• Examples: payment fees, marketplace percentage fees, pick-and-pack cost, packaging, shipping labels, per-order ad spend.
• If a fee depends on the selling price, it should be treated as a percentage-based cost, not hidden inside product cost.
• A seller who ignores variable selling costs usually underprices faster as sales volume grows.

3. Allocate fixed overhead before you trust your floor price

A product price is not healthy just because it beats the direct unit cost. Software, subscriptions, equipment, rent, accounting, and other fixed costs still need to be covered. The practical way is to divide expected monthly fixed costs by expected monthly orders so each sale carries a realistic share of overhead.

• allocated_fixed_cost_per_order = monthly fixed costs ÷ expected monthly orders
• Low-volume sellers need a higher per-order overhead allocation than high-volume sellers.
• Ignoring overhead creates a weak floor price that may look fine per order but fail over the month.

4. Set a target profit, not just a survival price

Once you know unit cost and overhead, decide what profit you actually want per order. That target can be a flat dollar amount or an implied margin goal, but it should be explicit. A price that only breaks even is a temporary diagnostic number, not a long-term business model.

• Floor price covers cost and overhead; target price also includes profit.
• Profit per order should be high enough to absorb refunds, bad weeks, and future growth costs.
• You do not need the highest possible margin, but you do need a margin that keeps the business worth running.

5. Check the price against demand and competitor reality

Cost-based pricing gives you a defensible floor, but market research tells you whether the price can survive in the real world. Compare your offer against competing products, product quality, buyer expectations, and the price range customers already accept. A price is weak if it ignores the market, but it is also weak if it blindly copies competitors whose costs and margins you do not know.

• Check demand, market size, saturation, and what buyers already pay for alternatives.
• Use competitors as context, not as your formula.
• If your product is stronger, faster, more trusted, or more specialized, the right price may sit above the market average.

6. Stress-test discounts, shipping, and sales channels

Before locking the final number, test what happens if you run a discount, include free shipping, or sell through a different channel. A price that works on your own site may fail on Etsy, eBay, PayPal invoicing, or another checkout flow because fee structure changes the math. Stress-testing keeps you from approving a headline price that collapses as soon as promotion starts.

• Test full price, discount price, and bundled price before publishing.
• Test each channel separately when fees or shipping responsibility differ.
• Keep one documented floor price that tells you when a sale stops making sense.

7. Review pricing when costs or volume change

Pricing is not a one-time decision. If supplier cost, shipping, conversion rate, refunds, or monthly order volume change, the correct price can change too. Review pricing on a schedule and after every meaningful cost shock so you are not selling today on assumptions from months ago.

• Recheck pricing after supplier cost increases or fee updates.
• Order volume changes overhead allocation, which can move your required price floor.
• A pricing system is stronger than a one-off guess because it can be updated quickly.

Use this guide when

You need a repeatable pricing method that works before you launch a new product or before you raise prices on an existing one.

• Useful when you know your product cost but are not sure how to add overhead and target profit.
• Useful when competitor prices look lower and you need to check whether they are actually sustainable for your business.
• Useful before adding free shipping, running discounts, or expanding to a new sales channel.

Core product pricing formula

unit_variable_cost = product_cost + direct_labor + packaging + fulfillment + shipping_subsidy + variable_ad_cost
allocated_fixed_cost_per_order = monthly_fixed_costs / expected_monthly_orders
price_floor_before_percentage_fees = unit_variable_cost + allocated_fixed_cost_per_order
target_price = (price_floor_before_percentage_fees + desired_profit_per_order + fixed_transaction_fees) / (1 - percentage_fee_rate)

• If you do not have percentage-based fees, set percentage_fee_rate to zero and the formula simplifies.
• If you sell on multiple channels, run the formula separately for each channel because the fee stack changes.
• Break-even uses zero desired profit. Target pricing adds the profit you want to keep per order.

Assumptions

• This guide is written for practical seller decision-making, not as legal, tax, or accounting advice for a specific jurisdiction.
• The formula is intentionally channel-aware: if your payment processor, marketplace, or shipping setup changes, you should rerun the price instead of carrying one static number everywhere.
• The worked example uses one simple percentage fee and one fixed transaction fee to show the math clearly. Real businesses may also need to model refunds, taxes, advertising, and bundle-level pricing.
• This guide explains the pricing framework. For platform-specific numbers, use the live SellerMaths calculators so marketplace and processor fees are modeled directly.

FAQ

Related pages

• eBay UK Break-Even Price Calculator
• Etsy Reverse Price Calculator
• Etsy Break-Even Calculator
• Etsy vs eBay Fees Calculator
• All calculators

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