How to set a selling price with markup
A well-built price covers the product cost, the taxes and fees charged on the sale, a share of fixed costs and still leaves the profit you want. The most common mistake is adding percentages to the cost, such as “cost + 50%”, forgetting that commissions, card fees and taxes included in the price are charged on the price, not on the cost.
The price formula
Price = variable cost per unit ÷ (1 − sum of percentages charged on the price)
The percentages include commission, card or marketplace fees, any tax included in the price, the share of fixed costs in sales and the target profit. The number 1 ÷ (1 − sum) is the multiplier markup.
Example
| Item | Value |
|---|---|
| Product cost | $50.00 |
| Sales commission | 5% |
| Card fee | 3% |
| Fixed costs (% of sales) | 15% |
| Target profit | 10% |
| Sum of percentages | 33% |
| Multiplier markup | 1 ÷ 0.67 = 1.493 |
| Selling price | $74.63 |
If you priced at “cost + 33%”, you would charge $66.50 and the profit would vanish: 33% of $66.50 is $21.95, leaving only about $44.55 to pay for a $50 product.
Contribution margin
It is what is left from each sale after variable costs, to pay fixed costs and form the profit. In the example, each $74.63 sale leaves $74.63 − $50 − 8% × $74.63 = $18.66 of contribution margin, or 25% of the price. Products with a higher margin deserve more sales effort.
The price also depends on the market
The calculation gives the minimum price that covers your costs with the desired profit. If customers pay less, the options are cutting costs, negotiating with suppliers, selling more to spread fixed costs or changing the product mix. If they pay more, you have room to raise your margin.