Why Setting the Right Selling Price Is Critical
The selling price is the biggest profit lever in your business. A price that's 5% higher, with no increase in costs, can double or triple your net margin. Likewise, a price that's 5% lower can wipe out your profit entirely — and even push you into a loss.
Setting prices by gut feeling or simply copying the competition is one of the main reasons small businesses generate a lot of revenue but earn little profit. The correct method starts with your own costs, not with other people's prices.
The Components of the Selling Price
Every selling price needs to cover three groups of expenses and still generate a profit:
1. Direct Costs (COGS)
- Purchase price of the product
- Inbound freight
- Packaging and production supplies
- Labels, seals, accessories
2. Variable Expenses
- Marketplace commission (11–16%)
- Card/gateway fee (2.5–3%)
- Sales tax
- Subsidized outbound shipping
3. Allocated Fixed Costs
- Rent / owner's draw
- Salaries and payroll taxes
- Utilities, internet, software
- Marketing and advertising
5-Step Method for Setting Your Price
-
Add up COGS and all direct costs
Example: product $40.00 + packaging $3.50 + inbound freight $2.00 = $45.50. -
Work out your variable expense percentages
If selling on eBay: 13% commission + 3% gateway + 6% tax = 22% of the selling price. -
Calculate the fixed-cost allocation per product
Fixed costs of $4,000/month ÷ 250 units sold = $16.00 per product. -
Set your target net margin
For a healthy business, aim for at least 15% to 20% net margin after all deductions. -
Apply the formula
Price = (COGS + allocated fixed costs) ÷ (1 − variable expenses% − margin%)
Full Calculation
COGS = $45.50 | Allocated fixed costs = $16.00 | Total = $61.50
Variable expenses = 22% | Target margin = 18%
Divisor = 1 − 0.22 − 0.18 = 0.60
Selling Price = $61.50 ÷ 0.60 = $102.50
Check: 18% of $102.50 = $18.45 net profit per sale ✓
What if the Calculated Price Is Higher Than the Competition?
This happens often, and it's an important signal. There are three paths forward:
- Reduce your costs: negotiate with suppliers, optimize logistics, rethink packaging.
- Justify the higher price: improve presentation, service, warranty — build perceived value above the competition.
- Reconsider the product: maybe this product isn't a good fit for your current sales channel or target audience.
Use the Margin Calculator to test different selling prices and see the immediate impact on your margin before making any decision.