What Is Pricing Strategy?
Pricing strategy is the process of determining the amount at which a product or service will be sold, taking into account all costs involved, operating expenses, taxes, and the profit margin the business wants to achieve.
Correct pricing keeps a business sustainable in the long run. Contrary to what many think, price shouldn't be set just by looking at the competition — it first needs to cover all your costs and still generate real profit.
The Three Pricing Methods
1. Cost-Plus Markup
The simplest method: a fixed percentage is applied on top of the product's cost. Easy to use, but risky if it doesn't account for all indirect costs.
2. Divisor Markup (more complete)
Simultaneously accounts for variable expenses, taxes, and desired margin, all expressed as a percentage of the selling price.
3. Value-Based Pricing
Price is set based on the customer's perceived value, not on cost. Useful for premium products, specialized services, and brands with a strong differentiator. Requires market research and clear positioning.
Step by Step: How to Set Your Selling Price
-
Work Out the Direct Product Cost (COGS)
Add up the purchase price, inbound freight, packaging, and any cost directly tied to the product. -
Identify the Variable Expenses of the Sale
Marketplace commissions, card processing fees, subsidized outbound shipping, sales taxes (VAT and other local taxes, depending on your tax regime). -
Calculate the Allocation of Fixed Expenses
Add up all monthly fixed costs (rent, salaries, utilities, internet, software) and divide by the number of units sold per month. -
Set Your Desired Net Profit Margin
Decide what percentage of the selling price should be net profit. Factor in business risk and expected return. -
Apply the Divisor Markup Formula
Add up variable expenses%, taxes%, and desired margin%. Subtract from 1 to get the divisor. Divide the total cost by the divisor. -
Validate and Adjust
Compare against the market. If the calculated price is far above the competition, review your costs or reposition the product.
Full Example — Product for Online Sale
| Component | Value or % |
|---|---|
| Product cost | $38.00 |
| Packaging | $4.00 |
| Inbound freight | $3.50 |
| Fixed cost allocation | $7.00 |
| Total COGS | $52.50 |
| Platform commission | 5% |
| Payment gateway | 3% |
| Sales tax (average) | 6% |
| Desired margin | 22% |
| Total deductions | 36% |
Divisor Markup = 1 − 0.36 = 0.64
Selling Price = $52.50 ÷ 0.64 = $82.03
Common Pricing Mistakes
- Not including all costs: forgetting packaging, shipping, or fixed cost allocation makes a price look profitable when it isn't.
- Ignoring taxes: depending on your tax regime, taxes can account for 6% to 18% of revenue.
- Confusing margin with markup: applying a 30% markup thinking you'll get a 30% margin actually yields only about 23% real margin.
- Not reviewing prices: with inflation and cost changes, a price set 12 months ago may already be outdated.
- Pricing below cost to win customers: a risky strategy that accelerates negative cash flow.
Use the Margin Calculator to quickly check whether your current price is generating the margin you expect.