All calculators

Guide · Pricing & Margin

How to Price a Product: A Step-by-Step Method

Price a product from its full cost: unit costs, a share of overhead, a target margin and a check against break-even.

By PriceAndProfit Editorial Updated 3 min read

On this page
  1. Five steps from cost to price
  2. When the market price is lower
  3. Frequently asked questions

$20 Worked example

for a product with $8 of unit costs and $4 of overhead per unit, priced for a 40% margin

Kraft packaging, material swatches, a blank tag and pricing tools on a light workbench.
Illustrative still life of inputs to a pricing decision. Objects and quantities are conceptual, not observed business data.

A price has to do three things: cover what each unit costs you, carry its share of the costs you pay anyway, and leave the profit you planned. Cost-based pricing is the floor — the price below which you lose money. What customers will pay and what similar products cost decide how far above that floor you can go.

Five steps from cost to price

  1. Add up the unit cost

    Everything one unit needs: materials or wholesale price, packaging, inbound shipping, per-order fees. Example: $6 + $1 + $1 = $8.

  2. Add a share of overhead

    Divide monthly fixed costs by the units you expect to sell: $2,000 ÷ 500 units = $4 per unit. Full cost: $12.

  3. Choose a target margin

    Decide what share of the price you want to keep. The example uses 40%; your figure depends on your business, not on an average.

  4. Calculate the price

    Price = full cost ÷ (1 − margin): $12 ÷ 0.6 = $20. The profit is $8 per unit, a 66.7% markup on the full cost.

  5. Check break-even and the market

    At $20 each unit contributes $20 − $8 = $12 toward the $2,000 of fixed costs, so you break even at 167 units a month. Then compare the price with what buyers see elsewhere.

When the market price is lower

If similar products sell below your calculated price, work backwards: maximum cost = market price × (1 − target margin). At a $17 market price and a 40% margin, you can spend at most $10.20 per unit, including the overhead share. Then decide what to change — a cheaper supplier, a larger batch that spreads overhead, a smaller margin, or a product that justifies a higher price.

Watch the volume

Overhead per unit depends on volume. If you sell 250 units instead of 500, the same $2,000 is $8 per unit, and the $20 price no longer gives a 40% margin. Recheck your price when volume changes.

Frequently asked questions

Should I price on markup or margin?

Either works if you are consistent. Margin is easier to plan with because it is the share of each sale you keep; markup is easier to apply to supplier costs.

Do I include my own time?

Yes, if you make the product. Add your labor as a cost per unit at the hourly rate you want to earn, or the price will not pay you.

Related calculators & guides