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Guide · Pricing & Margin

Minimum Selling Price: Define the Cost Floor

Build a minimum price from variable costs, selling fees, fixed-cost recovery, and a stated contribution requirement.

By PriceAndProfit Editorial Updated 3 min read

On this page
  1. Worked calculation
  2. Decision checks and limits
  3. Apply the calculation

There is no single minimum selling price until you specify what the sale must cover. A short-term incremental floor might cover only costs caused by accepting an order. A regular-price floor may also need to recover shared expenses and contribute toward a profit goal. Naming the floor prevents a temporary, limited decision rule from quietly becoming the price used for every customer.

Worked calculation

Price floor = (fixed-dollar variable costs + required contribution) ÷ (1 − price-based variable cost rate)

Assume a product requires $18 of materials and labor, $4 of packing and shipment costs, and a hypothetical transaction charge of $0.50 plus 3% of the selling price. The fixed-dollar variable cost is $22.50. The price that produces zero contribution is $22.50 divided by 0.97, or $23.1959. Rounded up to cents, $23.20 is the lowest price meeting that narrow mathematical condition. The 3% is an illustrative input, not a payment provider's current rate.

At $23.20, contribution is only $0.004 before currency settlement differences: $23.20 minus $22.50 minus $0.696. It does essentially nothing to cover rent, administration, or a desired operating profit. If the business needs $8 of contribution from each order, the price becomes ($22.50 + $8) divided by 0.97, or $31.4433, rounded up to $31.45. Contribution then equals $8.0065 before settlement rounding.

Hypothetical worked example
GoalUnrounded pricePrice rounded up to cents
Zero contribution $23.195876 $23.20
$8 contribution per order $31.443299 $31.45
$12 contribution per order $35.567010 $35.57

Decision checks and limits

A separate capacity test can raise the floor. If accepting the order displaces a different order that would contribute $12, the relevant comparison includes that forgone contribution. The $8 target alone no longer captures the choice. Likewise, an unusually large order may require overtime, a new setup, or an extra shipment. Add those incremental costs where they arise rather than spreading ordinary overhead across the order and assuming every allocated dollar is avoidable.

The formula requires a positive retained share of selling price. If total price-based variable charges equal or exceed 100%, no positive finite price covers a positive fixed-dollar cost under this model. Keep that result as an infeasible case. Also distinguish the quoted price from collected revenue after discounts and refunds. A floor applied before a coupon can be breached after checkout. Check the effective transaction price and use an explicit review date when supplier costs or fulfillment terms change.

Apply the calculation

  1. Define the decision

    State whether the floor is for spare-capacity work, a continuing product, or a sale that displaces other orders.

  2. Verify the cost bases

    Separate dollar costs from percentages of revenue. Apply each percentage only to the amount the actual agreement charges.

  3. Audit checkout results

    Run the proposed discount and shipping arrangement through the same cost model, then compare retained contribution with the stated requirement.

Method references: OpenStax: Relevant information for decisions. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.

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