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Guide · Pricing & Margin

Price Increases After Costs Rise: Two Targets

Calculate the different price increases needed to preserve profit dollars or gross margin after a supplier cost increase.

By PriceAndProfit Editorial Updated 3 min read

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

When supplier cost rises, preserving the old profit per unit and preserving the old margin percentage lead to different prices. Decide which question you are answering before passing the increase to customers. A dollar-for-dollar pass-through holds gross-profit dollars constant, but it usually reduces gross margin because those dollars become a smaller share of the new selling price.

Worked calculation

Price preserving profit dollars = new cost + old dollar profit; price preserving margin = new cost ÷ (1 − old margin)

Start with a $50 selling price and a $30 unit cost. Gross profit is $20 and gross margin is 40% of sales. The supplier raises cost by 10% of the old cost, from $30 to $33. Adding the $3 increase to price produces a $53 price and preserves the $20 gross profit. The new gross margin is $20 divided by $53, or approximately 37.74%. The supplier's 10% increase does not mean the necessary price increase is automatically 10%.

To preserve 40% gross margin, divide $33 by 0.60. The resulting price is $55, a 10% increase over the old $50 price, and gross profit rises to $22. This proportional relationship holds because the entire modeled unit cost rose 10% and the target margin did not change. If only one component of cost rises, apply the supplier increase to that component before recalculating total cost.

Hypothetical worked example
ScenarioPriceGross profitGross margin
Original $50.00 $20.00 40%
Preserve profit dollars $53.00 $20.00 37.7358%
Preserve margin $55.00 $22.00 40%

Decision checks and limits

For example, suppose the original $30 cost consists of a $20 purchased item plus $10 of other included costs. A 10% increase on the purchased item adds $2, making total cost $32. Maintaining 40% gross margin requires $53.3333 before currency rounding, not $55. A price of $53.34 meets the target after rounding up to cents. A $53.33 price falls slightly short. Use unrounded intermediates so the rounding policy is visible.

These equations hold volume and all other costs constant. If a selling commission is a percentage of price, its dollar amount changes when price changes and must enter a contribution-based equation. Customer reactions can also reduce total profit despite improved unit economics. Document the effective date of supplier invoices, existing inventory cost assumptions, and contractual prices so the decision uses comparable costs. A price calculated from replacement cost is a planning choice and should not be mislabeled as the historical cost of inventory already sold.

Apply the calculation

  1. Locate the changed component

    Read the supplier increase against the amount it actually affects. Keep unchanged packaging, labor, and freight separate.

  2. Choose the preservation rule

    Show both dollar-profit and margin-preserving prices. Explain why one is being used for the decision.

  3. Test realized prices

    Apply actual discounts and price-related costs, then compare total contribution at plausible sales volumes.

Method references: OpenStax: Contribution margin. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.

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