Knowing how to calculate selling price is the difference between a busy shop and a profitable one. This guide walks through the arithmetic of markup vs margin, the pricing formula behind cost-plus pricing, and how to price your products so every sale covers your costs. The examples use made-up round numbers, not benchmarks.
Work Out the Full Cost of One Unit Before You Price Anything
The first step is to know what one unit really costs you. This is the foundation of cost-plus pricing: you add a markup to the full unit cost. If you only count the product or materials, you will underprice every sale.
The table below is an illustration with made-up numbers.
| Cost item | What to include | Example |
|---|---|---|
| Product or materials | Wholesale unit cost, raw materials, ingredients | £8.00 |
| Packaging | Box, tissue, tape, labels, inserts | £1.20 |
| Delivery you pay | Postage label, courier fee, handling | £2.80 |
| Payment and platform fees | Card processing, marketplace or store subscription per order | £0.90 |
| Returns allowance | Expected refunds, return postage, lost stock | £0.60 |
| Your time | Picking, packing, admin, customer service at an hourly rate | £2.50 |
| Total cost per unit | £16.00 |
Your own numbers will differ. The point is to list every cost that disappears when you sell one unit.
Markup vs Margin: The Two Pricing Formulas That Confuse Most Sellers
Markup and margin describe the same gap between cost and price, but they measure it from different directions.
- Markup is the profit as a share of cost.
- Margin is the profit as a share of price.
The formulas are:
- Markup = (price minus cost) divided by cost
- Margin = (price minus cost) divided by price
In this illustration, a product costs £16 to make and sells for £24.
- Markup = (£24 minus £16) divided by £16 = £8 divided by £16 = 0.5, or 50% markup
- Margin = (£24 minus £16) divided by £24 = £8 divided by £24 = 0.333, or 33.3% margin
The same £8 profit looks like 50% markup but only 33.3% margin. Sellers often confuse the two, which leads to prices that feel profitable but are not.
How to Calculate Selling Price From a Target Margin
If you know the margin you want, use this pricing formula:
Price = cost divided by (1 minus target margin)
This is the cleanest way to price from the bottom up. Suppose your full unit cost is £16 and you want a 40% margin. The target margin in decimal form is 0.4.
Price = £16 divided by (1 minus 0.4) = £16 divided by 0.6 = £26.67
This is an illustration. The 40% figure is not a recommendation. The formula works for any target margin you choose.
Check Your Price Against the Market Before You Commit
Cost-plus pricing gives you a floor. The market tells you whether that floor is realistic. Customers compare you with direct competitors, similar products on marketplaces, and the perceived value of your brand.
Ergora's Competitor Pricing tool watches the market and flags when your prices drift out of line. For the market side of pricing, read this guide to pricing products with competitive intelligence. It covers how to position against competitors without racing to the bottom.
Include VAT If You Are VAT-Registered
If your business is VAT-registered, the price you show customers usually needs to include VAT. Check GOV.UK for the rate that applies to your products and whether you should show prices inclusive or exclusive of VAT. Do not assume one rate fits every product or every customer location.
When to Review Your Prices and What to Watch
Prices are not set once. Review them when material costs rise, when a carrier changes delivery rates, or when you introduce discounts and bundles. A price that made sense six months ago may no longer cover the full cost of a unit.
In the Ergora ecommerce pack, Store Analytics shows revenue, conversion rate and top products from your connected Shopify, WooCommerce or BigCommerce store. That helps you see whether a price change affected demand. If margin is slipping, read this guide to improving gross margin. If you want to offset a price rise with larger orders, this piece on increasing average order value on Shopify is a useful next step.
Set a Price That Covers Costs, Then Let the Market Refine It
The arithmetic in this guide gives you a floor. Market positioning and competitor behaviour refine it. Start with the full unit cost, apply a target margin with the pricing formula, and then check the result against what customers actually pay. If you want a workspace that puts your sales figures and competitor prices side by side, see Ergora's pricing.
Frequently asked questions
How do I calculate the selling price of a product?
Add up the full cost of one unit, including materials, packaging, delivery, fees, returns allowance and your time. Then choose a markup or a target margin. To price from a target margin, use the formula price = cost divided by (1 minus target margin).
What is the difference between markup and margin?
Markup is profit as a share of cost. Margin is profit as a share of price. A product that costs £16 and sells for £24 has a 50% markup and a 33.3% margin, because the same £8 profit is divided by different numbers.
How do I calculate price from a target margin?
Use the formula price = cost divided by (1 minus target margin). For example, a £16 cost with a 40% target margin gives £16 divided by 0.6, which is £26.67. The target margin is your choice, not a benchmark.
What is cost-plus pricing?
Cost-plus pricing means you calculate the full cost of one unit and then add a markup or margin on top. It ensures each sale covers your costs before profit is considered. The weakness is that it ignores what competitors charge, so it works best alongside a market check.
What costs should I include when pricing a product?
Include the product or materials, packaging, delivery you pay, payment and platform fees, an allowance for returns, and your time. If you leave out any of these, your price will look profitable while your bank balance says otherwise.
How often should I review my prices?
Review prices when your costs change, when delivery rates rise, or when you introduce discounts and bundles. A quarterly review is a sensible habit for most small sellers, but any material cost change should trigger an immediate check.