In this guide (10)
- How do you price a product?
- What margin does your business need?
- What cost should you price from?
- What are the main pricing methods?
- How do you combine the pricing methods?
- How do you set trade and wholesale price tiers?
- What do discounts do to your margin?
- How do you know if your prices are working?
- How EasyTaskr helps
- Questions people ask
Key takeaways
- Work out the gross margin your overheads and profit target need before you price a single line.
- Price from landed cost, including carriage and duty, not the supplier's list price.
- Mix methods: cost-plus sets the floor, competitors and value set the ceiling.
- Give trade and wholesale customers their own price lists rather than ad-hoc discounts.
- A 10% discount on a 40% margin needs a third more sales just to stand still.
How do you price a product?
Price from your real cost and the margin your business needs, then sense-check against the market. Cost tells you the lowest price you can live with; competitors and the buyer's view of value tell you how high you can go.
A good price does three jobs at once. It covers the cost of the item. It contributes enough to pay the rent, the wages and the running costs. And it leaves a profit. Most pricing problems come from getting the first job right and forgetting the other two.
This guide covers the main pricing methods, how to combine them, how to build price lists for trade and wholesale customers, and what discounts really cost. If markup and margin still feel interchangeable, read markup vs margin first; everything here uses margin.
What margin does your business need?
Divide your yearly overheads plus the profit you want by your expected sales. That is the average gross margin your prices have to deliver across the whole business.
Worked example: the margin you need
A shop expects sales of 400,000 a year, excluding VAT. Its overheads are 90,000: rent, wages, power, insurance, card fees and the rest. The owner wants a profit of 30,000.
Required gross margin = (90,000 + 30,000) ÷ 400,000 = 30%
That 30% is an average. Some lines will earn 15% and some 55%; what matters is the mix. If the shop prices everything at 25% because that is what a competitor seems to do, it will make 100,000 of gross profit and fall 20,000 short of its overheads and profit target combined.
Do this sum before you set any prices. It turns pricing from guesswork into arithmetic.
Free calculator
Markup and margin calculator
What one unit costs you, before VAT.
Before VAT. Or fill in a markup or margin below instead.
Markup is profit as a share of cost. Margin is profit as a share of the selling price, so it is always the smaller number.
What cost should you price from?
Price from the landed cost: what it costs to get the item onto your shelf, not just the supplier's price.
Landed cost includes:
- The supplier's price after any discounts or rebates you are sure to get
- Carriage or freight, split across the units
- Import duty and clearing charges, if you import
- Packaging or labelling you add
- Any VAT you cannot reclaim
Worked example: landed cost
You buy 200 units at 5.00 each. Carriage on the delivery costs 40.
- Carriage per unit: 40 ÷ 200 = 0.20
- Landed cost: 5.00 + 0.20 = 5.20
At a 40% target margin: 5.20 ÷ 0.60 = 8.67. Round to a price point of 8.99, and the margin becomes (8.99 − 5.20) ÷ 8.99 = 42.2%. Pricing from 5.00 instead would have quietly lost 0.20 on every unit.
What are the main pricing methods?
There are five methods most shops and wholesalers use. None is right on its own; the best prices come from using two or three together.
| Method | How it works | Best for | Watch out for |
|---|---|---|---|
| Cost-plus | Landed cost ÷ (1 − target margin) | Everyday lines, wholesale, new products | Ignores what the market will pay |
| Competitor | Match, beat or sit just above rivals | Items customers price-check | A rival's price says nothing about your costs |
| Value | Price on what the item is worth to the buyer | Specialist, urgent or hard-to-find items | Needs a clear reason the buyer will accept |
| Keystone | Double the cost (50% margin) | Gifts, clothing, some specialist retail | Too high for groceries and bulk lines |
| Psychological | Price points, endings, bundles | Retail shelves and menus | Can look cheap if overdone |
Cost-plus pricing
Cost-plus is the starting point for most businesses: take the landed cost and divide by one minus your target margin. It is simple, consistent, and guarantees each sale covers its cost. Its weakness is that it ignores the market. A line you can buy cheaply might sell happily at a much higher margin; another might not sell at all at your formula price.
Use cost-plus to set a floor. Then ask the next two questions.
Competitor pricing
Customers do not check every price. They check a small number of everyday items they buy often and remember well. These are sometimes called known-value items. Get those right and customers trust the rest of your pricing.
Check your known-value items against the businesses your customers actually compare you with, not every shop in the country. You do not have to be cheapest. Being close on the items people remember buys you room on the ones they do not.
Value pricing
Value pricing asks what the item is worth to this buyer, right now. A trade customer who needs one fitting to finish a job today will pay more than one stocking up for next month. A hard-to-find spare part, a tinted paint matched while the customer waits, or a delivery the same afternoon all carry value beyond their cost.
Value pricing works when there is a real reason the buyer will accept: speed, convenience, expertise, availability. It does not work as an excuse to charge more for something easy to buy elsewhere.
Keystone pricing
Keystone means doubling the cost: a 100% markup, which is a 50% margin. It is quick and still common in gifts, clothing and some specialist retail. For groceries, building materials and most wholesale lines, it is far too high; those trades work on lower margins and higher volumes.
Psychological pricing
Psychological pricing is about how a price feels, not what it is. Common techniques:
- Price endings. Prices ending in 9 or 99 tend to suggest value; round numbers can suggest quality. Pick one style per category and stick to it.
- Price points. Customers have rough ceilings in their heads. A price just under a round number often sells better than one just over it.
- Anchoring. Showing a premium version next to a standard one makes the standard price look reasonable.
- Bundles. "Three for" deals raise the average sale, but work out the margin on the bundle, not just the single.
Use these to round a cost-plus price into a good-looking one. Do not use them to hide bad value; repeat customers notice.
How do you combine the pricing methods?
Work through the methods in order: cost-plus for the floor, competitors and value for the ceiling, then a price point that sits between them.
Worked example: pricing a new line
A hardware shop adds a cordless drill battery.
- Landed cost: 31.50.
- Cost-plus at the 30% business average: 31.50 ÷ 0.70 = 45.00.
- Competitors: two nearby trade counters sell it at 54 and 57.
- Value: trade buyers often need a spare battery the same day.
- Price point: 52.99.
Margin at 52.99: (52.99 − 31.50) ÷ 52.99 = 40.6%. The shop stays below both competitors, sits well above its floor, and earns ten points more than the formula alone would have given. That extra margin helps pay for low-margin lines elsewhere in the shop.
How do you set trade and wholesale price tiers?
Give each type of customer its own price list, built from the same cost, with a margin that matches how much they buy and how much they cost you to serve.
A typical three-tier set-up:
| Tier | Who | Price (cost 60) | Margin |
|---|---|---|---|
| Retail | Walk-in shoppers | 100.00 | 40.0% |
| Trade | Account customers buying regularly | 85.00 | 29.4% |
| Wholesale | Resellers buying in bulk | 75.00 | 20.0% |
Some rules that make tiers work:
- Earn the tier. Set a clear qualifying rule, such as monthly spend or minimum order. Review it every year.
- Use price lists, not discounts at the till. A customer price list gives the same price every time, on every order, from every member of staff. Ad-hoc discounts drift upwards and nobody can say who agreed what.
- Add quantity breaks if they help. For example, a lower price from a full case or pallet. Make sure the break reflects a real saving, such as less handling.
- Keep the margin floor in sight. A wholesale margin of 20% might be fine on a pallet delivered once a week. It is not fine on single units delivered across town in small drops.
- Give price lists an end date. Supplier costs change; a price list set two years ago is probably losing you money.
If you sell to trade buyers through a catalogue link or a sales rep, the same price list should apply in both places, so a customer never sees two different prices for one item.
What do discounts do to your margin?
They take far more of your profit than their percentage suggests, because the whole discount comes out of the margin, not the price.
Worked example: a 10% discount
An item costs 60 and sells for 100. Profit is 40 a unit.
- With 10% off, the price is 90 and the profit is 30.
- To earn the same 40 of profit per original sale, you now need 40 ÷ 30 = 1.33 sales.
- So you need 33% more sales just to stand still.
The table shows the extra sales you need to keep the same gross profit:
| Discount | Starting margin 40% | Starting margin 30% |
|---|---|---|
| 5% | +14% | +20% |
| 10% | +33% | +50% |
| 15% | +60% | +100% |
| 20% | +100% | +200% |
A 20% discount on a 30% margin line needs three times the sales to make the same money. Sometimes that is worth it: clearing old stock frees cash and space, and a discount on one item can bring in a customer who buys several others. But decide it on purpose, with the numbers in front of you.
Better alternatives to a flat discount:
- Bundles that move a slow line alongside a popular one
- Extra value instead of a lower price, such as free delivery over a set order size
- Time-limited offers with an end date, so they do not become the normal price
- Tier moves, putting a growing customer onto the trade list rather than discounting each order
How do you know if your prices are working?
Compare the margin you planned with the margin you actually got, line by line, every month. The gap is where your money goes.
Look at:
- Actual margin by product and category, after discounts and price overrides
- The loss from discounts, measured as the difference between list price and selling price
- Lines whose cost has gone up since you last set the price
- Slow sellers, where the margin looks good but the cash has been sitting on the shelf for months
- Stock value at cost and at selling price, which shows the profit waiting in your stock; see stock valuation
Remember that prices affect cash as well as profit. Lines that sell slowly at a high margin can tie up more money than they earn; our guide to cash flow shows how to spot this.
Questions people ask
What is the simplest way to price a product?
Take the landed cost, divide it by one minus your target margin, and round to a sensible price point. For a cost of 6 and a 40% margin, that is 6 ÷ 0.6 = 10. Then check the result against what competitors charge.
What is keystone pricing?
Keystone pricing means selling at double the cost: a 100% markup, which gives a 50% margin. It is common in gifts, clothing and some specialist retail, but too high for most groceries and wholesale lines, which sell on lower margins and higher volume.
How often should I review my prices?
Whenever a supplier changes a cost, and in a full review at least once or twice a year. Fast-moving lines whose prices customers know by heart deserve a look every month.
Should I show prices with or without VAT?
Shoppers usually expect prices including VAT; trade buyers who reclaim VAT often prefer prices excluding it. Whatever you show, work out your margins excluding VAT and follow your local rules on how prices must be displayed.
