How to price products online: a practical method that protects your profit

Most new online sellers set prices by looking at a competitor, shaving a dollar off, and hoping volume makes up the difference. A few months later they notice that revenue is growing while the bank balance is not. The problem is rarely the product. It is almost always that the price was set without counting every cost that sits between the supplier invoice and the money that actually lands in the account.

This guide walks through a method I have used with retail clients for years. It works for a marketplace seller, a Shopify store, or a brand selling on both. The numbers in the examples are practical estimates for illustration, so swap in your own figures.

What does a product really cost you to sell online?

The first step in learning how to price products online is replacing the supplier price with your total cost per order. This is everything you pay to get one unit into a customer's hands and keep the sale.

• Landed cost: the unit price from your supplier plus inbound freight, import duties, customs brokerage and packaging. If you pay $9 for a unit and $3 more to get it to your shelf in a box, your landed cost is $12, not $9.
• Platform fees: marketplaces such as Amazon, Etsy or eBay charge a referral or transaction fee, usually a percentage of the sale price. On your own store you pay a subscription instead.
• Payment processing: card processors typically take around 3 percent plus a small fixed fee per transaction on your own store.
• Fulfillment: pick, pack, outbound shipping and any warehouse storage. If you offer free shipping, this cost does not disappear. It moves into your price.
• Returns allowance: a percentage of revenue you set aside for refunds, return postage and units you cannot resell. Apparel often runs much higher than home goods.
• Customer acquisition cost (CAC): what you spend on advertising and promotion divided by the number of orders it produces. Many sellers forget this line entirely.

Some of these costs are fixed amounts per unit (landed cost, fulfillment, ad cost per order). Others scale with the price (marketplace fees, payment fees, returns). That difference matters when you calculate, because raising the price also raises the percentage based costs.

Which pricing method should you use?

There are three common approaches. Strong sellers use all three together: cost sets the floor, customers set the ceiling, and competitors show where you sit between them.

Cost plus pricing

Cost plus pricing means adding a fixed markup to your cost. It is simple and guarantees you never sell below cost, as long as your cost figure is complete. Its weakness is that it ignores what customers would happily pay, so you can leave money on the table.

Value based pricing

Value based pricing sets the price according to the benefit the customer perceives. A handmade leather wallet with a lifetime repair promise can carry a much higher price than its material cost suggests. This approach produces the best margins but needs a clear story, strong reviews and good photography to justify the number.

Competitor based pricing

Competitor based pricing anchors your price to similar listings. It is essential on marketplaces where shoppers compare items side by side, but it is dangerous on its own. Your competitor may have lower costs, different fees, or may simply be losing money.

How do you calculate a price that protects your margin?

Know the difference between markup and margin

These two terms get mixed up constantly, and the confusion costs money.

• Markup is profit as a percentage of cost. A $20 item sold for $30 has a 50 percent markup.
• Margin is profit as a percentage of the selling price. That same $30 sale has a margin of about 33 percent.

If you tell yourself you want a 50 percent margin and then apply a 50 percent markup, you will end up with roughly 33 percent. Pick one measure and use it consistently. I recommend margin, because fees and discounts are quoted as a percentage of price.

Use a formula that includes every cost

Here is the formula that ties everything together:

Price = (fixed costs per order) ÷ (1 minus the sum of percentage costs minus your target net margin)

Fixed costs per order are landed cost, fulfillment and ad cost per order. Percentage costs are marketplace or payment fees and your returns allowance.

A worked example

Imagine a kitchen gadget sold on a marketplace, using illustrative numbers:

1. Landed cost: $12
2. Fulfillment and shipping: $5
3. Advertising cost per order: $6
4. Marketplace referral fee: 15 percent of price
5. Returns allowance: 5 percent of price
6. Target net margin: 20 percent of price

Fixed costs add up to $23. Percentage costs plus target margin add up to 40 percent, so the divisor is 0.60. The price is $23 ÷ 0.60, which equals $38.33. Rounded to a familiar price point, you list it at $38.99.

Check the result: the fee is about $5.85, the returns allowance about $1.95, and fixed costs $23. That leaves roughly $8.19 profit, or about 21 percent. If competitors sell the same gadget for $29, you now know you cannot follow them without cutting costs, and you can decide whether to differentiate, find a cheaper supplier, or drop the product.

How do marketplace fees and shipping change the math?

The same product often needs different prices on different channels. A marketplace may charge a referral fee in the range of 8 to 15 percent depending on the category, plus fulfillment fees if you use its warehouse. Your own store avoids referral fees but usually carries a higher advertising cost per order, because you must bring every visitor in yourself.

Shipping deserves its own decision. You have three common options:

• Build shipping into the price and advertise free shipping. Shoppers tend to respond well, but every unit must carry the cost.
• Charge shipping at checkout. Your listed price looks lower, but abandoned carts may rise.
• Set a free shipping threshold, such as free delivery above $50. This often lifts average order value because customers add a second item to qualify.

Run your pricing formula separately for each channel. A product that earns 20 percent on your own site may earn 8 percent on a marketplace, and that gap should shape where you spend your advertising budget.

When should you discount, and how much can you afford?

Discounts feel cheap to give and are expensive to recover. The reason is that a discount comes entirely out of your profit, not out of your costs.

Consider a product priced at $100 with $60 of total cost, leaving $40 profit. A 20 percent discount drops the price to $80, and profit falls to $20. You now need to sell twice as many units just to earn the same total profit. Most promotions do not double volume.

Before running any sale, ask three questions:

1. How many extra units must I sell to break even on this discount?
2. Will the promotion bring new customers who buy again, or just give a lower price to people who would have bought anyway?
3. Can I offer something with lower cost instead, such as a bundle, a free sample or a gift with purchase?

Bundles are often the smarter tool. Selling two related items together at a modest saving raises order value and spreads fulfillment cost across more revenue.

How do psychological pricing tactics fit in?

Once your floor price is set, presentation can influence how the price feels. Charm pricing, ending prices in 99 or 95, remains common because it makes a price read as lower at a glance. Price anchoring places a premium option next to your main product so the main product looks reasonable. Tiered options, such as a single item, a pack of three and a pack of six, let shoppers choose their own value level while nudging many toward the middle.

These tactics adjust perception. They never fix a price that does not cover costs, so always apply them after the math, not instead of it.

How often should you review and test your prices?

Prices are not a one time decision. Supplier costs move, carriers raise rates, marketplaces update fee schedules, and advertising costs often climb during busy seasons. A quarterly review is a sensible minimum, with an extra check before major sales periods.

When you test a new price, change one thing at a time and give it enough orders to judge, ideally several weeks of normal traffic. Track conversion rate, profit per order and total profit, not just revenue. A higher price that converts slightly worse can still earn more money overall.

Pricing tools that use AI to monitor competitor listings can help on large catalogs, but set a minimum price rule based on your own formula so the software never chases a rival below your cost.

Common pricing mistakes to avoid

• Using supplier price instead of landed cost
• Forgetting advertising cost per order
• Confusing markup with margin
• Applying one price across channels with very different fees
• Discounting without calculating the volume needed to break even
• Never revisiting prices after launch

Get the cost side right, set a margin target you can defend, and treat every price as a hypothesis to test. That discipline is what separates stores that grow profitably from stores that simply grow busy.