How to price a product so it's actually profitable
Published
Start from the profit you want to keep, then work back to the price, including VAT, fees and returns. A price built only from cost plus a markup usually looks healthy and earns far less than expected.
An example that looks fine
A UK seller has a product with these costs per unit:
| Cost | Amount |
|---|---|
| Purchase price | £12.00 |
| Freight to the warehouse | £1.50 |
| Postage to the buyer | £4.00 |
| Packaging | £0.50 |
| Total | £18.00 |
They price it at £29.99. That’s £11.99 above cost — a 67% markup. It looks like a good product.
What the sale really leaves
Now add what happens between the buyer paying and the money arriving. The price includes 20% VAT, the marketplace takes 15% of the VAT-inclusive price, and 10% of orders come back. A returned order is refunded and the item goes back into stock, but the postage is lost, and each return costs about £5 to handle.
| Per order | Amount |
|---|---|
| Buyer pays | £29.99 |
| VAT (29.99 − 29.99 ÷ 1.2) | −£5.00 |
| Revenue without VAT | £24.99 |
| Expected refunds (10%) | −£2.50 |
| Product cost, kept orders only | −£12.15 |
| Postage and packaging | −£4.50 |
| Commission (15% × £29.99) | −£4.50 |
| Return handling (10% × £5) | −£0.50 |
| Profit | £0.84 |
The margin is 3.8%, not the 40% that a 67% markup suggests. Each step is small; together they take almost everything.
Work back from the profit you want
The same costs give two useful prices:
- Break-even price: £28.59. Below this, every order loses money.
- Price for a 20% margin: £38.12. At that price the order leaves about £5.72.
These aren’t found by adding a markup to cost. The commission grows with the price, and so does the VAT, so the price has to be solved with all of them together. Leaving VAT and returns aside, the rule for a target margin m when fees are a share of the price is:
Price = costs per order ÷ (1 − fee rates − m)
That is why some targets are impossible: if fees and the margin you want add up to 100% of the price, no price reaches it.
A short checklist
- Use the price without VAT as your revenue.
- Find out what each fee is charged on: item or order, with or without tax.
- Include returns: refunds, lost postage and handling.
- Set a target margin or profit per order and solve the price from it.
- Round up to a price ending you like, not down.
The profit calculator does steps 1–4 at once: enter the costs above and it shows £0.84, £28.59 and, with a 20% target, £38.12.