Finance · 4 min read
Cost-Plus Pricing: How to Price a Product for Profit
Cost-plus pricing means working out exactly what each unit costs you, then adding enough on top to cover your overheads and leave a profit. It's the simplest pricing method there is, and for small sellers it's a solid starting point. The two places people go wrong are leaving costs out, and adding a percentage when they should be dividing by one.
Step 1: Build your full unit cost
Here's a handmade candle, sold online:
| Cost | Per unit |
|---|---|
| Wax, wick, fragrance, jar | $6.20 |
| Box, label, tissue | $0.80 |
| Labour: 15 minutes at $20/hour | $5.00 |
| Inbound shipping on supplies, per unit | $0.50 |
| Total unit cost | $12.50 |
That labour line is the one most makers skip. If you don't pay yourself in the cost, you're pricing as a hobby, and scaling up will hurt.
Step 2: Account for percentage fees
Marketplace and payment fees are a percentage of the selling price, not the cost. Between a marketplace transaction fee and card processing, online sellers often lose around 10% of every sale. You can't add those on as a fixed amount; they grow with the price.
Step 3: Divide, don't add
Say you want a 40% margin after fees. The price has to cover your cost, the 10% of fees and the 40% you keep:
Price = unit cost ÷ (1 − margin − fees)
= $12.50 ÷ (1 − 0.40 − 0.10)
= $12.50 ÷ 0.50 = $25.00
Check it: $25 minus $2.50 of fees minus $12.50 of cost leaves $10, which is 40% of $25. If you'd just added 40% to your cost, you'd have priced at $17.50 and kept about $3.25 after fees, a margin under 19%. That's the margin vs markup trap in action.
The profit margin calculator works this out (use your cost plus fees as the cost, or check the result against a target margin).
Step 4: Sanity-check against the market
Cost-plus tells you the minimum price that works for you. It doesn't tell you what customers will pay. Before you commit:
- Look at similar products. If they sell at $32, you may be underpricing at $25. If they're at $18, you need to cut costs, add value or find a different market.
- Consider price points people are used to. $24 or $26 might sell better than $25 in your niche; it's worth testing.
- Think about bundles. Two candles for $45 raises the average order and spreads your shipping cost.
Step 5: Make sure volume covers overheads
Your margin has to pay for things that don't scale per unit: website, software, photography, insurance, a market stall fee. If those come to $300 a month and you keep $10 per candle, you need to sell 30 candles a month just to break even. The break-even section of the profit margin calculator, and how to calculate a break-even point, show how to find that number.
When cost-plus isn't enough
- Your costs are very low but the value is high, like digital products or expert services. Pricing on cost leaves money on the table. Price on value instead.
- Competitors set the price. In commodity markets, you may have to work backwards from the market price to a cost you must hit.
- Your costs change a lot. Review your numbers every few months, especially after supplier price rises.
A quick checklist
- Include every cost, including your time.
- Treat percentage fees as a share of price.
- Divide by (1 − margin − fees).
- Compare with the market, then adjust.
- Check your volume covers fixed costs.
Frequently asked questions
What is cost-plus pricing?
Setting a price by calculating your full cost per unit and adding a margin on top to cover overheads and profit.
How do I calculate a cost-plus price with a target margin?
Divide your unit cost by (1 − target margin − percentage fees). A $12.50 cost with a 40% margin and 10% fees needs a $25 price.
Should I include my own time in product cost?
Yes. If your labour isn't in the cost, your price doesn't really pay you, and it becomes hard to grow or hire help.
What are the downsides of cost-plus pricing?
It ignores what customers are willing to pay and what competitors charge, so it can underprice high-value products or overprice commodity ones.