To price a product, add up your cost per unit, include every per-sale fee, pick the profit margin you want and divide: price = cost ÷ (1 − margin). Shopify’s guide uses this formula, and it avoids the classic mistake of thinking a 40% markup gives you a 40% margin.
Which costs go into the price?
Shopify splits costs into two groups. Fixed costs are what you pay for a period regardless of sales: rent, salaries, insurance, equipment, software and marketing. Variable costs move with volume: packaging, shipping, sales commissions, storage, raw materials and card processing fees. If you import or sell abroad, add tariffs, duties and international shipping, which Shopify notes can shift with trade policy.
The unit cost is (total variable costs + total fixed costs) ÷ units produced. For an online seller, the per-sale items matter most: marketplace referral fee, fixed per-item fees, payment fees, shipping you cover, returns. For how those look on real platforms, see Amazon seller fees and eBay selling fees.
Markup versus margin: what is the difference?
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. Shopify’s example: a product costing $40 and selling for $50 earns $10, which is a 25% markup but a 20% margin.
| Markup on cost | Margin on price |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
To convert, margin = markup ÷ (100 + markup), and markup = margin ÷ (100 − margin). When someone says “40% profit,” ask: 40% of what? A $60 product needs a $100 price for a 40% margin. Applying a 40% markup gives $84, which is only a 28.6% margin and $16 less profit per unit, a mistake Shopify specifically warns about.
How to calculate the price, step by step
- Add your fixed costs for a period, say a month.
- Add your variable costs for the same period.
- Get the cost per unit: (variable + fixed) ÷ units. Shopify’s example gives $14.28.
- Choose the margin you want. Shopify’s example uses 20%.
- Divide: $14.28 ÷ (1 − 0.20) = $14.28 ÷ 0.8 = $17.85.
Check: 20% of $17.85 is $3.57, and $14.28 + $3.57 = $17.85. The profit really is 20% of the price.
A marketplace example with per-sale fees
The numbers below are ours and illustrative, not a real platform’s rates. Say a product costs you $15, packaging is $1 and inbound shipping is $1, total $17. Suppose the marketplace takes a 15% referral fee plus a $0.50 fixed fee per item, and you want a 15% margin.
- Percentages on the price: 15% fee + 15% profit = 30%.
- Fixed dollars: $17 + $0.50 = $17.50.
- Price = $17.50 ÷ (1 − 0.30) = $17.50 ÷ 0.70 = $25.00.
Test: 15% of $25 is $3.75, plus $0.50 fee, plus $17 cost, equals $21.25. You keep $3.75, which is 15% of the price. If you had used a simple 45% markup on the $17 cost, you would price at $24.65. The fee would be $3.70 plus $0.50, leaving $24.65 − $17 − $4.20 = $3.45, a 14% margin. Close here because the margin target was modest. The gap widens as fees and targets grow, so always run the full formula.
What happens to the margin when you discount?
Each discount cuts the price, but cost and fixed fees stay put. On the $25 item, a 10% discount brings it to $22.50. The 15% fee falls to $3.375, and the $0.50 fee and $17 cost stay. Profit: $22.50 − $17 − $0.50 − $3.375 = $1.625, which is about 7.2% of the price. A 10% discount cut profit per unit by more than half, from $3.75 to $1.63. Before any sale, recompute the margin at the new price. The ROAS break-even guide shows how the same margin sets how much you can spend on ads.
Should you copy competitors’ prices?
Shopify lists “ignoring competitors” as a mistake, because prices you set once and never revisit invite undercutting, and suggests checking quarterly. It also lists underpricing out of fear, which can cut profit and make a product look lower quality, and ignoring rising costs: a 10% cost increase with unchanged prices shrinks your margin. In our assessment, the order matters: find your floor from your own costs first, then look at the market.
Shopify also suggests price testing: try a 5% to 10% increase on a group of SKUs and watch volume. If sales barely drop and profit rises, you may have been underpricing.
What about keystone pricing?
Keystone pricing means doubling your wholesale cost, a 100% markup and a 50% margin. It is fast, but Shopify notes it leaves out shipping, overhead, duties and fees, so the true margin is often thinner than 50%. Use it as a first guess, not a final price.
Who should not use this guide?
If you do not yet know your true unit cost, start there. If you sell services, the cost is mainly your time, so the logic differs. Taxes depend on your situation, so check with an accountant or the IRS or SBA pages before assuming any rate.
Frequently asked questions
What margin should I aim for?
There is no single number. Pick the minimum that covers your costs and still leaves a profit that justifies the work, then see what your market will pay.
Is a 100% markup a 100% margin?
No. Doubling your cost is a 100% markup and a 50% margin, according to Shopify.
Should I use one price on every channel?
Only if the fees match. Each channel has its own fees, so price per channel and include the fee in the formula.
How often should I review prices?
Whenever costs or fees change, and at least quarterly for competitor checks, as Shopify suggests.
