In this article
The key points in 30 seconds
- True cost = purchase price + packaging + shipping + fees + each unit’s share of ads and returns.
- Margin = profit ÷ selling price × 100, not profit ÷ cost.
- To price correctly, start from the margin you want: price = cost ÷ (1 − margin).
- Review your numbers monthly: silent rises in shipping and fees eat profit.
Many online store owners start pricing simply: they add a “reasonable” amount on top of the purchase price and wait for profits. Months later they find that sales are good but their bank account doesn’t reflect it. The cause is usually not low sales but a profit margin calculated wrongly from the start. In this guide we apply the calculation step by step to examples with real numbers and see where profit usually disappears.
Step 1: calculate the true cost per unit
Cost isn’t just the purchase price. To know your real profit, add up everything you pay until the product reaches the customer:
- Product cost: the supplier price or the cost of materials, printing and manufacturing.
- Packaging: boxes, bags, labels, thank-you cards.
- Shipping: if you pay all or part of it.
- Platform fees: marketplace commissions such as Etsy, Amazon or Noon.
- Payment fees: the payment gateway percentage and any fixed fee per transaction.
- Each unit’s share of ads and returns: we calculate these below.
Example 1: a physical product priced 60
Purchase price 30, packaging 2, shipping 5, platform and payment fees 4. True cost = 30 + 2 + 5 + 4 = 41, not 30. Profit = 60 − 41 = 19.
If the seller counted cost as only 30, they would think they make 30 per unit, 58% more than their real profit. That gap is exactly what “disappears” at the end of the month.
Step 2: apply the profit margin formula
The formula: Margin = (selling price − cost) ÷ selling price × 100. In the example above: 19 ÷ 60 × 100 = 31.7%, meaning you keep about 32 of every 100 the customer pays.
Let’s compare three common product types the same way:
| Product | Selling price | Total cost | Profit | Margin |
|---|---|---|---|---|
| Physical product (example 1) | 60 | 41 | 19 | 31.7% |
| Print on demand (T-shirt) | 25 | 14.5 | 10.5 | 42% |
| Digital coloring book PDF | 6 | 1.02 | 4.98 | 83% |
For a digital product, the cost per copy is limited to platform and payment fees (calculated here with Etsy’s default values: listing 0.20 + transaction 6.5% + processing 3% and 0.25), so the margin is very high. But don’t forget that the real design cost is your time, a fixed cost spread over all the copies you will sell.
Step 3: set the price from the margin you want
The professional way is to start with the target margin and derive the price: Price = cost ÷ (1 − margin).
Example 2: what price for a cost of 41?
- For a 20% margin: 41 ÷ 0.80 = 51.25
- For a 30% margin: 41 ÷ 0.70 = 58.57
- For a 40% margin: 41 ÷ 0.60 = 68.33
- For a 50% margin: 41 ÷ 0.50 = 82.00
Going from a 40% to a 50% margin requires a price increase of about 14, not 4, because the relationship isn’t linear.
Enter your cost and the margin you want to get the suggested price instantly, in any currency.
Try the profit margin calculator →Common mistakes that quietly lower your margin
1. Confusing margin and markup
Adding 40% on top of cost doesn’t give you a 40% margin. On a cost of 100, a 40% markup makes the price 140 and the margin only 28.6%. We explain this in detail in margin vs markup.
2. Ignoring returns
If 5 out of 100 orders are returned and each return costs 10 in round-trip shipping, returns cost 5 × 10 = 50 per 100 orders, or 0.50 per order to add to the unit cost.
3. Forgetting advertising cost
If each order costs 8 in ads on average, example 1’s profit falls from 19 to 11 and the margin from 31.7% to 18.3%. That is why you must know your cost per order before increasing your ad budget, as explained in What is ROAS.
4. Forgetting future discounts
If you plan seasonal 20% discounts, your base price must absorb them without selling at a loss. In example 1, a 20% discount makes the price 48 and the profit only 7. Use our discount calculator to see the impact before launching an offer.
What margin is right for your store?
There is no single number for everyone. Digital products can exceed 80% margins, while physical products should ideally stay above 30–40% if you rely on paid ads, because customer acquisition cost will take part of it. If your margin is below 20%, any small rise in shipping or fees can turn the product into a loser.
A 10-minute monthly checklist
- Update current purchase and shipping prices for your top 10 products.
- Review your platform and payment gateway fees pages for changes.
- Calculate last month’s advertising cost per order.
- Recalculate each product’s margin and flag any below your target.
- For each flagged product, decide: raise the price, cut costs or stop advertising it.
Frequently asked questions
Should I calculate margin before or after VAT?
Always on the price excluding VAT, because the tax isn’t your revenue. See how to calculate VAT.
Should I add the value of my time to cost?
For handmade products, yes: add labor hours per unit. For digital products, treat design time as a fixed cost spread over the expected number of copies sold.
How often should I review my prices?
A quick monthly review is enough for most stores, with an immediate review whenever platform or shipping fees change.
Summary
Calculate your true cost in full, including returns and ads, start from the target margin to set prices, and review your numbers every month. This simple habit is what separates a profitable store from one that sells a lot and earns little.
