Most new sellers set prices one of two ways. They copy a competitor, or they take their cost and double it. Both can work by accident. Neither tells you whether you’ll make money. A price has to do three jobs at once: cover what the product costs you, leave enough to run the business, and still look reasonable to the buyer.
Here’s a four-step method that handles all three, using one example throughout: a small business selling hand-poured candles online.
Step 1: Find Your True Cost Per Unit
List everything that goes into one unit, including the things people tend to skip:
- Wax, wick, jar, fragrance, label: $4.20
- Box and packing material: $0.80
- Labor, 10 minutes at $18 an hour: $3.00
That’s $8.00 per candle. The labor line is the one most makers leave out, and it’s the one that matters most later. If you don’t price your own time in, you can never afford to pay someone else to do the work.
Material costs depend heavily on who you buy from, so it’s worth getting quotes from more than one source. Our guide on finding suppliers you can trust covers how to compare them.
Step 2: Choose a Target Margin and Do the Math Correctly
Decide what share of the selling price you want to keep as gross profit. Handmade and specialty goods sold direct often aim for somewhere around 50–70%. Products sold through retailers need room for the retailer’s cut as well.
Then use this formula:
Price = Cost ÷ (1 − target margin)
For a 60% margin: $8.00 ÷ (1 − 0.60) = $8.00 ÷ 0.40 = $20.00.
The common mistake here is adding 60% to the cost instead. That gives $12.80 and a margin of only 37.5%. Adding a percentage to cost is markup, which is a different thing. If the distinction is new to you, read markup vs margin before you set a single price.
Step 3: Check It Against the Market
Now look at what comparable products actually sell for. Not the cheapest listing you can find, but the ones aimed at the same buyer.
- If similar candles sell for $18–$26, $20 sits comfortably in range. You could even test $22.
- If they sell for $12, you have a decision to make. Either cut costs, or give buyers a clear reason to pay more: better ingredients, nicer packaging, a stronger brand. Matching a price you can’t afford is the worst option.
- If they sell for $35, your formula price is leaving money behind. Cost sets the floor for your price. What customers will pay sets the ceiling.
Step 4: Test It Against Fees and Fixed Costs
Two more checks before you commit.
Selling fees. A typical card processing fee of 2.9% plus 30 cents takes $0.88 from a $20 sale. That leaves $11.12 per candle, a real margin of about 56%. Marketplace fees are usually higher, so work them in if you sell there.
Fixed costs. Suppose your website, insurance, studio space and other monthly overheads come to $1,200. Divide that by what each candle contributes: $1,200 ÷ $11.12 = 108 candles a month just to break even. Is that realistic for your current traffic and audience? If not, the price, the costs or the plan has to change. You can work through your own numbers with our guide on how to calculate your break-even point or the break-even calculator.
If you plan to run ads, remember the ad cost comes out of that same $11.12. The ROAS calculator guide shows how to find the return you need for ads to pay for themselves.
Pricing Mistakes That Cost the Most
- Offering free shipping without pricing it in. Someone pays for shipping. If it isn’t the customer, it’s your margin.
- Discounting by habit. At a 56% margin, a 20% discount doesn’t cost you 20% of your profit. It costs more than a third of it.
- Never raising prices. If your costs go up every year and your prices don’t, your margin shrinks quietly until one day there’s nothing left.
- Competing on price as a small seller. Bigger competitors buy cheaper than you ever will. Compete on something they can’t copy as easily.
A Price Is Never Final
Treat your first price as a starting point. Review it every few months, and whenever a supplier changes theirs. If you raise it by a dollar or two and sales hold steady, that increase is almost pure profit. For the other numbers that tell you how the business is doing, see our small business finance basics guide.
