How to Price a Product in 2025 (+ Pricing Calculator)

Pricing your products is one of the most important decisions you’ll make as a business owner. The pricing model you choose impacts virtually every part of your business.

It also affects your customers.

If you price your products too high, some customers will choose lower-priced products from competitors over yours, and you’ll miss out on sales. If you price your products too low, you might attract more customers, but you’ll risk cutting into your profits and struggling to cover costs.

It’s all too easy to get hung up on your pricing strategy when you’re launching a new business or product, but it’s important not to let the decision stop you from getting started.

This guide covers everything you need to know about pricing your products, including the fundamentals of a strong pricing strategy and the most common models businesses use today.

What is product pricing?

Product pricing is the process of determining how much you will sell a product for. It takes into account both internal factors (like production costs) and external factors (like market conditions) and has a direct impact on your business’s overall success, from cash flow and profit margins to customer demand.

Pricing strategies differ based on industry, target customers, and the cost of goods. In ecommerce retail, for example, value-based pricing models are common. In highly competitive markets, competitive pricing is often the way to go.

How should I price my products?

The easiest way to price a product is to add up all the costs involved in bringing it to market, then add a markup on top. This strategy is called cost-plus pricing.

If it seems too simple to be effective, you’re half right— here’s why.

Cost + Markup = Selling price

Your markup will depend on your industry, among other factors. Cost-plus pricing guarantees that you earn a gross profit on every item you sell, and it can work well as a short-term solution. However, there’s more to consider.

If your markup is too high and your products are seen as too expensive, potential customers won’t buy, and you’ll lose market share. If you set your markup too low, you could leave revenue on the table, which could make it challenging to grow at scale.

While cost-plus pricing works in some situations, there are other important factors that your pricing strategy needs to account for, like consumer trends and market positioning—how your brand is perceived relative to competitors.

You’ll establish your market positioning by expressing the unique value proposition that encourages customers to buy from you rather than competitors. Once you do this, you might want to move beyond the simple cost-plus pricing strategy.

That’s because different pricing strategies work best for different market positionings. For example, let’s say you have a value-based positioning strategy. This means customers buy your product over competitors’ because of the perceived value it offers them.

Maybe, for example, you sell a vacuum that’s quieter than others on the market. Since you’re differentiating based on noise level, you’ll want to estimate the approximate value in dollars your customers put on quietness, and add that to the base price of the vacuum.

If you sell a commodity product, on the other hand, you might use an economy pricing strategy, in which you keep prices low and rely on sales volume to make a sustainable profit. If you sell a luxury product like high-fashion handbags or fine jewelry, you might use a premium pricing strategy, setting higher prices to create the illusion of prestige and exclusivity.

Keep in mind: Pricing is not a decision you make once. As market conditions and your business change, you’ll likely need to revisit your product prices. However, if you’re trying to find the retail price of your product for the first time, cost-plus pricing is a relatively quick and straightforward way to establish a baseline.

How to price your product

1. Add up fixed costs
2. Add up variable costs
3. Consider international costs and tariffs
4. Calculate cost per unit
5. Add a profit margin

To price a product, you’ll first need to determine the product’s cost per unit. This is the amount of money you spend to make and sell each product. Start by adding up your business expenses—both fixed and variable costs.

1. Add up fixed costs

Fixed costs are expenses that do not change regardless of how many products you make. They include overhead expenses like rent, business insurance, and salaries.

Here are a few common fixed costs:

• Rent for office, production, or warehouse space

• Salaries

• Business insurance

• Property tax

• Manufacturing equipment

• Software subscriptions, like for an ecommerce platform or accounting tools

• Marketing and advertising costs, like your digital advertising spend

Before you start adding up these expenses, pick a time period to ensure accounting consistency. That could be a month, quarter, or year, for example. You’ll measure each expense for this time period.

2. Add up variable costs

The second step in calculating your cost per unit is to total your variable costs. These are expenses that change based on the number of products you produce. For example, those costs could include:

• Packaging costs

• Shipping costs

• Sales commissions

• Inventory storage costs

• Raw material costs

• Credit card processing fees

Tally these expenses for the same time period you used for your fixed costs.

3. Consider international costs and tariffs

If you source products internationally or sell to customers abroad, you’ll need to add costs like tariffs, duties, and international shipping to your total variable costs. These expenses can fluctuate significantly due to shifting trade policies.

For businesses that import products, understanding relevant tariff rates is essential for accurate cost calculations. Tariffs are based on Harmonized System (HS) codes, which classify products for customs purposes. Using incorrect HS codes can lead to unexpected fees, shipment delays, or even penalties for your business or your customers.

When calculating your costs, factor in these international import and shipping costs to ensure your profit margins remain sustainable. You may also want to explore strategies like diversifying suppliers or optimizing duties collection to manage these costs effectively.

4. Calculate cost per unit

Now that you’ve added up your fixed and variable costs, it’s time to calculate your cost per unit. You can follow this simple formula:

(Total variable costs + Total fixed costs) / Number of units produced = Cost per unit

Use the same time period you used in your fixed and variable cost calculations to determine the number of units produced, answering the question: How many products did you make during that time?

5. Add a profit margin

Once you’ve calculated your cost per unit, it’s time to build gross profit into your price.

Typical gross profit margins vary across industries. According to New York University, here are the average gross profit margins for several major industries:

• General retail: 32.22%

• Furniture and home furnishings: 28.50%

• Electronics: 37.48%

• Apparel: 54.28%

• Food and grocery: 26.09%

Once you’re ready to calculate a price, take your cost per unit and divide it by 1 minus your desired profit margin expressed as a decimal. For example, if your desired profit margin is 20%, you’d divide your cost per unit by 0.8 (since 1 -0.2 = 0.8).

Target price = (Cost per unit) / (1 - Desired profit margin as a decimal)

If your cost per unit is $14.28 and your desired profit margin is 20%, you would do the following calculation:

$14.28 / (1 - 0.2) = $17.85 (selling price)

Note that gross profit margin and markup are not exactly the same thing, and they’re calculated with slightly different formulas. Markup is the percentage added to your product cost to determine the selling price. Margin is the percentage of the selling price that remains after you subtract the product cost.

Before you lock in your selling price, consider it in light of overall market conditions and competitor prices to make sure your price still falls within the overall “acceptable” price range for your product. If your price is significantly higher than your competitors’ for a similar product, it may be difficult to attract buyers.

Using a product pricing calculator

A product pricing calculator can help you find a profitable selling price, which can be incredibly helpful in understanding how different price points may affect your business.

Shopify’s profit margin calculator is a great way to figure this out. It uses a cost-plus pricing strategy that takes the total costs to make your product, then adds a percentage markup to determine the final selling price.

To start, simply enter your product cost for each item and what percentage in profit you’d like to make on each sale. For example, if your item costs $20 to produce and you want to apply a 25% markup, the calculator will generate your target selling price automatically.

After inputting your numbers, click “Calculate profit.” The tool will run those numbers through its profit margin formula to find the recommended price you should charge your customers. In the example below, a $25 sale price yields a $5 profit and a 20% gross margin.

Play around with the inputs to find the perfect price point for your customer base and bottom line. If you can charge a higher price, increase your markup. Once you’ve found the right balance, you can confidently set prices and start generating profit from each sale.

Best practices for product pricing

• Identify your target audience
• Analyze competitors
• Define your unique value proposition
• Determine your market positioning
• Experiment with discount and psychological pricing

Use these tips as you start setting product prices.

Identify your target audience

Identifying your target audience is a crucial first step in everything from product development to marketing. It’s just as essential when you’re pricing a product.

For example, let’s say you’re selling rugs. If your target audience is professional city dwellers who own homes, you’ll likely be able to charge more for your product than if your target audience is college students looking for dorm décor, because homeowners generally have more disposable income.

Analyze competitors

You might sell an amazing product, but if customers can get a similar product at a lower price point, you’ll likely miss out on sales. Before you set your prices, analyze your competitors’ prices by conducting a competitive analysis.

A thorough competitive analysis involves examining more than prices, and you’ll also learn about your competitors’ marketing strategies, refund and shipping policies, and more. This helps you position your price within the market while also ensuring your customer experience holds up against the competition.

Define your unique value proposition

Your unique value proposition (UVP) is why consumers choose your product over others on the market. This will ultimately impact your market positioning, and therefore your optimal pricing strategy.

For example, let’s say you sell flour. You’re able to source low-cost wheat and have a factory that can churn out large quantities of flour with low labor costs and little overhead. In this case, your value proposition might be affordability, and you’ll want to price your products low.

Conversely, let’s say you source organic wheat from local farmers and make proprietary flour blends in small batches. Your value proposition might be product quality, and you can likely set higher prices.

Determine your market positioning

Now that you’ve established your UVP, it’s time to define your market positioning. There are a number of market positioning strategies:

• Price point positioning. Focusing on where your product sits on the pricing spectrum, whether as an affordable option or a high-end, premium offering.

• Quality positioning. Emphasizing product quality as the core differentiator.

• Competitor positioning. Framing your product as better than a direct competitor—for example, comparing favorably to a well-known rival.

• Usage positioning. Highlighting your product’s specific use case, emphasizing functionality, performance, or technical features.

• Availability positioning. Focusing on convenience—for instance, offering same-day shipping on air conditioners to become the go-to option during heat waves.

• Novelty positioning. Centering on innovation, such as technologies or products competitors don’t yet have.

Once you’ve found the right positioning for your brand, choose a pricing strategy that aligns with it. For example, availability positioning might align with a dynamic pricing model (think Uber surge pricing), which adjusts pricing based on demand. Competitor positioning might mean pricing your products just slightly below your biggest rival.

Experiment with discount and psychological pricing

You can combine discount and psychological pricing with other pricing strategies to find the perfect prices for your product.

Psychological pricing, also called charm pricing, uses consumer psychology to influence purchases. Classic tactics include ending prices in .99 or using odd numbers to make prices feel lower.

Discount pricing, or placing your products on sale, can encourage purchases because shoppers feel like they’re getting a good deal. This can also help clear out older inventory. Just be careful not to overdo it: Discounting too many products can make you look like a bargain retailer, undermining your brand reputation if you position your products as premium or high quality.

Test different pricing strategies

Don’t let fear of choosing the “wrong” price hold you back from launching your store. Pricing decisions can evolve with your business, and as long as your price covers your expenses and includes a profit, you can test and adjust as you go.

To get started, you might use a cost-plus pricing model and run a price comparison to make sure your products are priced appropriately relative to competitors.

Later on, you might try another pricing strategy. Value-based pricing is especially common in ecommerce. It involves setting prices based on the perceived value of the products and services you offer.

Once you have that, offer lower prices through discounts and use customer feedback to adjust your pricing structure in the future.