How to Calculate the Selling Price of a Product

Why most prices are wrong from the start

Most small business owners price their products in one of three ways: they copy what competitors charge, they add a round percentage on top of cost ("I'll add 50%"), or they go with whatever "feels right." All three share the same problem: they're not anchored to the actual cost of the product.

The result is either prices too low to be sustainable or too high to be competitive — usually the former.

The correct selling price starts with one number: the real cost of the product. From there, the formula is straightforward.

The selling price formula

Selling Price = Cost ÷ (1 − Desired Margin)

The desired margin is expressed as a decimal (60% = 0.60).

Example: your product costs £8.00 to make and you want a 60% margin.

Selling Price = £8.00 ÷ (1 − 0.60) = £8.00 ÷ 0.40 = £20.00

At £20.00, you keep £12.00 (60%) after covering the £8.00 cost.

Worked example — hair salon

A cut and colour service costs you:

With a target margin of 40%:

Selling price = 31.50 ÷ (1 − 0.40) = 31.50 ÷ 0.60 = £52.50

If you charge £45 instead, your real margin is 30%, not 40%.

Margin vs markup — the confusion that kills profits

This is the most common pricing mistake, and it leads businesses to underprice systematically.

Markup is calculated on cost:

Markup % = (Selling Price − Cost) ÷ Cost × 100

Margin is calculated on selling price:

Margin % = (Selling Price − Cost) ÷ Selling Price × 100

If you add a 60% markup to an £8.00 product, you get £12.80 — a margin of only 37.5%, not 60%.

Always decide in terms of margin (percentage of selling price). It's the number that tells you how much of every pound you actually keep.

What counts as "cost"

The cost figure in the formula must include everything that goes into the product or service — not just materials.

Direct costs (per unit):

Indirect costs to allocate:

The ones most often forgotten:

A candle that costs £2.50 in materials might cost £4.80 once you include packaging, a share of equipment, and the time to make it. Pricing from £2.50 means you're subsidising every sale.

Worked example — car repair garage

A full service has these real costs:

With a target margin of 35%:

Selling price = 103.40 ÷ 0.65 = £159.08

If the garage charges £120, it thinks it makes £82 per service (£120 minus parts), but it actually makes £16.60 — a margin of 13.8%.

How VAT affects your selling price

VAT is collected on behalf of HMRC — it passes through your business, it's not your revenue. But the way you present prices affects your margin calculation.

If you sell to consumers (B2C): your advertised price includes VAT. The margin formula uses the ex-VAT price.

Ex-VAT price = VAT-inclusive price ÷ 1.20 (for 20% VAT)

Example: you sell a product at £24.00 including 20% VAT.

If you sell to businesses (B2B): prices are normally quoted ex-VAT, so just use the ex-VAT selling price.

On the Flat Rate Scheme (FRS): you pay a fixed percentage of your VAT-inclusive turnover to HMRC rather than the difference between output and input VAT. The rate depends on your sector, so check yours on GOV.UK and account for it when working out how much VAT you actually keep.

Align your price with the market without destroying your margin

The formula gives you the price at which your business reaches the chosen margin. Knowing it doesn't mean ignoring the market. The process is:

1. Calculate your minimum price — the price below which you lose money

2. Calculate your target price — with the margin you need to be profitable

3. Compare with the market — if your target price is well above the market, you have a cost problem, not a pricing problem

4. Decide where to position yourself — low price (volume), mid price (standard) or high price (perceived value)

If the market pays less than your minimum price, you have two options: cut costs or differentiate enough to justify a higher price.

Margins vary widely between sectors and businesses, so there is no single target that fits everyone. Work out your own gross margin, track it over time, and compare it with what you need to cover your fixed costs and pay yourself.

The three most common pricing mistakes

1. Using purchase price instead of total cost

The price on the supplier invoice is not your cost. Add packaging, delivery, storage, wastage, and your own time to assemble or prepare the product.

2. Pricing from memory, not from current supplier prices

Supplier prices change. If you haven't recalculated since your last supplier price increase, you may already be below your target margin.

3. Applying the same margin to everything

High-volume, low-effort products can sustain lower margins. Bespoke, time-intensive or low-volume items need higher margins. A blanket "50% on everything" ignores the cost structure of each product.

Keep reading