How to Calculate the Selling Price of a Product

Why most prices are wrong from the start

The majority of small business owners price their products 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 approaches 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 prices 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

$$\text{Selling Price} = \frac{\text{Cost}}{1 - \text{Desired Margin}}$$

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

$$\text{Selling Price} = \frac{£8.00}{1 - 0.60} = \frac{£8.00}{0.40} = £20.00$$

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

Margin vs markup — the confusion that kills profits

This is the most common mistake in pricing, 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:

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.

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. The margin calculation is cleaner — 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 effective rate depends on your sector (e.g. 7.5% for catering, 11% for general retail). Account for this when calculating how much VAT you actually keep.

Minimum viable price vs optimal price

The formula gives you the minimum price at which your business survives at the chosen margin. But the optimal price is often higher — constrained by what the market will pay, not by your costs.

Practical benchmarks by sector:

If your current prices are below the lower end of your sector's range, you're likely underpriced — not uncompetitive.

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 — sometimes significantly. A product you priced 18 months ago may now cost 20% more to make. If you haven't recalculated since your last 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 to be viable. A blanket "50% on everything" ignores the true cost structure of each product.