Grow your ecommerce store · Business basics · 3 min read
How to Price Your Product for Maximum Profit
Short answer
Start with your true landed cost per unit (product, shipping to you, duties, packaging, fulfillment, payment fees), decide the gross margin you need to cover marketing and overhead, and calculate price = cost / (1 - target margin). Then check the price against competitors and customer perception, leave room for discounts, and test higher prices before lowering them.
Pricing is one of the most powerful levers in your business and one of the least tested. A small price increase can do more for profit than a big jump in traffic. Here's a formula-based approach, followed by the judgment calls that formulas can't make.
Step 1: Calculate true landed cost
Include everything it takes to get one unit into a customer's hands:
| Cost | Example |
|---|---|
| Product cost | $12.00 |
| Inbound freight and duties | $1.50 |
| Packaging | $0.80 |
| Fulfillment (pick, pack) | $2.50 |
| Payment processing (approx.) | ~3% of price |
| Average shipping subsidy | $2.00 |
Many sellers underprice because they only count the product cost.
Step 2: Choose a target gross margin
Gross margin needs to cover:
- Marketing and customer acquisition
- Overhead (software, salaries, rent)
- Returns and damages
- Profit
DTC brands that rely on paid ads typically need higher margins than wholesalers or marketplace resellers.
Step 3: Apply the formula
Price = landed cost / (1 - target margin)
If landed cost is $18.80 (excluding processing) and you want a 65% gross margin:
$18.80 / (1 - 0.65) = $18.80 / 0.35 = $53.71
Round to a sensible price point, like $54 or $55, then recheck the margin after payment fees.
Step 4: Check the market
Look at:
- Direct competitors: Similar products and their positioning
- Perceived value: What does your branding, packaging and story suggest?
- Reference prices: What customers expect in your category
If your formula price is far above the market, either justify it (quality, story, service) or reduce costs. If it's far below, you may be leaving money on the table.
Step 5: Plan for discounts
If you'll run sales, offer bundles or use free shipping thresholds, build that into the price. A product that only breaks even at 20% off can't survive Black Friday.
Step 6: Consider pricing strategies
- Good-better-best: Three tiers to anchor value. See good-better-best pricing.
- Bundles: Higher order value with a perceived saving.
- Charm pricing: $49 vs $50. Common, though premium brands often use round numbers.
- Free shipping thresholds set slightly above AOV.
- Value-based pricing: Price on the outcome for the customer, not just cost.
Step 7: Test
Prices aren't permanent. Ways to test:
- Raise prices on new products or variants first
- Test a price increase on one product and track conversion and profit per visitor
- Compare bundle vs single-item offers
Measure profit per visitor, not just conversion rate. A price increase that slightly lowers conversion can still increase total profit.
Markup vs margin: don't mix them up
| Cost | Price | Markup | Margin |
|---|---|---|---|
| $20 | $40 | 100% | 50% |
| $20 | $50 | 150% | 60% |
| $20 | $60 | 200% | 67% |
Many pricing mistakes come from applying a "50% markup" thinking it's a 50% margin.
Pricing psychology without tricks
How a price is presented changes how it feels. Showing a bundle saving, anchoring with a premium option, or breaking an annual price into a monthly equivalent all help customers judge value. Keep it honest: only show a compare-at price that was genuinely charged, don't invent "limited time" deadlines, and make sure fees appear before the final checkout step. Shoppers forgive a higher price far more readily than they forgive feeling tricked, and regulators in many countries actively police fake reference prices and drip pricing.
When to revisit prices
- Supplier costs change
- Shipping rates rise
- You add features or improve quality
- Competitors move significantly
- At least once a year
For Shopify-specific advice, read the ultimate guide to Shopify pricing strategy, and for marketplaces, Amazon pricing strategy.
Frequently asked questions
What's a good gross margin for ecommerce?
It varies by category, but many DTC brands aim for gross margins well above 50% to afford paid acquisition. Resellers and marketplaces often run lower margins with higher volume.
What's the difference between markup and margin?
Markup is profit as a percentage of cost; margin is profit as a percentage of price. A product costing $20 and selling for $50 has a 150% markup and a 60% margin.
Should I price lower than competitors?
Only if you have a cost advantage and want to compete on price. Many small brands do better competing on quality, story, service or niche focus at similar or higher prices.
Sources and further reading
Platform features, prices and policies change. Check the official help pages linked above before you act on a detail that matters to your store.