Product pricing is the process of determining the cost of products you sell to consumers. When you are figuring out how to price a product for retail, you are facing a delicate balance — price your items too high, and no one will buy; price them too low, and you sacrifice your profits.
When pricing a product:
- Determine all the costs associated with being able to sell a product.
- Consider your competitor pricing and your target market’s demand.
- Choose a pricing strategy that’s both fair and profitable.
- Determine your target markup and profit margin.
- Monitor the change in consumption of a product in relation to a change in its price.
This article provides a five-step guide on how to price products, from determining your costs to making adjustments and embracing the pricing fluidity that will maximize your profits.
Step 1: Determine your costs
Before you can begin pricing retail products, you have to understand all the costs associated with buying and selling them, as well as other costs associated with running your business. This will give you an idea of the expenses that your sales have to cover. In other words, how much money will your product sales need to generate?
In general, retail costs fall under two categories: cost of goods sold (COGS) and fixed costs.
Cost of goods sold
The first thing you need to find when pricing your products is the cost of goods sold. COGS comprises all the costs associated with the manufacturing of a product or the buying and selling of already-made products. For a retail business, COGS is your variable costs.
If you buy products from trade shows or online, your COGS is straightforward. They are simply the amount you paid for your product, including its purchase price and all shipping fees. If you manufacture products, your COGS include a few more variables: labor costs, production time, material costs, and overhead expenses.
Fixed costs
Also known as indirect costs, fixed costs are expenses not directly associated with the product that stay the same no matter how much you sell. It is important to have a handle on your fixed costs, as these are typically a large portion of your business expenses.
Examples of fixed costs include:
- Rent/mortgage
- Loan payments
- Payroll
- Taxes
- Utilities
- Business licenses
- Insurance
- Software fees
- Permits, professional fees, licenses
- Marketing costs
- Store decor or website maintenance costs
Step 2: Consider your market
Along with accounting for product and business costs when pricing retail products, you will also need to take two other variables into consideration: your target market and your competition.
Target market
A key part of successfully pricing a product is ensuring the price will be feasible for your target market. Your target market is the group of consumers, defined by age, gender, socioeconomic position, location, etc., to which your products and marketing are aimed.
You want to understand who your target market is so you can understand their preferences and behaviors.
For example, if I defined my target market for my organic pet food store, the group could be middle-aged or young pet owners who have some extra spending money to buy higher-end pet products. Location-wise, my target market is in the upscale community around my store.
Once you have defined your target market, you will then consider them as you make pricing decisions. This will largely come down to their spending power and their demand for your product.
Competitor research
In addition to your target market, you will also need to understand the larger market you are competing against so you can price your product competitively
Take a look at retailers that are already selling your products or similar products. See how they are pricing their items, take notes from the most successful brands, and seek to define a niche that is adjacent but not the same.
For example, if I research organic dog food brands online, I see that the typical selling price is anywhere from $65 to $120 for a bag. The biggest names in the organic pet food space sell their bags for $85 to $105. Based on this data, my strategy would be to price my product line between $65 and $120.
💡Ignoring competitor research and market positioning is one of the biggest mistakes when pricing a product.
Step 3: Choose a pricing strategy
Once you have a grasp on your outgoing expenses as well as the market you are selling in, it is time to get into the weeds and start actually pricing your products.
To start, select a pricing strategy. Pricing strategies create a uniform approach to pricing retail products and help ensure that your prices are fair, consistent, and profitable.
When selecting a pricing strategy, take into account the idiosyncrasies of your specific situation and adjust your pricing strategy accordingly.
- Industry standards (ensuring that your prices are competitive)
- Net and gross margins
- Location
- Local purchasing power
- Product costs
- Overhead costs
- Brand positioning (luxury, bargain, etc.)
Continuing with the dog food example, if my target market is located in a more upscale community and is willing to spend a little extra on their pets, I might shoot to price my product somewhere between $80 to $100 per bag. (Remember that our competitor research found pricing ranging from $65–$120.) However, a similar store that sells organic dog food in a middle-class neighborhood might price at the lower end of the range, around $65.
Because of the different locational factors affecting these stores, both will likely be able to sell their dog food with similar success. Not only that but because the two stores’ fixed costs are likely different, they will probably result in similar net profits.
Step 4: Calculate potential profits
After setting prices for your products, it’s time to determine the next variable: your profit. In retail, your profit is expressed as your gross margin and your net margin. You will also need to understand what a markup is and know when to use it instead of calculating for margins.
Gross profit margin
Your gross profit margin is the amount by which the selling price of an item exceeds its COGS, expressed as a percent. It is a great gauge to see if your prices fall in a reasonable range and will give you a better idea of your pricing’s consistency as wholesale or manufacturing costs change.
Here’s how gross profit margin is computed:
Net profit margin
Your net profit margin, on the other hand, is a measure of your profit as a percentage of your revenue. Essentially, your net profit margin tells you your total profitability, taking into account both COGS and fixed variables. You can use net profit margin to gauge your company’s bottom line.
Net profit margin is computed as:
Markup
Markup is typically used to help guide your pricing to make your business profitable and competitive. Using a strategic markup, you can determine how much you need to sell your products to offset any production or wholesale costs while also meeting profit goals.
How to compute for markup:
How to use gross profit margin vs net profit margin vs markup
In summary:
Strategy goal | Margin or markup | Rationale |
|---|---|---|
Set a price above cost | Markup | It helps target a price point |
Monitor profitability | Margin | Reveals earnings after cost |
Assess discount tolerance | Margin | Helps avoid cutting too deep |
You can use your margin to look at individual products and how much profit they are going to create for your business. However, you can also use your margin to help you understand larger trends in your business and stay on top of your finances.
- Quarterly or annual profit reports: You can look at your margin for the quarter or the year to understand your overall profit and revenue. Let’s say your overall margin for the quarter is 50%. Because all the COGS have been accounted for, you know that the 50 cents per dollar of remaining revenue can go toward other business expenses.
- Company efficiency: Keeping an eye on your margin will alert you to company efficiency issues before your margins are so low that you can no longer cover costs. If your margin drops significantly from the previous year, you must reevaluate your costs and revenue to determine the issue.
The easiest way to adjust your margin is to either decrease your wholesale and production costs or increase your price. Beware though: You don’t want to sacrifice quality or drive people away with your prices.
For example: A local café purchases a bag of beans for $10 and sells cups of coffee made from that bag for $40 total.
Markup = ($40 – $10) / $10
Markup = ($30) / $10
Markup = 3 or 300%
This shows that the café registers a 300% markup on cost. However, the cafe’s margin on price is 75% or ($40 – $10) / $40. The owner uses markup to set pricing, but will need to calculate margin to evaluate whether wholesale costs are eroding profits.
Step 5: Monitor and adjust
One key technique for monitoring and adjusting prices, as well as exploring different pricing strategies, is price elasticity of demand. This metric looks at the change in consumption of a product in relation to a change in its price. In other words, price elasticity of demand measures how a change in price affects how well a product sells.
Expressed mathematically, price elasticity of demand looks like:
💡Note: A negative value does not impact or change the price elasticity of demand (PED) percentage. In other words, 1.2 and -1.2 mean the same thing.
Inelastic demand
Quick definition: Demand for a product is unaffected by a change in price.
For some products, demand is inelastic. Things like gasoline or bread have inelastic demand because people are willing to pay for them no matter the price. Typically, necessities like essential food products, utilities, and transportation have inelastic demand. Brands with great recognition, like Apple or luxury brands, also tend to be inelastic.
For a good to have inelastic demand, the demand should change by less than the price changes, making the price elasticity of demand less than one. For example, if the price of apples changes by 10% but your demand only decreases by 5%, then your price elasticity of demand would be 0.5, making apples inelastic.
The goal of any business is to create an inelastic demand or a willingness among your customers to pay any price for the goods you sell. One of the best ways to do this is by creating exclusivity or a sense that your product is unique and limited in quantity. This supposed rareness will create a sense of urgency among your customers and a willingness to pay more for the good.
Elastic demand
Quick definition: Demand for a product changes based on the price of the product.
The majority of goods and services, however, have elastic demand. Demand typically decreases as the price of a good goes up, and demand increases as the price of a good goes down.
For a good to have elastic demand, the demand should change by more than the price. For example, say the price of apples increases by 8%, so consumers decrease their purchase of apples by 19%. In this case, apples would have a price elasticity of demand of 2.375, making them quite elastic.
💡Promotional pricing tips
As you review the effectiveness of your pricing strategy, a tactic you might try with items that are not performing well is putting them on a promotion. While this might help move unsold products in the short term, promotions do sacrifice your margins and can eat away at your profits if not applied properly.
Before discounting, try the following:
- Market the product on social media
- Improve how the product is merchandised in your store and online
- Be sure the item is available on your ecommerce site
- Coach your staff to recommend the item
- Promote the product via an influencer
- Put the product in front of new audiences/markets
If you try these strategies and the product is still not having success, then a sale might be the best move. You should be sure that you know how the sale will impact your profits before you start, and then seek to end the promotion before cutting into your bottom line.
Common pricing pitfalls and how to resolve them
Without a solid pricing strategy, it’s not uncommon for businesses to make pricing mistakes that can undermine profitability, brand value, and customer trust. Below are some of the most common examples:
1. Underpricing due to fear of losing business
- Why it happens: Fear of rejection, early-stage customer acquisition, or misunderstanding market value
- Example: A SaaS platform that undercharges during launch may struggle to raise prices later without backlash.
- How to avoid it: Benchmark pricing against competitors and market expectations; use value-based pricing and not just cost-plus; anchor price points by showing comparative options or ROI.
- How to resolve it: Gradually increase pricing while adding value (e.g., new features, better service); reposition your offer with tiered pricing; communicate the value clearly, focusing on outcomes, not features.
2. Overcomplicating the pricing structure
- Why it happens: Trying to cater to every customer or upsell every feature
- Example: A managed service provider (MSP) with five packages and 10 a-la-carte options may overwhelm small business clients.
- How to avoid it: Keep tiers simple and benefits clear; limit core packages to two to three choices max; bundle high-frequency features into plans.
- How to resolve it: Audit your pricing page to eliminate redundancy; survey customers to find most-valued features and streamline; re-launch pricing with a simpler UI and visual hierarchy.
3. Ignoring competitor and market positioning
- Why it happens: Overconfidence in uniqueness or isolation from market dynamics
- Example: A mid-market CRM priced like an enterprise platform may turn off budget-conscious teams.
- How to avoid it: Run periodic competitive analysis (pricing, messaging, tiers); map yourself on a positioning matrix (price vs value); understand buyer personas and what alternatives they’re considering.
- How to resolve it: Adjust pricing to match your intended value tier (premium, value, niche); clarify differentiation points (e.g., support, integrations, UX); use win/loss interviews to learn where price affected outcomes.
4. Focusing only on cost-plus pricing
- Why it happens: Finance-driven mindset or lack of customer insight
- Example: A consulting firm that charges hourly based on staff time instead of value delivered to the client.
- How to avoid it: Align pricing with perceived customer value, not just internal costs; include emotional and strategic value in pricing considerations. Use ROI calculators to demonstrate worth.
- How to resolve it: Recalculate pricing based on delivered outcomes (e.g., time saved, revenue gained); train sales to shift conversations from cost to value; repackage services to highlight transformation, not effort.
5. Misaligning price with brand positioning
- Why it happens: A disconnect between pricing, quality, and brand promise
- Example: A “luxury” app charging $99/month but with frequent bugs and a poor onboarding experience.
- How to avoid it: Ensure your pricing matches the experience (UX, support, outcomes); validate whether your buyers associate price with premium or economy; use social proof to reinforce the pricing tier (case studies, testimonials).
- How to resolve it: Adjust your price up or down to better reflect customer perception; improve the product/service experience to justify existing pricing; rebrand or reposition to clarify your market identity.
Latest technology for price optimization
Learning how to price a product to sell goes beyond computing for profitability. Not to mention a considerable number of factors that are constantly changing.
So, how do you price a product and future-proof your profitability especially during periods of inflation or supplier changes? The answer: pricing automation tools.
According to McKinsey, companies that implement digital pricing transformations can achieve sustained margin improvements of 2 to 7%, with initial benefits realized in as little as three to six months.
Here are some pricing technologies to consider:
- AI-powered pricing platforms: Tools like Prisync, Intelligencenode, or Omnia Retail use AI to track competitor prices in real time, recommend price changes, and simulate margin impact.
Example: A Shopify retailer selling home goods gets automatic alerts when competitors drop prices and adjusts their pricing dynamically to maintain competitiveness while staying above a target 40% margin.
- Dynamic pricing engines: SaaS solutions like Pricefx, Zilliant, or NetRivals let retailers automate pricing updates based on inventory levels, seasonality, or conversion data.
Example: A fashion retailer uses dynamic pricing to auto-discount excess inventory after 30 days on the shelf, ensuring margin goals are maintained without manual markdowns.
- Integrated POS & analytics suites: Systems like Square, Lightspeed, or Shopify POS now include margin tracking, cost syncing, and automated pricing suggestions inside the point-of-sale system.
Example: A cafe owner sees real-time reports of gross margin by item and gets prompted when rising supplier costs threaten profitability, allowing them to adjust markup before losses accumulate.
- Pricing scenario simulators: Tools like Quicklizard or Incompetitor let businesses run “what-if” scenarios for pricing changes, discount strategies, or bundling offers.
Example: A small electronics store uses simulation to test how a 10% bundle discount affects margin across three SKUs before running the promo live.
Frequently asked questions (FAQs)
Click through the questions below to get answers to some of your most frequently asked product pricing questions.
A good selling price for a $50 item depends on a few things, including your fixed and inventory costs as well as your target market and your competition. In general, however, retailers sell their products with a 15%-60% markup or $57.50-$80, in this case.
Product profits vary based on your costs, but if you are only looking at the difference between purchase and selling price, your profit should be 15%-60% of the purchase price. If you purchased an item for $10, you should sell it for $11.50-$16 and make between $1.50–$6.
Price a product to make a profit by considering your costs, customers, and competition so that the price both covers your expenses and is sellable.
The pricing process for handmade items is similar to regular items. As with non-artisanal products, consider costs, customers, and competition. From there, you should also account for time and labor and the added value of the item being homemade. This is a great place to take cues from competitors or similar vendors.
Bottom line
How to price products is a big question that retailers have to answer accurately to run their business well. When you price your product effectively, you stand to both make sales and a good, sustainable profit that will keep your business running and growing. When you overprice or underprice items, however, you stand to lose money or incur high holding costs. With the tools in this guide, you will be able to create a pricing strategy that will drive sales and help your business thrive.
