How to cost a product so the price survives the marketplace
Ask a seller what a product costs and you will get the supplier’s invoice price. It is the least useful of the three numbers that deserve the name, and pricing against it is the most common reason a business that looks profitable on paper is not profitable in the bank.
Three layers, not one number
Purchase price — what the supplier invoices. Useful only for comparing suppliers.
Landed cost — purchase price plus freight, insurance, duty, clearance and any import charges, divided by units received. This is what the goods cost sitting in your warehouse.
Fully loaded cost per unit — landed cost plus everything that happens per sale: packaging, fulfilment, marketplace commission, payment fees, and a provision for returns. This is the only one you should price against.
The gap between the first and the third is routinely 50 to 100 per cent. A margin calculated on the first is not a margin, it is a decoration.
Building it up on a real example
Take a product invoiced at 10.00 by the supplier, imported in a batch of 500:
| Purchase price | 10.00 |
| Freight and insurance per unit | 2.52 |
| Duty at 12% | 1.50 |
| Clearance per unit | 0.30 |
| Landed cost | 14.32 |
| Packaging | 0.40 |
| Fulfilment fee | 4.19 |
| Marketplace commission at 15% of 49.99 | 7.50 |
| Returns provision at 5% | 0.95 |
| Fully loaded cost | 27.36 |
Sold at 49.99 gross in Germany, net revenue is 42.01. Against the invoice price of 10.00 that looks like a 76% margin. Against the fully loaded cost it is 34.9% — before a cent of advertising.
Both numbers are arithmetically correct. Only one of them will still be true at the end of the quarter.
What gets left out most often
- Inbound freight per unit. People remember the container cost and forget to divide it. It is usually the second largest line after the goods.
- Returns. A 5% return rate does not cost 5% — you lose the fulfilment fee, often the return shipping, and a share of units come back unsellable. In apparel with 30% returns this line dominates everything else.
- Payment fees. One to three per cent, charged on the gross amount including VAT and delivery.
- Storage. Trivial for fast movers, ruinous for slow ones. Charge it against the units actually sold in the period, not against the batch.
- The units that never sell. If you write off 5% of a batch, the other 95% carry that cost.
- Currency. Customs converts at an official monthly rate, your bank at its own with a spread. Neither is the rate you assumed.
Advertising: in or out?
Both, depending on what you are asking.
Leave it out when calculating contribution margin in order to judge advertising. Break-even ROAS is the inverse of that margin, so including ad cost inside it double-counts and makes every campaign look worse than it is.
Put it in when asking whether the product is worth selling at all. Advertising cost per unit is a real cost, and a product that only works with zero marketing spend does not work.
Keep both figures. They answer different questions and confusing them is how sellers end up scaling a product that loses money at volume.
Cost per unit changes with volume — plan for it
Freight per unit falls as the batch grows. Duty does not. Fulfilment fees are flat per unit. Storage rises with how long stock sits, which means slow movers get more expensive the longer you hold them.
So the fully loaded cost of an identical product differs between a 200-unit and a 2,000-unit order, and not always in the direction you expect. A larger batch cuts freight per unit but ties up cash and accrues storage; a supplier’s MOQ often pushes you past the point where the saving is real.
Run the calculation at both quantities before committing. The difference is usually decision-changing.
The order to do it in
- Landed cost per unit, using real freight quotes and the actual duty rate for your commodity code.
- Add per-sale costs: packaging, fulfilment, commission, payment fees, returns provision.
- Price to a target margin from that figure — not from the invoice price.
- Check the break-even price, so you know how far a promotion or a price war can go.
- Only then decide the advertising budget, using the contribution margin from step two.
Each step has a calculator on this site, and they take the same inputs. Doing them in this order takes about ten minutes per product and removes most of the ways a price can be quietly wrong.
Frequently asked questions
No, if you can deduct it. Import VAT and VAT on your inputs come back on your return, so including them inflates the cost and understates the margin. Plan the cash for the gross figure; calculate against the net one.
By volume or weight rather than by value, whichever is driving the freight cost. Allocating by invoice value overcharges dense expensive items and undercharges bulky cheap ones — which is the wrong way round.
Your own rate from the last full quarter, not an industry figure. If you do not have one yet, start at your category’s reputation — a few per cent for homeware, twenty to thirty for apparel — and replace it with real data as soon as you have it.
No. Rent, salaries and subscriptions do not vary with the unit, so they belong in the break-even calculation rather than in the cost per item. Mixing them in produces a unit cost that changes whenever sales volume does, which makes pricing impossible.