How to Price a Product When You Know Your Unit Economics
A good price covers your variable costs, contributes enough to pay for fixed costs and growth, and still works for the customer. Start from your unit economics, then test the price before you roll it out.
- Floor price
- The lowest price at which a sale still adds money after variable costs
- Target price
- Variable cost per unit divided by (1 minus your target contribution margin)
- Rule
- Test the new price on a segment before changing it everywhere
15+ years in finance: 100+ financial models built, €40m+ raised for clients, Forbes contributor and lecturer.
Short answer: start from your costs, not from a competitor's price. Work out the lowest price that still adds money, the price that gives you the contribution margin you need, and then test what customers will accept in between.
Step 1: know your cost per unit
Add up every cost that grows with each extra sale: product or delivery cost, packaging, shipping, payment fees, expected returns, sales commissions. This is your variable cost per unit. Fixed costs such as rent and salaries stay out of the unit, because they are paid from the total contribution. If you need the background, read our guide to contribution margin.
Step 2: find your floor price
Your floor price is the price at which a sale adds nothing beyond its own variable cost. Below it, every sale loses money, and more volume makes things worse. You should know this number for every product, and you should be able to say why you would ever sell near it (a launch, a clearance, a customer-acquisition offer).
Step 3: calculate a target price
Decide the contribution margin you need. Then use this formula:
Target price = variable cost per unit / (1 - target contribution margin)
An illustrative example, with made-up round numbers: a product costs 60 to deliver in total and you want a 40% contribution margin. The target price is 60 / (1 - 0.40) = 100. At that price each sale leaves 40 to pay for overheads, marketing and profit.
| Item | Illustrative value |
|---|---|
| Variable cost per unit | 60 |
| Target contribution margin | 40% |
| Target price | 100 |
| Contribution per unit | 40 |
Use your own numbers. The point is the method: the margin you need decides the price, not the other way round.
Step 4: check what the market allows
Now compare your target price with what customers see elsewhere and with the value you deliver. There are three outcomes:
- The market pays more than your target. You have room. Do not give it away.
- The market pays about your target. Your pricing is sound. Focus on keeping costs down.
- The market pays less than your target. Either lower your costs, change the product or the segment, or accept a lower margin and check that the business still works. See our break-even analysis for what volume you then need.
Step 5: test before you roll out
Change the price for one product, one channel or one group of customers, and watch it for a few weeks. Compare total contribution in money, not just the number of orders. A higher price with fewer orders can still leave you with more money. A lower price with more orders can leave you with less.
Common mistakes
- Copying a competitor's price without knowing their costs
- Using average cost across products that have very different costs
- Ignoring returns, discounts and payment fees
- Setting the price once and never revisiting it as costs change
- Looking at revenue instead of contribution
What to do this week
List your top five products, write down the variable cost per unit, the current price and the contribution margin. If any product sits below your floor price, or well below your target, that is your first pricing decision. If you also want to understand how much marketing you can afford per customer, see LTV to CAC.
Book a CFO diagnostic call - 30 minutes, no pitch, a real CFO.
Related questions
Should I price by cost plus a margin or by what the market pays?
Use both. Cost tells you the minimum you can accept, the market tells you the maximum you can ask. Your price should sit between them, as high as your customers accept without hurting volume.
What costs belong in the unit cost?
Every cost that rises with each extra sale: product cost, packaging, shipping, payment fees, returns, and commissions. Overheads such as rent and salaries are covered by the contribution, not added to each unit.
How do I know if a price increase will hurt sales?
You do not know in advance. Test it on one product, one channel or one customer segment for a few weeks, and compare contribution in money, not only the number of orders.
