The short answer
There are two ways to turn a cost into a price, and they give different answers:
- Markup: price = cost × (1 + markup). A £25 item with a 50% markup sells for £37.50.
- Target margin: price = cost ÷ (1 − margin). A £25 item priced for a 50% margin sells for £50.
The same “50%” produces prices £12.50 apart. If you are VAT-registered, add VAT after you have worked out the price. If you sell through a marketplace or take cards, build the fees in before you add VAT, or they come out of your profit.
Pricing with a markup
A markup is the percentage you add to the cost. It is the simplest way to price: take what you paid, multiply, and that is your price before VAT.
- Cost£25.00
- Markup50% of £25+£12.50
- Selling price before VAT£37.50
Markup is easy to apply across a range: if everything gets a 100% markup, every price is simply double the cost. The drawback is that the percentage looks bigger than the profit it gives. A 50% markup leaves you a third of the selling price, not half of it.
| Markup | Price before VAT | Profit | Gross margin |
|---|---|---|---|
| 25% | £31.25 | £6.25 | 20.0% |
| 50% | £37.50 | £12.50 | 33.3% |
| 75% | £43.75 | £18.75 | 42.9% |
| 100% | £50.00 | £25.00 | 50.0% |
| 150% | £62.50 | £37.50 | 60.0% |
| 200% | £75.00 | £50.00 | 66.7% |
Pricing for a target margin
If you know the margin you need, for example because your overheads take 35p of every pound you sell, price from the margin instead. Divide the cost by one minus the margin.
- Cost£25.00
- Divide by1 − 0.40÷ 0.60
- Selling price before VAT£41.67
- Profit£41.67 − £25£16.67
| Target margin | Price before VAT | Same as a markup of |
|---|---|---|
| 20% | £31.25 | 25.0% |
| 30% | £35.71 | 42.9% |
| 40% | £41.67 | 66.7% |
| 50% | £50.00 | 100.0% |
| 60% | £62.50 | 150.0% |
Adding the margin to the cost does not work
Adding 40% to a £25 cost gives £35, which is only a 28.6% margin. You would be £6.67 short on every sale compared with the price you meant to charge.
Pricing from margin is the better habit, because your accounts, your lender and your break-even sums all work in margin. Our gross profit margin calculator checks the margin on any price you already charge.
Keystone pricing
Many independent shops use keystone pricing: double the wholesale cost. That is a 100% markup and a 50% margin. It is popular because it is quick, easy to check and leaves room for overheads and the odd sale.
Keystone works best for goods that:
- are not easy to compare online, such as handmade or own-brand items;
- sell slowly enough that each sale has to carry a share of rent and staff time;
- come with a recommended retail price that is close to double the trade price anyway.
It works badly for branded goods sold everywhere at a known price, and for heavy or bulky items whose delivery cost is a big part of the total. For those, start from what customers will pay and check the margin that leaves.
Adding VAT to your price
Once you are VAT-registered, you charge VAT on top of your own price and pass it to HMRC. Work out your price before VAT first, then multiply by 1.2 for the standard 20% rate.
- Cost before VAT£25.00
- Price before VAT100% markup£50.00
- VAT at 20%+£10.00
If you are not registered, you cannot reclaim the VAT on your stock. Use the cost including VAT, and do not add VAT to your price. You must register once taxable sales pass £90,000 in any rolling 12 months. At that point a shop selling to the public either raises shelf prices by up to a fifth or absorbs the VAT out of its margin, so it is worth planning for well before you reach it.
Some goods carry 5% or 0% VAT, such as children’s clothes and most food. Use the VAT calculator to add or remove VAT at any rate.
Marketplace and card fees
Marketplaces, payment providers and card machines take a percentage of what the customer pays. If you work out your price and then pay the fee out of it, your real margin is lower than you planned.
- Price
- £50.00
- 15% fee
- −£7.50
- Cost
- −£25.00
- Profit
- £17.50 (35% margin)
- Price
- £71.43
- 15% fee
- −£10.71
- Cost
- −£25.00
- Profit
- £35.72 (50% margin)
To price a fee in, take it off the denominator: price = cost ÷ (1 − margin − fee). For a 50% margin and a 15% fee, that is £25 ÷ 0.35 = £71.43. The calculator does this for you, including the extra step when the fee is charged on a VAT-inclusive price.
A 50% margin with a 15% fee leaves only 35% of each pound for cost, which is why marketplace prices so often sit well above the same item in a shop. If the market will not bear that price, you may need to accept a lower margin online and make it up through direct sales.
Postage, packaging and other extras
Anything you pay every time you sell one item is part of its cost: postage you do not charge for, packaging, a printed insert, a gift box. Add them to the cost before you apply a margin.
- Item cost£25.00
- Postage and packaging+£3.50
- Total cost per sale£28.50
If you priced at £50 and paid the postage out of it, your margin would be 43%, not 50%. Seven points of margin is a lot to lose to a parcel.
Price endings and rounding
A calculated price such as £37.50 plus VAT, £45.00, is rarely the price you put on the shelf. Most shops round to a familiar ending. Rounding up adds a little profit; rounding down takes it away.
Prices ending in 99p or 95p are common in UK shops; whole-pound prices suit gifts, premium goods and anything sold by hand at a market. Whichever you choose, use it consistently. A shelf of mixed endings looks less considered.
Price marking rules
Shops must show the selling price clearly, including VAT, for goods offered to consumers. If you show a “was” price, it must be a genuine earlier price, not one invented to make a discount look bigger.
Sales, markdowns and lost stock
Not everything sells at full price. End-of-season reductions, damaged items and stock that goes missing all pull your real margin below the one on the price tag.
| What happens | Average price received | Real margin |
|---|---|---|
| Everything sells at full price | £50.00 | 50.0% |
| 20% of stock sold at 30% off | £47.00 | 46.8% |
| 30% of stock sold at half price | £42.50 | 41.2% |
If you know roughly how much ends up in the sale, price for it from the start. To average £50 when one item in five sells at 30% off, the full price needs to be about £53.19.
Lost and damaged stock works the same way. If 3% of what you buy is never sold, each item you do sell has to carry the cost of the missing ones, so the effective cost of a £25 item is about £25.77, and a £50 price gives a 48.5% margin rather than 50%.
When cost-plus is not enough
A markup tells you the lowest sensible price. It does not tell you the best one. Before you settle on a price, look at it from two other angles:
- Competitors: if the same item sells for less nearby or online, a high markup will not stick. Either find a cheaper supplier or compete on service, range or convenience.
- Value to the customer: if what you sell is rare, handmade or solves a problem quickly, customers may happily pay more than cost-plus suggests. Charging less than they would pay leaves money on the table.
A good approach is to calculate the cost-plus price, check it against the market, and then choose a price between your floor and what the market will bear. Test a higher price on a few lines and see whether sales really fall.
A pricing checklist
- Step 1Find the full cost per sale
Item cost, plus postage, packaging and anything else you pay each time.
- Step 2Choose a margin
Big enough to cover overheads, a share of markdowns and the profit you want.
- Step 3Price in fees
Divide by one minus the margin minus the fee, so marketplace and card fees are covered.
- Step 4Add VAT if registered
Multiply by 1.2 at the standard rate.
- Step 5Round and sense-check
Round up to your usual ending, then compare with competitors and adjust.
Trade prices and recommended retail prices
If you make products and sell them to shops as well as direct to customers, you need two prices: a trade price for retailers and a retail price for everyone else. Shops usually expect to make their own margin of around 50% on what they sell, so a common starting point is a trade price of about half your recommended retail price, before VAT.
- Your cost to make£12.50
- Trade price: 100% markup£25.00
- Retail price: shop's 100% markup£50.00
Selling direct at the retail price gives you a much bigger margin, but do not undercut the shops that stock you. If your own website sells for less than they can, they will stop ordering. Keep the recommended retail price the same everywhere and use your extra margin to pay for delivery, marketing and the time you spend on each order.