True unit cost is not your supplier invoice
Pricing decisions go wrong at the cost input, not the markup. Suppliers quote an FOB price; your actual cost of putting a sellable unit on a shelf includes packaging, inbound freight, duty, labour for kitting, and a returns provision.
The returns provision is the one that gets omitted most often. If 6% of orders come back and processing a return costs $12 plus 5% of the item’s value in shrink, that is roughly $1.40 per unit sold — which on a $34 product is over 4% of revenue, right off the margin.
True cost = Materials + Packaging + Labour + Inbound freight
+ (Return rate × (Processing cost + Price × Shrink%))| Line | Typical amount | Why it matters |
|---|---|---|
| Returns provision | 2–6% of revenue | Scales with price, not volume |
| Inbound freight & duty | $0.50–2.50 per unit | Varies with shipping mode and volume |
| Payment processing | 2.9% + $0.30 | Fixed fee hurts low-price products most |
| Packaging & inserts | $0.80–2.00 per unit | Often 5% of a $30 product |
| Marketplace fees | 5–15% | Zero on your own store, material on Etsy |
Deriving price from a margin target, not a multiplier
Most brands price by applying a markup — "3x cost" — which produces margins that vary wildly with the cost basis and ignores channel fees entirely. A better method is to solve for the price that delivers a target contribution margin after fees.
Price = (True unit cost + Fixed fee) ÷ (1 − Fee% − Target margin%)
Example: ($14.10 + $0.30) ÷ (1 − 0.029 − 0.62) = $41.09| Target margin | Required price | Contribution per unit |
|---|---|---|
| 50% | $29.51 | $14.75 |
| 58% | $35.56 | $20.62 |
| 62% | $41.09 | $25.48 |
| 70% | $59.42 | $41.59 |
The discount ladder: where margin actually dies
Discounts are usually decided emotionally. The discount ladder makes it arithmetic: for each discount level, what price do you charge, what do you pay in fees, what is left as contribution, and what margin percentage does that represent?
The pattern is consistent and important: because fees are proportional to price, a discount reduces contribution by more than the discount percentage. A 20% discount on a 62%-margin product typically reduces contribution by 27–30%. And every fee line — payment processing, marketplace commission, affiliate payout — stacks on top of the discount rather than alongside it.
- A 20% discount on a $41 product costs $8.20 of price and roughly $8.90 of contribution.
- Discounts below break-even are not marketing, they are charitable donations.
- Site-wide promotions should be tested against a held-out control group to measure incrementality.
- Wholesale at 45% off is structurally different from a consumer promo — it carries no acquisition cost.
Pricing across channels without cannibalising yourself
Most brands sell through their own store, a marketplace and wholesale, and each channel has a different fee structure and price expectation. The chart below shows how the same true unit cost produces very different contribution depending on channel.
| Channel | Selling price | Fees | Contribution | Margin |
|---|---|---|---|---|
| DTC (Shopify) | $41.00 | $1.49 | $25.41 | 62.0% |
| Promotional (−20%) | $32.80 | $1.25 | $17.45 | 53.2% |
| Wholesale (−45%) | $22.55 | $0.95 | $7.50 | 33.3% |
| Marketplace (+15%) | $47.15 | $7.37 | $25.68 | 54.5% |
| Bundle (per unit, −12%) | $36.08 | $1.35 | $20.63 | 57.2% |
Covering overhead: the number behind the number
Contribution margin pays for variable costs; it must also carry your fixed overhead — software, salaries, warehousing overhead, retainers. The coverage ratio is monthly contribution divided by monthly fixed overhead, and it is the fastest way to see whether a product is actually funding the business.
Below 1.0x, the product loses money at any volume. Between 1.0x and 2.0x it pays its own way but leaves little room. Above 2.0x the product is subsidising growth, whether in ads or in new SKUs.
- Units needed to cover overhead = fixed monthly overhead ÷ contribution per unit.
- Coverage ratio above 2.0x means the product has room to fund acquisition.
- A price increase of 5% typically improves coverage by 12–18% because costs stay flat.
- Cutting COGS by 5% improves coverage by roughly half as much as a 5% price increase.
How to use this tool
- Build the true unit cost. Enter materials, packaging, labour, inbound freight, return rate and return processing cost. The allocator produces a true cost that includes the returns provision most brands omit.
- Set a contribution margin target. 55–70% for DTC with paid acquisition. The calculator solves for the price that delivers it after all percentage fees.
- Test the pricing tiers. Review retail, promotional, wholesale, marketplace and bundle pricing side by side. Every tier is derived from the same cost basis, so comparing contribution is apples to apples.
- Download and run the discount ladder. The workbook shows contribution at 0% to 50% discount so you know exactly where margin dies before you run the next promotion.
What is inside the download
A true-cost allocator that captures returns and freight, a scenario tab with five pricing tiers and overhead coverage maths, and a discount ladder plus competitor benchmark index.
COGS Allocator— a separate worksheet inproduct-pricing-matrix.xlsx.Pricing Scenarios— a separate worksheet inproduct-pricing-matrix.xlsx.Benchmark Index— a separate worksheet inproduct-pricing-matrix.xlsx.