A profitable price must cover the product’s relevant costs and leave enough contribution to help pay operating expenses. A markup percentage and a gross-margin percentage are not the same. Confusing them can leave a product priced below the margin you intended.
Start with accurate purchase or production cost, then account for other costs that vary with each sale. Review taxes and consumer-pricing rules that apply to your business before publishing a price.
Calculate gross margin correctly
Gross profit per unit = selling price − cost of goods sold.
Gross margin = (selling price − cost of goods sold) ÷ selling price.
Markup = (selling price − cost of goods sold) ÷ cost of goods sold.
If an item costs KES 1,000 and sells for KES 1,250, gross profit is KES 250. Gross margin is KES 250 ÷ KES 1,250 = 20%. Markup is KES 250 ÷ KES 1,000 = 25%.
To target a gross margin, use:
Price before other selling costs = unit cost ÷ (1 − target margin).
For a KES 1,000 cost and a 20% target gross margin:
KES 1,000 ÷ (1 − 0.20) = KES 1,250.
Do not calculate target margin by adding 20% to the cost. That creates a KES 1,200 price with a margin of about 16.7%.
Include the costs that affect each sale
Depending on the product and channel, relevant costs can include:
- Purchase or production cost.
- Inbound delivery, duties, packaging, or preparation.
- Payment processing and settlement charges.
- Marketplace or channel fees.
- Pick, pack, and delivery costs paid by the seller.
- Expected spoilage, damage, or returns.
- Sales commissions or other per-order costs.
Avoid counting the same cost twice. Decide whether shipping is included in the product price or charged separately. Allocate shared costs consistently, then show the assumptions behind the calculation.
A contribution calculation can help compare channels:
Contribution per unit = net selling price − product cost − variable selling costs.
Contribution is not the same as net profit. It still needs to cover rent, salaries, software, utilities, tax, financing, and other fixed costs.
Check tax and discount treatment
Decide whether your displayed price includes applicable taxes and communicate that clearly. If your business is subject to a tax regime, confirm the required price display and invoice process with current official guidance or a qualified tax adviser.
Check whether discounts apply before or after tax under the rules that apply to the transaction. Record the list price, discount, tax, and final amount so staff can explain the total. Do not advertise a discount from a reference price that was not genuinely used.
A discount reduces margin faster than it reduces price. If cost is KES 1,000 and the regular price is KES 1,250, a 10% discount gives a KES 1,125 selling price and KES 125 gross profit. The resulting gross margin is about 11.1%, before payment, delivery, or other selling costs.
Price a bundle by its complete cost
For a bundle, add the cost of every included item and any packaging, picking, delivery subsidy, or payment costs. Compare the bundle price with the combined standalone prices, then calculate the remaining contribution.
A bundle should be easy to understand and should not conceal a forced purchase. Check whether the items are available in the required quantities and whether selling them together will create a shortage of a more popular item. State what the bundle includes and whether substitutions are allowed.
Check break-even and capacity
If a product’s contribution is positive, it can help cover fixed costs, but you still need enough total contribution to cover those costs. A simplified break-even estimate is:
Break-even units = fixed costs assigned to the product or period ÷ contribution per unit.
For example, if a product contributes KES 200 per unit after variable costs and the relevant monthly fixed costs are KES 20,000, the simple break-even point is 100 units. This assumes the contribution and fixed-cost allocation stay constant; actual product mixes and operating costs may differ.
Check that the sales volume required by the calculation is operationally possible. A price that works only if you sell more than your available stock, production capacity, or delivery capacity is not a practical plan. Review the product’s role in the broader catalog and whether a shared cost should be allocated across multiple products.
Test price changes carefully
Before changing a price across the whole range, write down the hypothesis, customer group, measurement window, and stopping condition. A small, clearly disclosed test can help reveal demand response, but avoid charging different customers unfair prices based on sensitive personal data or obscured criteria. Keep tax and advertised-price disclosures consistent.
After the test, compare units sold, contribution, returns, customer questions, and stock position. If the price changed alongside a promotion or supplier cost, record that context. A higher conversion rate is not necessarily a better outcome if contribution falls below the level needed to operate sustainably.
Review competitor prices with context
Competitor prices can inform a decision, but compare the same quality, size, service, delivery, warranty, tax basis, and availability. A lower visible price may exclude fees or reflect a different product. Your business may also have different costs or service expectations.
Use customer questions and conversion data as evidence, not as the only measure. A lower price can increase unit sales while reducing total contribution. A higher price can be sustainable if the value, service, or convenience is clear to customers.
Review the price as the business changes
A price that was profitable last quarter may no longer cover a supplier increase, delivery subsidy, or payment fee. Set a review trigger for meaningful cost changes, and make sure staff know when a new price takes effect. Keep a record of the previous price, new price, reason, and affected variants.
Check the customer-facing price in every channel after a change. A storefront, printed menu, quotation template, and POS catalog can hold separate values. A correct spreadsheet does not help if one channel still displays the old amount.
For products with several sizes or pack quantities, calculate each variant. A larger pack may have lower cost per unit but higher packaging or shipping expense. Do not apply one margin percentage automatically if the costs and demand differ materially.
A repeatable pricing worksheet
For each product or variant, record:
| Input | Your value |
|---|---|
| Purchase or production cost per sellable unit | ___ |
| Other direct costs per unit | ___ |
| Payment, channel, packaging, and delivery costs | ___ |
| Target gross margin or contribution | ___ |
| Tax treatment and displayed-price basis | ___ |
| Regular price and approved discount floor | ___ |
| Last review date and reason for change | ___ |
Recalculate when supplier cost, exchange rate, payment fees, tax treatment, delivery cost, or product specification changes. Review actual contribution after promotions so you know whether an offer helped.
Common pricing questions
What is the difference between margin and markup?
Margin divides gross profit by selling price. Markup divides gross profit by cost. A 20% markup therefore gives a lower gross margin than 20%.
How do I check a discount?
Subtract the discount from the actual selling price, then recalculate gross profit and margin using the same cost basis. Include fees and other variable costs before deciding the lowest acceptable price.
How often should prices be reviewed?
Review after meaningful changes to supplier cost, tax, payment fees, delivery, or product specification. Set a regular schedule too, and check that every sales channel shows the approved price.
For inventory and product mix decisions, read how to identify slow-moving stock and how to keep product variants accurate.