A common piece of e-commerce advice is to price at three times your cost. It sounds safe. It is not, and the reason is that the gap between what you paid a supplier and what a customer pays you has at least eight other claims on it before any of it is yours.
Here is the full line.
A worked example
You sell an item for 1,000 units of currency. It cost you 300 from the supplier. That looks like 700 of profit and a comfortable 3.3x markup.
| Line | Amount | Running total |
|---|---|---|
| Selling price | 1,000 | 1,000 |
| Cost of goods | -300 | 700 |
| Inbound shipping and duty | -60 | 640 |
| Payment processing (about 2.5%) | -25 | 615 |
| Outbound shipping and packaging | -90 | 525 |
| Marketplace or platform fee (10%) | -100 | 425 |
| Returns allowance (8% of orders) | -85 | 340 |
| Customer acquisition cost | -200 | 140 |
The 3.3x markup is a 14 percent contribution margin. And that is before rent, software, your own time, or tax.
The three lines people underestimate
Returns
A return costs you the outbound shipping you already paid, the return shipping, the handling time, and often the product itself if it cannot be resold. In apparel, return rates above a quarter are normal. Budget for it as a percentage of revenue from day one rather than treating each return as an unpleasant surprise.
Acquisition cost
Most new stores model their economics on organic sales to friends and early adopters, then discover that paid acquisition costs four times what they assumed. If your contribution margin before marketing is 340 and your CAC is 200, you have 140 to cover everything else — and CAC tends to rise as you scale, not fall.
Shipping
Free shipping is not free. It is a discount you have chosen not to show on the price tag. It often makes sense, because conversion improves enough to pay for it, but it belongs in the cost column where you can see it.
The numbers to track weekly
- Contribution margin per order — the 140 above. If this is negative, growth makes things worse.
- Average order value — the cheapest lever you have, because shipping and processing do not scale proportionally with basket size.
- Repeat purchase rate at 90 days — the single best predictor of whether the business survives, since the second order carries no acquisition cost.
- Cash conversion cycle — how many days between paying your supplier and being paid by your customer. Profitable businesses die here.
Where the leverage actually is
Given the table above, raising price by ten percent adds 100 to the bottom line and costs you a little conversion. Cutting cost of goods by ten percent adds 30. Raising average order value by adding a 200 accessory with 60 percent margin adds 120 at no extra acquisition cost.
Three conclusions follow, and they are the opposite of what most new sellers do. Stop negotiating hard with suppliers over small amounts. Stop discounting. Start working on basket size and repeat purchase, because those two are where the margin hides.
A sanity rule
Before you list anything, write out every line above with your own numbers. If contribution margin per order is under twenty percent of the selling price, you do not have a pricing problem, you have a product selection problem — and no amount of marketing skill fixes a product that cannot carry its own costs.