How to set a price that hits your target margin

To set a price that leaves you the margin you want, divide your loaded cost by one minus the margin: price = cost ÷ (1 − margin). With a $5.40 cost and a 45% margin, the price is 5.40 ÷ 0.55 = $9.82 before tax. If the channel takes a commission, subtract that in the divisor too: price = cost ÷ (1 − margin − commission). Tax goes on at the end, and if the commission is charged on the tax-inclusive price there is an exact formula further down.

The basic formula

Margin is the share of the price you keep after paying the cost. If you want to keep 45% of the price, the cost has to be the other 55%. That is why you divide the cost by 0.55.

price = cost ÷ (1 − margin)

Always check it backwards: (price − cost) ÷ price should give you the margin you were after. With $9.82 and $5.40: (9.82 − 5.40) ÷ 9.82 = 4.42 ÷ 9.82 = 45%.

What does not work is multiplying the cost by 1.45. That is a 45% markup, which leaves a margin of only 0.45 ÷ 1.45 = 31%. The difference between the two is covered in markup vs margin.

When the channel takes a commission

A delivery app, a card reader or an ordering platform keeps a percentage of what you charge. That percentage comes out of the same price as your cost and your margin, so it goes in the divisor as well:

price = cost ÷ (1 − margin − commission)

With a $5.40 cost, a 45% margin and an example commission of 25%: 5.40 ÷ (1 − 0.45 − 0.25) = 5.40 ÷ 0.30 = $18.00. The app takes $4.50, the cost is $5.40, and you keep $8.10, which is 45% of $18.00.

The same works for card fees. If your card reader charges, say, 3%: 5.40 ÷ (1 − 0.45 − 0.03) = 5.40 ÷ 0.52 = $10.38. Small fees still move the price.

The common mistake is to take your direct price and add the commission percentage on top. If the app charges 25% and you add 25% to your price, the commission is charged on the higher price and takes more than you added. The example below shows it with numbers.

Sales tax goes on separately

Sales tax or VAT is collected for the government, not earned by you, so your margin is always worked out on the price before tax. Whether you charge it, and at what rate, depends on where you are and how your business is registered. Check your local tax rules or ask an accountant.

• Price with tax = price before tax × (1 + your tax rate)
• Price before tax = price with tax ÷ (1 + your tax rate)

The guide on including sales tax in your prices goes into more detail.

Commission and tax together: the exact formula

Here is the trap. Many apps charge their commission on what the customer pays, tax included. So the commission eats into tax money you still owe. Check what your agreement says.

If the commission is charged on the tax-inclusive price, the customer price you need is:

price with tax = cost ÷ ((1 − margin) ÷ (1 + tax rate) − commission)

It looks heavy, but it is three steps on a phone calculator: divide (1 − margin) by (1 + tax rate), subtract the commission, then divide the cost by the result. If your prices do not include tax, the tax rate is zero and you are back to the simpler formula.

Worked example: a meal prep box

You sell meal prep boxes. Your loaded cost is $5.40 a box (chicken, rice, vegetables, sauce, the container, the label, your time, energy and waste). You want a 45% margin in every channel. To keep the arithmetic clear, this example leaves tax out.

Direct sales (orders by message, paid by bank transfer or cash):

• 5.40 ÷ (1 − 0.45) = 5.40 ÷ 0.55 = $9.82
• You round to $9.90. Your margin becomes (9.90 − 5.40) ÷ 9.90 = 45.5%.

Delivery app, the wrong way. You add 25% to your direct price: 9.90 × 1.25 = $12.38.

• Commission (25% of $12.38): $3.10
• You keep: 12.38 − 3.10 − 5.40 = $3.88
• Margin: 3.88 ÷ 12.38 = 31.3%. You wanted 45%.

Delivery app, the right way at 45%:

• 5.40 ÷ (1 − 0.45 − 0.25) = 5.40 ÷ 0.30 = $18.00
• Check: commission 18.00 × 0.25 = $4.50; you keep 18.00 − 4.50 − 5.40 = $8.10; margin 8.10 ÷ 18.00 = 45%.

$18.00 for a box that costs $9.90 direct will not sell. So you lower the margin you ask of the app.

Delivery app, the right way at 30%:

• 5.40 ÷ (1 − 0.30 − 0.25) = 5.40 ÷ 0.45 = $12.00
• Check: commission 12.00 × 0.25 = $3.00; you keep 12.00 − 3.00 − 5.40 = $3.60; margin 3.60 ÷ 12.00 = 30%.

The lesson: with a 25% commission, the app needs a price far above your direct price to leave you the same margin. The usual answer is to accept a lower margin there, and to know exactly what it is. Notice that adding 25% by eye happened to land close to a 30% margin here. That is luck, and with a different cost or commission it would not be.

If the price you need will not sell

The formula tells you what price you need. It does not tell you whether anyone will pay it. If the number comes out well above what others charge, you have these options:

• Look at the cost. A better supplier, cheaper containers or less waste lower the cost, and the price with it.
• Accept a different margin in that channel, if your other channels make up for it. The guide on selling on delivery apps covers which products are worth listing.
• Change the size. A smaller box may have a price people will pay.
• Compare properly. See how to use competitors' prices as a check, without copying them.

And if your cost goes up after you have set the price, the same formula tells you what the new price needs to be. How to make that change without driving customers away is in how to raise prices without losing customers. The full method, from cost to a price per channel, is in how to price a food product.

Do it with the calculator

Enter your recipe, the margin you want and the channel commission in the food cost calculator, and it gives you the customer price, with tax if you need it, without doing the long sum by hand.