How to Price Your Products: The Complete Guide for Online Stores

Pricing is one of the highest-leverage decisions you make as an online store owner — and one of the most misunderstood. Too many first-time merchants either price by gut feeling or copy competitors without understanding why those prices work. The result: margins too thin to sustain the business, or prices so high that conversions collapse.

This guide covers every major pricing strategy, the math behind healthy margins, and how to test and iterate your pricing systematically.

Start With Your Cost Structure

Before you can set a price, you need to know what it costs to deliver your product. This sounds obvious, but many merchants undercount their costs and end up losing money on sales they think are profitable.

Your true cost of goods sold (COGS) includes:

• Product cost — what you paid the supplier or manufacturer
• Shipping to you — inbound freight from supplier to your location
• Packaging — boxes, tape, inserts, branded materials
• Payment processing — typically 2.9% + $0.30 per transaction (Stripe, PayPal)
• Platform fees — monthly subscription + any transaction fees
• Returns — factor in your expected return rate and the cost to process each return

Once you have a complete cost figure, you can start thinking about margin.

Understanding Gross Margin

Gross margin is the percentage of revenue left after paying for the product itself. The formula is simple:

Gross Margin = (Selling Price - COGS) / Selling Price × 100

For a product that costs $20 to produce and sells for $60:

Gross Margin = ($60 - $20) / $60 × 100 = 67%

What's a healthy gross margin? It depends on your category:

• Physical goods (general) — aim for 40–60%
• Fashion and apparel — 50–70% is standard
• Electronics — 20–40% is common (lower margins, higher volume)
• Handmade / artisan — 60–80% to account for labor
• Digital products — 70–90%+ (virtually no COGS after creation)

If your gross margin is below 30%, you'll struggle to build a sustainable business. After paying for marketing, staffing, and overhead, you'll have very little left.

The Major Pricing Strategies

Cost-Plus Pricing

The simplest approach: take your cost, add a markup percentage, and that's your price. If your product costs $25 and you want a 60% margin, you price it at $62.50.

Cost-plus pricing is easy to calculate and ensures you never sell below cost. The problem: it ignores what customers are actually willing to pay, and it ignores what competitors charge. You might be leaving significant money on the table, or pricing yourself out of the market.

Use it as a floor, not a ceiling.

Competitor-Based Pricing

Research what similar products sell for and price accordingly. This is a useful starting point, especially in commodity categories where products are functionally identical.

The danger: pricing based on competitors assumes they've figured out the right price. Many haven't. Copying a competitor's price without understanding their cost structure, margins, and strategy can lead you into the same traps they're in.

Use competitor pricing as context, not as your primary strategy.

Value-Based Pricing

Value-based pricing sets prices based on what your product is worth to the customer — not what it costs you to make. This is the most powerful pricing strategy, and the one that creates the highest margins.

The key question: what outcome does your product deliver, and how much is that outcome worth?

A productivity tool that saves 10 hours per month is worth far more than the cost to build it. A handmade piece of furniture that will last 30 years is worth far more than the materials and labor. A skincare product that actually clears acne is worth far more than the ingredients.

To price based on value, you need to understand your customer deeply. What problem are they solving? What would they pay for the solution? What alternatives do they have?

Psychological Pricing

Small changes in how a price is presented can have a significant impact on conversion:

• Charm pricing — $49.99 feels meaningfully cheaper than $50 to most buyers
• Price anchoring — showing a "original price" next to a sale price makes the sale price feel like a deal
• Decoy pricing — offering three tiers where the middle option looks most attractive
• Bundle pricing — selling products together at a slight discount increases average order value while maintaining margin

How to Set Your Initial Price

Here's a practical framework for pricing a new product:

1. Calculate your full COGS — don't skip any costs
2. Set a minimum price — COGS ÷ (1 - target margin). For 50% margin on a $20 cost: $20 ÷ 0.5 = $40 minimum
3. Research competitor prices — find 5–10 comparable products and note the range
4. Assess your differentiation — are you meaningfully better, worse, or similar to competitors?
5. Set an initial price — above your minimum, informed by market rates, adjusted for your positioning

Testing and Iterating Your Prices

Your first price is a hypothesis. Most merchants set a price and never change it — but pricing is something you should actively test and optimize.

Start Higher Than You Think

A common mistake is to launch with a low price to attract buyers, planning to raise it later. This almost never works. Customers anchor on your launch price, and price increases generate backlash. It's much easier to offer introductory discounts from a higher price than to raise prices later.

Launch at the higher end of your target range. You can always discount; you almost never raise.

A/B Test When You Have Volume

Once you have consistent traffic, test two price points simultaneously. Split your traffic 50/50 and measure not just conversion rate but revenue per visitor (RPV). A higher price with slightly lower conversion often generates more total revenue.

You need at least 200–300 visitors per variant to get statistically meaningful results.

Watch Your Conversion Rate

A sudden drop in conversion rate after a price increase is a signal to pay attention to. But don't panic immediately — some conversion rate drop is expected and acceptable if the math still works. What matters is revenue and margin, not just conversion rate.

When to Offer Discounts

Discounts can drive volume and clear inventory, but they have real costs. Training customers to wait for sales is one of the most damaging habits an e-commerce store can develop.

Use discounts strategically:

• Launch promotions — time-limited, with a clear end date
• Email subscriber exclusives — rewards loyalty without public price cuts
• Bundles — discount the bundle, not the individual product
• Seasonal clearance — clear old inventory, not your hero products

Avoid permanent discounts on your core products. If you need a permanent discount to sell, your price is too high or your product isn't differentiated enough.

The Pricing Mistakes Most Stores Make

• Underpricing to compete on price — a race to the bottom you can't win against larger competitors
• Not accounting for all costs — forgetting payment processing, returns, or platform fees destroys margins
• Never raising prices — costs increase over time; prices should too
• Copying competitor prices without understanding their strategy
• Using one price forever — pricing should be tested and iterated like everything else

The Bottom Line

Pricing is not a one-time decision — it's an ongoing process of understanding your costs, your customers, and your market position. Start with a solid cost-plus floor, use competitor research as context, and aim for value-based pricing wherever your product has real differentiation.

Launch at a higher price than feels comfortable, test aggressively once you have traffic, and resist the temptation to discount your way to growth. The stores with the best margins are almost always the ones with the most sustainable businesses.