Pricing is the process of determining the financial value of a product or service, taking into account costs, the target return, and the value perceived by the customer. To calculate a baseline price for your product, add up the costs, then divide them by the remaining percentage after subtracting the target margin and percentage-based transaction fees, keeping in mind the calculation basis for fees and taxes.

If payment gateway fees are calculated on the pre-tax selling price:

Selling Price Before Tax = Total Allocated Unit Costs ÷ (1 − Target Margin − Payment Fee Percentage)

The calculation may seem straightforward, but its accuracy depends entirely on the inputs you use. The difference between a price that merely covers product procurement and one that sustains your store could lie in absorbed shipping costs, the ad spend required to secure the order, or an overlooked payment fee calculation method. In this guide, we break down the formula step by step, then validate it with a practical example.

How to Price Your Product in 5 Steps

1. Calculate the Procurement or Manufacturing Cost

Start with what it costs you to acquire a single unit ready for sale. If you source the product, review the supplier's price along with the unit's share of freight and all landing costs. If you manufacture it, calculate raw materials, labour, wastage, and prep work, including your own time when handling production yourself.

Allocate batch costs across sellable units. Sourcing materials for ten units does not mean the cost per unit is a tenth of the total if some materials spoil or yield defective items unfit for sale.

For VAT-registered businesses, separate deductible input tax from your cost base; non-deductible tax, however, may form part of the cost depending on the scenario. The Zakat, Tax and Customs Authority (ZATCA) guidelines clarify the rules for handling input tax on purchases, so do not assume that every tax amount paid can be reclaimed.

2. Add Fulfilment and Operational Costs

The supplier price rarely reflects the true total cost of sale. Compile a list of all costs associated with delivering the order to the customer, such as:

• Packaging and order prep.

• The portion of shipping absorbed by your store.

• Marketing acquisition costs attributed to the order.

• Fixed payment gateway transaction fees, if applicable.

• Estimated returns or damage costs borne by you, based on historical data.

For percentage-based payment processing fees, account for them once directly within the formula; do not add them to your base cost and then deduct their percentage again.

Mind the distinction between a product and an order: If a customer purchases three items in a single shipment, avoid burdening each item with the full cost of shipping and advertising. Calculate shared order-level costs once, then allocate them proportionally when analysing individual product performance.

3. Define the Margin You Aim to Track

A margin is a percentage of the selling price, yet it requires a clear definition: are you tracking what remains after the product procurement cost alone, or after packaging, shipping, payment processing, and marketing as well?

In the following example, we target a contribution margin: the amount left over after variable unit costs, which contributes towards covering fixed overheads and generating profit. Consequently, this should not be confused with net profit before deducting the rest of the store's operational expenses.

You can use this approach to determine your pricing baseline, then verify whether the total contribution margin at realistic sales volumes is sufficient to cover software subscriptions, payroll, rent, and other overheads. If you allocate these overheads across units in a separate calculation, ensure you do not double-count them.

4. Apply the Formula Based on Your Payment Fee Structure

If payment fees are calculated as a percentage of the price before tax, use:

Price Before Tax = Cost ÷ (1 − Margin − Fee Percentage)

If fees are calculated as a percentage of the total collected amount inclusive of tax, use:

Price Before Tax = Cost ÷ [1 − Margin − Fee Percentage × (1 + Tax Rate)]

Enter percentages in decimal format: 30% equals 0.30, and 2.5% equals 0.025. Add any fixed per-transaction fee directly to your costs, accounting for how it is distributed across products.

Both formulas serve as streamlined mathematical models; select the one that matches your gateway contract, and check whether fees apply to shipping charges, feature minimum fee thresholds, or carry VAT on the provider's service. Such variations will impact the final figure.

5. Calculate VAT and Review the Final Price

If you are VAT-registered and your product is subject to the standard rate in Saudi Arabia, calculate the inclusive price by multiplying the pre-tax price by 1.15. Certain supplies receive different tax treatments, so do not apply this rate automatically across every product category.

The tax authority stipulates that displayed retail consumer prices must be inclusive of VAT. Calculate your pricing components internally, then display the gross tax-inclusive price to consumers whenever applicable.

Next, benchmark against the market on a like-for-like basis: specifications, volume, shipping speed, and service quality. If the calculated price sits significantly above what customers are willing to pay, review your cost structure, product offering, or product viability before assuming that cutting margins is your only option.

Example: How to Calculate a Product Selling Price in SAR

Suppose you are selling an order consisting of a single item, fully covering the shipping cost. The figures below are illustrative and do not reflect Salla fees or those of any specific provider.

We also assume that the stated costs contain no deductible input VAT, and that the hypothetical payment processing fee is calculated on the gross amount collected inclusive of sales VAT, with no fixed transaction charges or secondary costs included in this example.

Applying the formula:

Price Before Tax = 63 ÷ [1 − 0.30 − (0.025 × 1.15)]

Price Before Tax ≈ SAR 93.85

If you opt to adjust the price up to SAR 95 before tax, the breakdown becomes:

The remaining amount is not your store's net profit. This example excludes advertising, returns, and fixed operational overheads; if applicable to your business, factor them into your overall financial model before assessing profitability.

Rounding up to SAR 95 is a deliberate commercial choice, not a strict mathematical rounding to the nearest riyal. After any manual price adjustment, always recalculate your true effective margin.

What Is the Difference Between Profit Margin and Markup?

Suppose the calculated cost of a product is SAR 70, and you sell it for SAR 100, excluding taxes or auxiliary fees for the purpose of this example. The remaining sum is SAR 30, but the percentage changes depending on your denominator:

Margin on Selling Price = 30 ÷ 100 = 30%

Markup on Cost = 30 ÷ 70 ≈ 42.86%

Consequently, adding a 30% markup to a SAR 70 cost yields a price of SAR 91 and a margin of roughly 23.08% on the selling price; it does not yield a 30% margin.

When establishing financial targets, define clearly whether you mean 'margin on price' or 'markup on cost', and state exactly which cost lines have been subtracted. This prevents discrepancies between you and your team.

What Are the Most Common Pricing Strategies and When Should You Use Them?

Your cost calculation establishes a baseline; your strategy then guides the optimal retail price and promotional offer. The examples below are illustrative and do not constitute specific pricing recommendations.

Competitive pricing does not always mean being the cheapest, and psychological pricing does not guarantee an increase in order volume. Track real impacts on profitability and orders, keeping other variables as consistent as possible.

Which Pricing Mistakes Erode Your Profits?

Treating Free Shipping as Zero-Cost

Free shipping for the customer is an expense borne by your business. If you absorb it, incorporate it into your order unit economics, and monitor its impact when shipping zones, package weights, or basket sizes change.

Overlooking Your Time and Product Returns

You might track raw materials meticulously yet forget manufacturing or packaging hours. Similarly, orders that appear profitable on paper can see margins wiped out by returns, return courier charges, damaged goods, and gateway reversal fees. Rely on your operational data to update your estimates instead of sticking indefinitely to your initial model.

Confusing Tax with Usable Revenue

The total amount collected from the customer often includes sales VAT. Isolate this when analysing revenue and margins, factoring in input tax credits and official tax filings; never treat gross collected cash as pre-tax revenue or profit.

Offering Discounts Without Recalculating Unit Economics

When you reduce your price, your retained margin shrinks, often requiring significantly higher sales volume to compensate. Recalculate payment fees and variable costs affected by the offer, and review the impact of discounting on profit margins before running promotions.

Spreading Fixed Costs Over Overly Optimistic Sales Volumes

Dividing monthly overheads by an unrealistically high sales volume makes the cost allocated per unit appear misleadingly small. Stress-test your calculations using realistic, conservative sales figures, and adjust them as demand shifts.

How Do Pricing Calculations Differ Across Industries?

For manufactured goods, such as abayas, you may need to account for fabrics, tailoring, embellishments, fabric wastage, and production batch sizes. The abaya pricing calculator helps you structure these cost components, allowing you to validate assumptions against your actual expenses.

For digital cards, cost lines differ substantially from physical goods; focus on supplier costs, payment processing fees, marketing expenses, and relevant tax treatments, without adding packaging or freight costs that you do not incur. Explore calculating digital card profits and setting selling prices.

For professional services, calculate delivery hours, client revisions, and supporting software tools. An untracked billable hour can completely alter service profitability, even without physical materials or parcel deliveries.

Frequently Asked Questions About Product Pricing

How do I price my product?

Calculate unit procurement and fulfilment costs, establish your target margin, and apply a formula that accounts for your payment processing fee structure. Factor in VAT where applicable, then evaluate the final price against market rates and perceived customer value.

Should I add VAT on top or include it in the price?

If you are registered for VAT and selling standard-rated goods, you can calculate the pre-tax price internally and then add 15%. However, the final price displayed to retail consumers must be VAT-inclusive. If starting from a gross retail price, divide by 1.15 to find the pre-tax base; do not simply subtract 15% from the total.

What is a good profit margin for an e-commerce store?

There is no universal benchmark that fits all product categories and business models. Cost structures, inventory turnover rates, return rates, and overheads vary widely. Define the specific margin metric you wish to track, then assess whether total retained earnings at realistic sales volumes are adequate to cover expenses and meet your financial objectives.

Is it enough to price above the supplier cost?

Supplier cost is only one component. Packaging, transaction processing, shipping, and marketing can easily absorb the entire difference; make sure you calculate your total cost to sell, not just your acquisition cost.

What should I do if my calculated price is higher than competitors?

Examine what the customer is actually comparing, then review supplier rates, fulfilment efficiency, order volume discounts, and your unique value proposition. To make an informed decision on raising or lowering prices once you know your numbers, read How to Price Your Products While Protecting Profit and Customer Loyalty.

Turn Your Calculations into Actionable Pricing

Maintain clear documentation for each product covering unit costs, shipping allowances, processing fees, and target margins, updating them whenever suppliers, tariffs, or promotions change. A structured model gives you complete visibility into the commercial impact of your choices, helping you catch loss-making sales before they repeat.

If you are launching a new venture, set up your store on Salla, launch with products priced on solid unit economics, and refine your commercial strategy using actual sales data.