Pricing is the process of setting the financial value for 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 your costs, then divide by the percentage remaining after subtracting your target margin and percentage-based payment fees, while taking into consideration the basis on which fees and taxes are calculated.

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

Pre-tax selling price = Allocated unit costs ÷ (1 − Target margin − Payment fee percentage)

The calculation may seem simple, but its accuracy depends on what you include in it. The difference between a price that covers the product's purchase and one that keeps your store sustainable could lie in a shipping fee you absorbed, an ad that generated the order, or a payment fee whose calculation method went unnoticed. In this guide, we break down the formula step-by-step and test it with a clear example.

How to Price Your Product in 5 Steps

1. Calculate the purchase or manufacturing cost of the product

Start with what it costs you to get a unit ready for sale. If you purchase the product, factor in the supplier's price, the unit's share of shipping, and the expenses required to get it delivered to you. If you manufacture it, calculate raw materials, labor, wastage, and preparation—including your own time if you do the work yourself.

Distribute batch costs across sellable units. Buying raw materials sufficient for ten items does not mean the cost per item is one-tenth of the total amount if some materials get damaged or result in unsellable units.

For businesses registered for Value Added Tax (VAT), separate deductible input tax from your costs; non-deductible tax may be incorporated into the cost depending on the scenario. The Zakat, Tax and Customs Authority (ZATCA) guide outlines the requirements for handling input tax on purchases, so do not assume every tax paid is recoverable.

2. Add fulfillment and selling costs

The supplier price does not necessarily represent the total cost of sale. Prepare a list of costs associated with delivering the order to the customer, such as:

• Packaging and order preparation.

• The portion of shipping absorbed by you.

• Marketing cost attributed to the order.

• Fixed payment transaction fees, if applicable.

• An estimate of return or damage costs you incur, based on your data.

As for payment fees that are a percentage of the transaction value, factor them into the formula once; do not add them to the cost and then deduct their percentage again.

Pay attention to the difference between an item and an order: If a customer purchases three items in a single shipment, do not assign the entire cost of shipping and advertising to each individual item. Calculate shared order costs once, then allocate them appropriately when analyzing individual products.

3. Define the margin you want to measure

Margin is a percentage of the selling price, but it requires a clear definition: are you calculating what remains after the product purchase cost only, or also after packaging, shipping, payment processing, and marketing?

In the following example, we target a contribution margin: the remaining amount after accounted variable costs, which helps cover fixed overheads and ultimately yield a profit. Therefore, we do not call it net profit before deducting the rest of the store's operating expenses.

You can use this approach to estimate the price, and then verify that total contribution at a realistic sales volume is sufficient to cover subscriptions, salaries, rent, and other expenses. If you allocate these expenses across units in a separate calculation, do not deduct them twice.

4. Apply the formula based on how payment fees are calculated

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

Pre-tax price = Cost ÷ (1 − Margin − Fee percentage)

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

Pre-tax price = Cost ÷ [1 − Margin − Fee percentage × (1 + Tax rate)]

Input percentages in their decimal format: 30% equals 0.30, and 2.5% equals 0.025. Add any fixed per-transaction fee to your cost, taking into account how it is distributed across products.

Both equations are simplified mathematical models; choose the one matching your contract terms, and verify whether fees apply to collected shipping charges or include a minimum charge or VAT on the provider's service. These details can change the final calculation.

5. Calculate tax and review the final price

If you are registered for VAT and the 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 have different tax treatments, so do not apply the rate automatically across every activity.

ZATCA guidelines specify that displayed retail prices must include VAT. Calculate your price components internally, then display the tax-inclusive price to consumers when applicable.

After that, compare your price with the market on an equal footing: specifications, quantity, shipping, and customer service. If the calculated price is far from what customers accept, review your costs, offer, or product viability before assuming that lowering the margin is the only option.

Example: How to Calculate a Product Selling Price in SAR

Suppose you are fulfilling an order containing a single item, and you absorb the full shipping cost. The following figures are for illustration purposes only and do not represent Salla fees or those of any specific provider.

We also assume that the listed costs do not include deductible input tax, and that the hypothetical payment fee is calculated on the total amount collected inclusive of sales tax, with no fixed transaction fees or other expenses in this example.

Applying the formula:

Pre-tax price = 63 ÷ [1 − 0.30 − (0.025 × 1.15)]

Pre-tax price ≈ 93.85 SAR

If you decide to round the price up to 95 SAR before tax, the figures become:

The remaining balance is not the store's net profit. This example does not include ad spend, returns, or fixed operational overheads; if you have these, incorporate them into an appropriate model before assessing profitability.

Raising the price to 95 is a deliberate commercial decision, not a mathematical rounding to the nearest riyal. After every price adjustment, recalculate your actual margin.

What is the Difference Between Profit Margin and Markup?

Suppose the accounted cost of a product is 70 SAR, and you sell it for 100 SAR, excluding tax or additional fees in this example. The remaining balance is 30 SAR, but its percentage differs depending on the denominator:

Margin on selling price = 30 ÷ 100 = 30%

Markup on cost = 30 ÷ 70 ≈ 42.86%

Therefore, adding 30% to a cost of 70 SAR results in a price of 91 SAR, yielding a margin of approximately 23.08% of the selling price—not a 30% margin.

When defining your target, clearly state whether you mean a "margin on selling price" or a "markup on cost," and specify which costs are deducted. This prevents discrepancies between you and your team.

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

The calculation sets a baseline, and your strategy helps you choose the right price point and offer. The following examples are for illustrative purposes and do not represent specific pricing recommendations.

Competitive pricing does not always mean being the cheapest, and psychological pricing does not guarantee an increase in sales volume. Test the impact on profitability and order volume while keeping other variables constant whenever possible.

What Pricing Mistakes Hurt Your Profitability?

Assuming free shipping costs nothing

Free shipping for the customer is a cost incurred elsewhere. If you absorb it, include it in your order calculations and assess its impact when delivery zones, package weight, or item counts change.

Overlooking labor time and product returns

You might purchase raw materials and account for them precisely, but overlook hours spent on production or assembly. Similarly, seemingly profitable orders can be eroded by returns requiring extra shipping legs, damaged goods, or service fees. Use your operational data to update estimates instead of relying on static initial calculations.

Confusing tax with available revenue

The amount collected from customers may include sales tax. Separate this when evaluating revenue and margins, keeping input tax and tax settlements in mind; do not treat the full collected amount as profit or pre-tax revenue.

Offering discounts without recalculating margins

Lowering your price decreases the remaining margin on each sale, and you may need significantly higher volume to compensate. Recalculate payment fees and costs that shift with promotions, and evaluate the impact of discounts on profit margins before running any campaign.

Spreading fixed expenses over optimistic sales targets

If you divide monthly overheads across an unrealistically high number of units, the cost per unit will appear misleadingly low. Test your calculations against realistic sales volumes, and adjust them as demand fluctuates.

How Does Pricing Differ Across Business Models?

In manufactured goods, such as abayas, you may need to account for fabrics, tailoring, embellishments, scrap waste, and batch expenses. The Abaya Pricing Calculator helps organize these line items based on practical assumptions and your actual costs.

For digital cards, the cost components differ substantially from physical goods; review supplier rates, payment fees, marketing costs, and relevant tax treatments without adding packaging or shipping costs you do not incur. Read more on calculating digital card profits and pricing them.

In services, calculate execution time, client revisions, and tools. An unbilled extra hour can significantly impact service profitability, even if you never purchased physical materials or shipped a product.

Frequently Asked Questions About Product Pricing

How do I price my product?

Calculate unit cost alongside fulfillment and selling expenses, set your target margin, and apply a formula that accounts for your payment processing fees. Then calculate VAT where applicable, and evaluate the final price against customer value and market competition.

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

For VAT-registered merchants selling standard-rated goods, you can calculate the pre-tax price internally and add 15%. However, retail prices displayed to end consumers must be VAT-inclusive. If you work backwards from an inclusive price, divide it by 1.15 to determine the pre-tax price; do not simply deduct 15% from it.

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

There is no single benchmark suitable for all products or stores. Costs, inventory turnover, return rates, and operating expenses vary widely. Define the specific margin you are tracking, then test whether the total contribution generated at a realistic sales volume covers overheads and meets your financial goals.

Is selling above supplier cost enough?

Supplier cost is only one element. Packaging, payment processing, shipping, and ad spend can easily consume the entire difference. Always calculate total selling costs, not just purchasing costs.

What if my calculated price is higher than competitors?

Examine what the customer is actually comparing, then review supplier pricing, fulfillment, order volume, and your overall value proposition. To evaluate whether to adjust prices after assessing your numbers, read How to Price Your Products While Preserving Profit and Customers.

Turn Calculations into an Actionable Pricing Baseline

Maintain clear records of unit costs, shipping and payment assumptions, and margins for each product. Revisit them whenever supplier prices, fees, or promotions change. A structured calculation gives you a baseline to assess the impact of your commercial decisions, helping you catch unprofitable sales before they recur.

If you are launching your business, set up your store on Salla, start with products backed by accurate cost and pricing data, and refine your decisions as actual order metrics come in.