Pricing for profit: the landed-cost formula

In Lesson 2 you wrote your niche in one sentence and picked your first five products. Today we price them. Most new luxury stores don't fail on traffic. They fail because they price from the product cost alone, then discover that shipping, duties and fees have eaten the margin. The fix is to price from the landed cost.

What "landed cost" means

Landed cost is everything it takes to get one product to your customer's door:

• Product cost: what you pay your supplier for the item.
• Shipping: the cost of delivering that order to your customer's country.
• Duties and import taxes: depending on the destination and how you ship, either you or your customer pays them. Decide which before you set prices.
• Payment fees: card and checkout fees on every sale, usually a few percent.
• Your fixed costs, per order: your monthly apps and subscriptions divided by the orders you expect that month.
• A returns allowance: a small percentage set aside, because some luxury orders come back.

Add them up and you have the real cost of one sale.

The formula

Pick the margin you want to keep, then work backwards:

Selling price = landed cost ÷ (1 − target margin)

Example, with round illustrative numbers: if a bag's landed cost is 500 and you want a 25% margin, your price is 500 ÷ 0.75 = about 667. If you'd simply added 25% to the product cost, you'd have priced it lower and kept far less.

Three checks before you publish a price

1. Compare it. Look at what established stores charge for the same piece. If you're far above, choose a different product rather than cutting your margin.
2. Test your worst case. Recalculate with the highest shipping cost you might pay. If the margin disappears, that product isn't right for that market.
3. Write your duties policy on the product page. Tell customers clearly who pays import charges. Surprise fees at delivery cause refusals and returns.

See you Tuesday. We're competing on price without racing to the bottom.