Pricing and Margins

How to learn with this guide

1. Read each explanation, then repeat the worked example without looking.
2. Follow the three-step method aloud and answer the check.
3. For feedback and a reworded attempt, return to the interactive lesson.
4. At the end, explain how the idea applies to your own industry.

LESSON 1 OF 4

Cost, markup, and margin

Outcome: Separate markup on cost from gross margin on price.

Concise briefing

Markup divides gross profit by cost; gross margin divides it by price. Confusing their denominators can make a price look safer than it is. Gross margin here excludes overhead and tax.

Worked example

A bar sells for $20 and costs $12 per unit. Gross profit is $8. Markup is $8 ÷ $12 = 66.7%; gross margin is $8 ÷ $20 = 40%.

Repeatable method

1. Subtract unit cost from selling price.
2. Divide profit by cost for markup.
3. Divide profit by selling price for gross margin.

LESSON 2 OF 4

Find the landed unit cost

Outcome: Include per-unit packaging and inbound freight in a decision.

Concise briefing

The decision cost should include relevant variable costs beyond the ingredient or purchase price. Allocate inbound freight over the units received; keep fixed overhead distinct. Use actual supplier quotes when pricing for sale.

Worked example

The chocolate costs $7, packaging $2, and inbound freight $150 for 50 bars ($3 each). Landed unit cost is $7 + $2 + $3 = $12.

Repeatable method

1. List variable production and packaging costs.
2. Divide shipment freight by saleable units.
3. Sum the components for unit landed cost.

LESSON 3 OF 4

Compare channels

Outcome: Check contribution at each selling price.

Concise briefing

A retailer buying wholesale pays less than a direct customer. Check each channel's selling price minus channel-specific variable cost and fees. Do not assume direct sales are automatically more profitable; fulfillment costs may differ.

Worked example

Direct price $24 less $12 landed cost and $4 direct fulfillment leaves $8. Wholesale price $17 less $12 landed and $1 handling leaves $4. Both contribute, but volume and fixed costs matter.

Repeatable method

1. Write each channel's price.
2. Subtract its own variable costs.
3. Compare contribution alongside realistic volume and payment timing.

LESSON 4 OF 4

Stress-test a discount

Outcome: Estimate how a promotion changes contribution and the units needed to cover fixed cost.

Concise briefing

A discount reduces the selling price without automatically reducing unit cost. Calculate the new contribution, then divide fixed campaign cost by contribution. A lower margin may require much higher volume to pay for the promotion.

Worked example

Normal $20 price less $12 variable cost gives $8. A 20% discount sets price at $16, leaving $4. A $200 campaign cost needs 50 discounted sales to cover, before other fixed costs.

Repeatable method

1. Apply the discount to the selling price.
2. Subtract unchanged variable cost.
3. Divide campaign cost by new contribution and compare likely demand.

Final review

Close your notes and answer these in the interactive course. Revisit any missed lesson before attempting the reworded check.

1. A unit costs $12 and sells for $20. Which denominator gives gross margin?
2. A $200 campaign has $4 contribution per discounted sale. How many sales cover the campaign cost?
3. Why compare direct and wholesale separately?

Use it in your setting

Replace one fictional example with facts from your field. Name the decision, evidence needed, and the first assumption to verify.

All examples are educational. This printout does not create a verified grade, enrollment, or credential.

Sources and further reading

Original Aim High Hero explanations and fictional exercises. External sources do not endorse this course.

• U.S. Small Business Administration — Break-even analysis