Ecommerce Pricing Basics: Building a Profit-First Pricing Mindset

What “Profit” Means in Ecommerce (and Why It’s Not Just “Revenue Minus Cost”)

In ecommerce, profit is the money left after you pay for everything required to acquire, fulfill, and support an order. A profit-first mindset means you treat profit as a design constraint in your pricing—not a pleasant surprise at the end of the month.

Key profit definitions you’ll use

• Gross profit: Revenue minus cost of goods sold (COGS). This tells you whether the product itself has room to pay for marketing and overhead.
• Contribution margin: Revenue minus all variable costs per order (COGS, payment fees, pick/pack, shipping subsidies, returns allowance, packaging, marketplace fees, etc.). This tells you whether each order contributes cash to cover fixed costs and profit.
• Net profit: What’s left after variable costs and fixed costs (rent, salaries, software, insurance) and taxes. This is the “business outcome,” but it’s not the best number to steer day-to-day pricing decisions.

For pricing decisions, contribution margin is often the most actionable: it connects directly to how pricing affects cash flow and your ability to scale.

How Pricing Connects to Cash Flow and Growth

Pricing is not only about “making more per sale.” It changes how fast cash comes in, how much you can spend to acquire customers, and how resilient you are to shocks (ad cost spikes, higher return rates, supplier increases).

Three practical ways pricing impacts cash flow

• Marketing capacity (CAC headroom): Higher contribution margin gives you more room to pay for ads and still stay profitable.
• Inventory velocity and reorders: If your price is too low, you may sell quickly but lack cash to reorder inventory. If your price is too high, inventory may sit, tying up cash.
• Refunds/returns exposure: If returns are common in your category, thin margins can turn “good sales days” into negative cash weeks when refunds hit.

Example: Same revenue, different cash reality

If you sell 500 orders/month, Scenario A generates $8,000 contribution; Scenario B generates $5,000. That $3,000 difference can be the budget for testing new ads, hiring support, or funding inventory reorders. Pricing is a growth lever because it determines the cash your business produces per unit of demand.

Clarify Your Pricing Goals (Profit, Volume, Positioning)

Before you set or change prices, decide which goal you’re optimizing for right now. Most pricing mistakes happen when a store tries to achieve all goals simultaneously without trade-offs.

Continue in our app.

You can listen to the audiobook with the screen off, receive a free certificate for this course, and also have access to 5,000 other free online courses.

Or continue reading below...

Download the app

1) Profit goal (margin-first)

Use when: you have stable demand, ad costs are rising, you need cash to fund inventory, or you’re preparing for wholesale/retail expansion.

• Primary metric: contribution margin per order and contribution margin %
• Typical actions: raise price, reduce discounting, add bundles, adjust shipping thresholds, reduce costly variants

2) Volume goal (growth-first)

Use when: you’re entering a market, launching a new product, or trying to increase repeat purchase base.

• Primary metric: contribution margin dollars at target volume (not just margin %)
• Typical actions: introductory pricing with guardrails, tighter cost control, higher AOV tactics to protect contribution

3) Positioning goal (brand/market signal)

Use when: your brand competes on quality, design, or outcomes and price is part of the signal.

• Primary metric: conversion rate and customer feedback at target price point, alongside contribution margin
• Typical actions: price architecture (good/better/best), fewer discounts, premium bundles, value communication

Decision rule: Write your primary goal for the next 30–60 days. If you can’t state it in one sentence, your pricing will drift.

Where Prices Appear (and Why “Price” Is More Than the Product Page)

Customers experience your price in multiple places. Profit-first pricing means you manage the entire price surface area, not just the product’s base price.

Common price touchpoints to audit

• Product page: list price, sale price, compare-at price, subscription price, bundle price, quantity breaks.
• Collection/search results: “From $X,” badges, sale flags, sorting by price, quick-add price display.
• Cart: discount codes, automatic discounts, free gift thresholds, shipping estimator, taxes estimate.
• Checkout: shipping line items, expedited options, duties/taxes (especially cross-border), payment method fees (if applicable).
• Post-purchase: upsells, add-ons, subscription conversion offers, partial refunds/credits.
• Emails/SMS/ads: advertised price, “free shipping” claims, limited-time promos, bundle savings.

Two stores can have the same product page price but very different profitability depending on shipping subsidies, discount stacking, and return handling.

Mini-audit: find your “silent discounts”

Work through one real order and list every place margin can leak:

• Promo code applied?
• Automatic discount stacked?
• Free shipping threshold triggered?
• Shipping label cost higher than charged?
• Payment processing fee?
• Packaging/pick cost?
• Return probability and expected cost?

The Core Workflow You’ll Use Throughout the Course

This course uses a repeatable workflow so pricing becomes a system, not a guessing game. You’ll cycle through four steps: unit economics → strategy → guardrails → testing.

Step 1: Calculate true unit economics (per SKU and per order)

Your goal is to compute contribution margin using realistic, fully-loaded variable costs.

Step-by-step: build a “true unit economics” line

1. Start with selling price (what the customer pays for the item).
2. Subtract COGS (landed cost if possible: product + inbound freight + duties allocated per unit).
3. Subtract variable fulfillment costs: pick/pack labor, packaging, inserts, warehouse fees if 3PL charges per order/unit.
4. Subtract payment fees: percentage + fixed fee per transaction (estimate blended rate).
5. Subtract shipping subsidy: shipping label cost minus what the customer paid for shipping (if you offer free shipping, subsidy equals full label cost).
6. Subtract marketplace/channel fees if applicable (Amazon, Etsy, etc.).
7. Subtract expected returns allowance: (return rate × average return cost). Return cost can include reverse shipping, restocking labor, and write-offs.
8. Result = contribution margin (dollars) and contribution margin %.

Use a simple formula template:

Contribution Margin ($) = Item Price - COGS - Variable Fulfillment - Payment Fees - Shipping Subsidy - Channel Fees - Returns Allowance

Step 2: Choose a pricing strategy that matches your goal

Once you know your unit economics, you can choose a strategy that fits your objective (profit, volume, positioning) and your constraints (competition, elasticity, brand).

• Margin-led: set price to hit a target contribution margin.
• Market-led: price within a competitive band, then engineer costs/AOV to make it work.
• Value-led: price based on perceived value/outcome, supported by positioning and offer design.

Strategy is the “why.” The number you publish is the “what.” You need both.

Step 3: Set guardrails so pricing changes don’t break the business

Guardrails are pre-decided rules that prevent accidental unprofitable growth (for example, discount stacking or free shipping thresholds that erase margin).

Examples of practical guardrails

• Minimum contribution margin per order (e.g., “Never below $12 contribution on paid orders”).
• Minimum contribution margin % for specific categories (e.g., “Accessories must be ≥ 55% CM%”).
• Discount limits (e.g., “No more than 15% off unless AOV ≥ $80”).
• Free shipping threshold rule (e.g., “Free shipping only when expected shipping subsidy ≤ $6”).
• Ad spend ceiling tied to margin (e.g., “Max CAC = contribution margin × 0.7”).

Step 4: Test and iterate (measure, learn, adjust)

Pricing is a hypothesis. You’ll run controlled changes and evaluate results using a small set of metrics so you can tell whether you improved profitability, not just revenue.

Step-by-step: a simple pricing test loop

1. Pick one change (e.g., raise price 5% on one SKU or adjust free shipping threshold).
2. Define success metrics (conversion rate, AOV, contribution per session, refund rate).
3. Set a test window (e.g., 2 weeks) and avoid overlapping major promos.
4. Compare against baseline (previous period or control group if available).
5. Decide: keep, revert, or iterate with a smaller/larger adjustment.

Profit-first testing focuses on contribution and cash impact, not vanity metrics.

Checklist: Key Numbers You’ll Track Throughout the Course

Keep these numbers in a spreadsheet or dashboard. You’ll use them repeatedly when calculating unit economics, setting guardrails, and evaluating tests.

Per-unit / per-SKU numbers

• Selling price (regular and promotional)
• COGS (ideally landed cost per unit)
• Packaging cost per unit
• Pick/pack cost per unit (or 3PL per-unit fees)
• Average discount % (blended)
• Return rate by SKU (or category proxy)
• Expected return cost per unit (reverse shipping + handling + write-offs)

Per-order numbers (blended averages)

• Average order value (AOV)
• Items per order
• Average shipping label cost
• Average shipping charged to customer
• Shipping subsidy (label cost minus shipping collected)
• Payment processing rate (blended % + fixed fee)
• Contribution margin per order ($) and contribution margin %

Customer acquisition and growth numbers

• Customer acquisition cost (CAC) by channel (blended and by campaign)
• Conversion rate (sitewide and by product/category)
• Refund/chargeback rate (and reasons)
• Repeat purchase rate (or returning customer %)
• Customer lifetime value (LTV) estimate (even a simple 60–180 day LTV)

Cash flow and operating numbers (to connect pricing to reality)

• Inventory purchase terms (prepay vs net terms) and lead times
• Ad spend as a % of revenue (and as a % of contribution)
• Fixed costs per month (to understand break-even contribution)
• Break-even orders per month = fixed costs ÷ contribution per order

As you work through the course, you’ll repeatedly answer: “If we change this price or offer, what happens to contribution margin, cash flow timing, and our ability to grow?”