How to use the price increase needed to offset cost calculator
- Choose what to hold constant: your margin percent or your dollar profit per unit.
- Enter your current price, your current cost per unit and the new cost per unit.
- Read the new price needed and the price increase as a percent.
- Compare the margin you would get if you kept the old price, shown beside the result.
Formula
Hold the margin: new price = new cost / (old cost / old price)
Hold the dollar profit: new price = old price + (new cost - old cost)
Price increase = new price / old price - 1
Holding the margin percent keeps cost at the same share of the price, so the price rises in proportion to the cost. Holding the dollar profit adds only the extra cost.
Cost rises from $60 to $66 on a $100 price
A product sells for $100 and costs $60, a 40% margin. The cost rises by $6 to $66. To keep a 40% margin the price must be $66 / 0.60 = $110.00, an increase of 10%. If you left the price at $100, the margin would fall to 34%.
If you only want to keep the $40 profit per unit, the price becomes $100 + $6 = $106.00, a 6% increase, and the margin is $40 / $106 = 37.74%.
Two ways to pass on a cost increase
Holding the margin percent means that if costs rise 10%, prices rise 10%. Holding the dollar profit asks for a smaller rise, because you keep the same dollars of profit per unit and your margin percentage slips a little. Which one fits depends on what you want to protect: the percentage return on each sale or the dollars it earns.
Neither is right for every business. The calculator lays out both so that you can see the difference before choosing.
What a price rise does not guarantee
This is arithmetic. It does not know whether customers will accept the new price or buy less. If volume falls enough, higher margins on fewer sales can leave you with less total profit. To test that trade-off, see the discount profit impact calculator, which shows the volume change needed for a given price change.
If your costs change in several places at once, add them into one cost per unit first. For the reverse question of how low a price can go, use the discount to keep margin calculator.
Assumptions and limits
- The cost per unit is the whole cost that your margin is measured against.
- Margin is profit as a percent of the selling price.
- Sales volume stays the same after the price change.
- The new price is rounded to the cent for display.
Frequently asked questions
How much should I raise prices when my costs go up?
To keep the same margin percent, raise the price by the same percent as the cost. A cost rise from $60 to $66 is 10%, so a $100 price goes to $110. To keep the same dollar profit, add the cost increase to the price.
Why is the percent increase different when I hold the dollar profit?
Holding the dollar profit adds only the $6 cost increase, which is 6% of a $100 price. Holding the margin percent also scales the profit up with the cost, which takes the price to $110.
What happens to my margin if I do not raise the price?
It falls. With a $60 cost rising to $66 on a $100 price, the margin drops from 40% to 34%. The tool shows this figure so you can see the cost of waiting.
Can I use this when my cost goes down?
Yes. A lower new cost gives a negative price change, which is the price cut that would keep your margin or your dollar profit unchanged.