Ecommerce Pricing: Margins, VAT and Setting Prices That Work

Price is one of the most powerful levers in an online store, and one of the least understood. Too low and you work hard for no profit. Too high and nobody buys. This guide explains how to calculate a price you can defend, with South African VAT and shipping in mind.

Step 1: Know your true cost per sale

Many sellers only count the purchase price of the product. Your real cost per order includes:

Product cost, including any import duties and clearing fees.
Packaging and labels.
Payment gateway fees.
Shipping costs you absorb.
Returns and refunds, as an average cost per order.
Marketing cost to acquire the customer.
A share of overheads such as platform fees and software.

Add these together to find your cost per order. Anything above that is profit.

Margin and markup are different

These two terms are often confused.

Markup is the percentage added to cost. Cost R100, sell R150: markup is 50%.
Margin is the percentage of the selling price that is profit. Selling at R150 with cost of R100 gives a margin of 33%.

A 50% markup does not mean 50% margin. When you decide on a margin target, calculate the price as: cost divided by (1 minus margin). For a 40% margin on a R100 cost, the price is R100 / 0.6 = about R167.

VAT in plain terms

If your business is registered for VAT, you charge VAT on taxable sales and can generally claim VAT on business purchases. The standard rate in South Africa is currently 15%, but check SARS for the latest rules, including registration thresholds and any zero-rated or exempt goods.

Points to get right:

Show prices consistently. Consumers generally expect to see prices including VAT. Say clearly that prices include VAT.
Work out price before and after VAT. A price of R115 including VAT is R100 plus R15 VAT. Your revenue is the R100, not R115.
Calculate margin on the price excluding VAT, because VAT is not yours to keep.
Keep records of every invoice, and make sure your store produces valid tax invoices if you are registered.
Be careful when comparing with competitors. Make sure you compare prices on the same basis.

Speak to an accountant about your registration status and how to treat things like imported goods. Connecting your store to accounting software helps keep records accurate; see connecting your accounting software to your store and CRM.

Three ways to set a price

Cost-plus pricing. Add a set margin to your cost. It is simple and guarantees a margin, but ignores what customers will pay.

Competitor-based pricing. Price relative to similar products. It keeps you in the market but can start a race to the bottom, and assumes competitors have priced correctly.

Value-based pricing. Price according to the value the customer gets. A distinctive product that solves a real problem can command a premium. This usually produces the best margins and needs strong branding and product pages.

In practice, use cost-plus to set your minimum, look at competitors for context and aim for value-based pricing where you can.

Shipping and pricing

Shipping affects what customers pay and what you earn. Options include:

Charge actual shipping, which is transparent but can put shoppers off.
Flat rate, which is simple but may over- or under-charge.
Free shipping, built into the product price or offered above a threshold.

A free-shipping threshold slightly above your average order value encourages shoppers to add items. Always check that the margin still works after courier costs. Details in online store shipping in South Africa.

Discounts without destroying profit

Discounts bring in sales but can damage margins and train customers to wait for sales.

Know your break-even: how large a discount can you give before you make a loss?
Use discounts with a purpose: clearing old stock, a launch, rewarding loyal customers, growing the basket.
Prefer bundles and gifts with purchase over blanket percentage cuts.
Be honest. Do not inflate the "before" price to fake a saving; consumer law prohibits misleading price claims.
Limit codes and watch for abuse.

Remember that a 20% discount on a 40% margin does not reduce profit by 20%; it can reduce it by half. Work out the maths before you run a sale.

Psychological and practical pricing touches

Charm pricing such as R199 rather than R200 is common, though premium brands often use round numbers.
Good, better, best options help buyers choose a middle tier.
Bundles raise the average order value.
Anchoring, such as showing a larger pack next to a smaller one, makes the value of each clearer.
Show unit prices for products sold in packs or by volume.

Test and adjust

Your first price is a hypothesis.

Launch with a price based on your numbers.
Watch conversion rates, margins and customer feedback.
Test one change at a time, such as a small price increase on a best seller.
Review pricing regularly as costs, exchange rates and competitors change.

If you import, exchange-rate swings can erase your margin quickly. Build in a buffer and review prices when the rand moves significantly.

Metrics to watch

Gross margin per product and overall.
Average order value.
Conversion rate.
Return rate by product.
Customer acquisition cost compared with profit per customer.

See ecommerce metrics that matter for how to use them.

Common mistakes

Forgetting payment fees, returns and marketing in the cost.
Confusing markup with margin.
Calculating margin on a VAT-inclusive price.
Discounting too often and too deeply.
Pricing purely on what competitors charge.
Never revisiting prices.

Good pricing is the difference between a store that is busy and a store that is profitable. Combine it with a well-chosen range, as discussed in how to choose products to sell online.