Practical guide · Pricing
Your supplier raised prices. What should you charge now?
There are four sensible ways to set the new price. They give four different numbers, and each protects something different. Pick on purpose.
The short answer
If your cost rose from 1,000 to 1,100 and you sell at 1,250, your gross margin falls from 20% to 12% unless you act. Raising the price to 1,350 keeps your profit per unit; raising it to 1,375 keeps your 20% margin. The right choice depends on the customer, the product and how price-sensitive they are.
01 / Example
One product, one cost increase.
A fictional item: you buy it for 1,000 and sell it for 1,250. The supplier raises your cost by 10% to 1,100. The currency doesn't matter; use the same one for every figure, and use net prices (after discounts, before tax).
Gross margin is (price − cost) ÷ price. Before the increase it is 250 ÷ 1,250 = 20%. If the price stays, it becomes 150 ÷ 1,250 = 12%: you keep 100 less on every unit you sell.
02 / Options
Four ways to set the new price.
| Approach | New price | Price rise | Profit / unit | Margin |
|---|---|---|---|---|
| 1. Keep the price | 1,250 | 0% | 150 | 12.0% |
| 2. Protect profit per unit (pass on the cost increase exactly) | 1,350 | +8.0% | 250 | 18.5% |
| 3. Protect the margin percentage | 1,375 | +10.0% | 275 | 20.0% |
| 4. Meet a target margin (example: 25%) | 1,467 | +17.4% | 367 | 25.0% |
For options 3 and 4, the price is new cost ÷ (1 − margin). For a 20% margin: 1,100 ÷ 0.80 = 1,375. Round the result up to your usual price points.
Notice that option 2 raises the price by less than the supplier did (8% against 10%) and still keeps every unit as profitable in money terms. It is often the easiest increase to explain.
03 / Choose
Which approach for which customer?
Keep the price only on purpose: for a product you use to win the customer, or where a competitor would take the order at any increase. Write down that you chose it.
Protect profit per unit for price-sensitive customers and commodity lines. It is the smallest increase that leaves you no worse off per unit sold.
Protect the margin percentage where your costs to serve also rise with value, such as financing stock and credit terms, which cost more when goods cost more.
Meet a target margin for lines that were already below target before this increase. The supplier's change is a natural moment to correct them.
Start with the customers where the most money is at stake: multiply the profit lost per unit by the quantity each customer buys. A large customer on a small product can matter more than a small customer on a large one. A higher price can reduce how much a customer buys; none of these calculations predicts that, so use your knowledge of the customer.
04 / Communicate
How to tell customers.
Give notice. State the effective date and give as much notice as your terms allow, so customers can order at the old price or budget for the new one.
Show the cause. Say how much your own cost rose. If you chose option 2, say you are passing on the increase without adding to it.
Keep it per customer. List only the products that customer buys, with the current price and the new price.
Write it, then call. A short letter plus a call to your largest customers prevents surprises on the first new invoice.
Hundreds of products to reprice?
FOCUS Margin Desk compares your price list with the supplier's new costs, flags every product below your target margin, compares these four options for each one, and prints a price change letter per customer. Try it free; your files stay on your computer.