Profit & margins
Product costing: how to work out what a product really costs
Costing is the process of working out what a product really costs you, so you can price it correctly and know your true margin. For an online store, that means landed cost: the supplier price plus every cost of getting the product into your warehouse ready to sell, such as freight, duties and packaging.
Landed cost build-up
Landed cost adds up everything you pay for a batch of stock, then spreads it across the units:
Landed cost per unit = (Supplier cost + Freight + Duties and fees + Packaging + Other inbound costs) ÷ Units
| Cost component | What it includes |
|---|---|
| Supplier cost | The product price, plus any tooling or setup charges |
| Freight | Shipping from the supplier to your warehouse or 3PL |
| Duties and fees | Import duties, customs brokerage, port and handling charges |
| Packaging | Boxes, inserts and labels that ship with the product |
| Other inbound costs | Inspection, insurance in transit, inbound 3PL receiving fees |
Leave out outbound shipping to customers, ad spend and overheads. Those are operating costs, not product costs.
Standard vs actual costing
Actual costing uses the real cost of each batch. It's accurate, but your margins jump around every time freight or supplier prices move.
Standard costing sets a planned cost per unit, used for pricing and reporting until you review it. You then compare each batch's actual cost with the standard to see the variance.
| Standard costing | Actual costing | |
|---|---|---|
| Cost per unit | A fixed planned figure | Recalculated for every batch |
| Margins in reports | Stable | Move with every batch |
| Best for | Pricing, budgeting, comparing periods | Final accounts, checking real profitability |
| Watch out for | Letting the standard go stale | Noisy month-to-month numbers |
Most small brands use both: a standard cost in Shopify and their pricing sheet, and actual costs to check it.
Worked example
Worked example: standard cost, then a costlier batchExample numbers
Batch 1 sets the standard (500 water bottles):
| Cost | Amount |
|---|---|
| Supplier price (500 × $8.00) | $4,000 |
| Freight | $600 |
| Duties and customs fees | $300 |
| Packaging | $250 |
| Total | $5,150 |
Standard cost = $5,150 ÷ 500 = $10.30 per unit
Batch 2 (500 units), freight rises to $900:
Actual cost = ($4,000 + $900 + $300 + $250) ÷ 500 = $10.90 per unit
Variance = $10.90 − $10.30 = $0.60 per unit, or $300 across the batch.
At a $29 selling price, gross margin drops from 64.5% to 62.4%. Small per unit, but worth knowing before you set next season's prices.
Allocating shared costs across products
When one shipment carries several products, split shared costs in the way they were charged:
- Freight charged by weight or volume: allocate by weight or volume.
- Duties charged on value: allocate by value.
- Brokerage and fixed fees: allocate by units or by value.
The guide to cost per unit has a worked example of splitting one freight bill both ways.
Want this handled automatically?Forecast demand and know exactly when to reorder, before you stock out or tie cash up in overstock.Try Verve AICommon costing mistakes
- Using the supplier price as the product cost. It's often well below the landed cost.
- Never updating the standard. A cost set two years ago can make margins look healthier than they are.
- Forgetting one-off charges. Tooling, samples and setup fees should be spread over the units they relate to.
- Leaving costs out of Shopify. Shopify's profit reports only count variants with a cost per item entered.
To see how unit costs feed into store-wide profit, see how to calculate COGS and the guide to gross profit margin.
FAQ
What is costing in business?
Costing is working out the full cost of making or buying a product, so you can price it, measure its margin and spot when costs change. For an online store it mostly means landed cost: everything paid to get a product into stock.
Should I use standard or actual costing?
Most small brands use a standard cost per product for day-to-day pricing and reporting, then compare it with the actual cost of each batch. That keeps margins stable in your reports while still catching cost changes.
What's the difference between landed cost and COGS?
Landed cost is the cost of one unit, or one batch, delivered into your warehouse. COGS is the total landed cost of all the units you sold in a period.
How often should I update product costs?
Whenever a new batch costs noticeably more or less than your standard, and at least once or twice a year. Freight and duty costs in particular can change quickly.