Minimum margin pricing: how to set a price floor for your online store

A price floor is the lowest price you are prepared to sell a product at, whatever competitors do. It is the single most important rule in any competitive pricing setup, manual or automated, because it is the one that stops a bad reading, an aggressive competitor or a hurried campaign decision from selling stock at a loss. This article explains how to calculate a minimum margin floor properly, which costs to include, and how to apply floors across a catalogue.

Margin, markup and why the difference matters

The two are easily confused, and the confusion produces floors that are lower than intended.

• Margin is profit as a share of the selling price: (price − cost) ÷ price.
• Markup is profit as a share of cost: (price − cost) ÷ cost.

A product that costs 100 kr and sells for 125 kr (excluding VAT) has a 25% markup but a 20% margin. If you intend a 25% margin floor but calculate it as a 25% markup, every floor price will be lower than you meant. In this article, margin always means margin on the selling price excluding VAT.

The floor formula

To find the lowest price that still delivers a given minimum margin:

Floor price (excl. VAT) = cost ÷ (1 − minimum margin)

With a cost of 400 kr and a minimum margin of 15%, the floor excluding VAT is 400 ÷ 0.85 ≈ 471 kr. With 25% VAT, the floor shown to customers is about 588 kr. The margin calculator does this for any cost, margin and VAT rate.

Which costs belong in the floor

The weakest point in most floors is the cost figure. Purchase price alone understates what a sale costs you. Consider including:

• Landed purchase cost: supplier price plus inbound freight, duties and currency costs.
• Payment fees: card and wallet fees, usually a percentage of the order value.
• Fulfilment: picking, packing and packaging per order.
• Delivery subsidy: the part of shipping you pay when you offer free or reduced delivery.
• Expected returns: the cost of returns averaged over all sales, which is significant in categories such as clothing.
• Channel fees: marketplace commission or the cost per click on comparison sites, if the product sells mainly through that channel.

You do not need perfect allocation. A reasonable per-order estimate for fulfilment and delivery, and a percentage for payment fees and returns, is far better than ignoring them.

A worked example

Say you sell a blender at 1,249 kr including 25% VAT, or 999 kr excluding VAT. Your costs per unit:

• Landed purchase cost: 610 kr
• Fulfilment and packaging: 35 kr
• Delivery subsidy: 45 kr
• Payment fees: about 2% of the price excluding VAT
• Returns allowance: 15 kr per unit sold

The fixed costs add up to 610 + 35 + 45 + 15 = 705 kr. Payment fees scale with price, so include them in the denominator. For a 10% minimum margin after all these costs:

Floor (excl. VAT) = 705 ÷ (1 − 0.10 − 0.02) = 705 ÷ 0.88 ≈ 801 kr

That is about 1,001 kr including VAT. If you had used purchase cost alone, 610 ÷ 0.90 ≈ 678 kr excluding VAT, or about 847 kr including VAT. A competitor at 899 kr would look matchable on the simple calculation, but at 899 kr including VAT your price excluding VAT is about 719 kr, below the full-cost floor. Every unit sold there would miss your 10% minimum margin entirely: after payment fees, it would roughly break even.

Setting the minimum margin itself

The floor formula needs a minimum margin as input. There is no universal figure; it depends on what the margin has to cover. A few ways to set it:

• Cover overheads. If your fixed costs (staff, rent, software, marketing) are a known share of revenue, the minimum margin on contribution should at least cover that share on average. Individual products can go lower only if others make up the difference.
• Differ by role. Traffic products that bring customers in can have a lower floor than accessories and own-brand items.
• Differ by category. Electronics typically carry thinner margins than home textiles. A single shop-wide minimum is either too high for one or too low for the other.

Whatever level you pick, write it down per category and review it when costs change, for example after a supplier price increase or a new carrier contract.

Keeping floors up to date

Floors also go out of date. A floor calculated in spring on last year's supplier price, carrier rates and exchange rate may be too low by autumn. Keep the cost inputs in one place, such as the cost field in your shop platform or a single cost sheet, and recalculate floors whenever one of them changes. For products bought in another currency, it is worth recalculating after any significant exchange rate move, since the landed cost changes even though the supplier's price list does not.

It also helps to check, once a month, which products are currently priced at or close to their floor. A long list is a warning sign: either the market has moved below your cost base in those categories, or a matching rule is pulling prices down further than intended. Both deserve a conversation with the buyer responsible, not just a pricing adjustment.

Floors, targets and ceilings

A floor is a limit, not a target. A healthy pricing set-up has three levels per product:

1. Floor: the lowest acceptable price. Never crossed.
2. Target: the margin you aim for in normal trading, often well above the floor.
3. Ceiling: an upper limit, such as a supplier's recommended price or a maximum index against competitors, so that automated increases do not price you out.

Competitive moves happen between the floor and the ceiling. When the market price falls below your floor, the right response is usually to hold the floor and accept fewer sales on that product, not to follow. If it happens often, it is a buying problem rather than a pricing problem: talk to the supplier.

Floors in automated and rule-based pricing

Any rule that moves prices in response to competitors needs a floor built in, because the rule will otherwise follow the market wherever it goes, including to a misread price or a competitor's error. Two further safeguards work well alongside the floor:

• A maximum step per change. A cap on how far one change can move a price limits the damage from a wrong input.
• An approval threshold. Changes beyond a certain size, or close to the floor, go to a person for approval rather than straight to the shop.

These are covered in more depth in repricing rules vs ML pricing and price matching strategy.

In Luska, price recommendations include two fixed safeguards that cannot be switched off: no recommendation goes below an 8% margin, and no single recommendation moves a price by more than 15%. On top of that you set your own target margin, price position, rounding and the threshold above which changes need approval. The 8% is a safety net, not a recommended floor; most shops will want their own target well above it.

Frequently asked questions

What is a good minimum margin for e-commerce?

It depends on your category and cost structure. Work it out from what the margin must cover, overheads, marketing and returns, rather than adopting a figure from another shop.

Should the floor include marketing costs?

Include costs that vary directly with a sale, such as cost per click on a comparison site when the product sells mainly there. General brand marketing is better covered by the minimum margin level itself.

Is it ever right to sell below the floor?

For clearance of stock that will otherwise not sell, yes, but as a deliberate decision for named products and a limited period, not as the outcome of a matching rule.