My supplier raised the price, how much should I raise mine?

Your supplier calls and says the price is going up. Your first thought is to add the same rupees to your selling price and move on. That feels fair, but it does not protect your margin. Here is why, and what to do instead.

The starting position

You sell an item at Rs 250. It costs you Rs 100. Your margin, which is profit as a share of the selling price, is (Rs 250 minus Rs 100) divided by Rs 250.

Rs 150 divided by Rs 250 is 0.6, or 60 percent.

The supplier raises the price by Rs 15

Cost goes from Rs 100 to Rs 115. You keep the price at Rs 250 for the moment.

New profit is Rs 250 minus Rs 115, which is Rs 135. Margin is Rs 135 divided by Rs 250, which is 54 percent.

You lost six points of margin because of a Rs 15 rise in cost.

Add the same Rs 15 to your price?

If you raise your price to Rs 265, profit is Rs 265 minus Rs 115, which is Rs 150. You are back to your original rupee profit. Margin is Rs 150 divided by Rs 265, which is about 56.6 percent. Your rupee profit is intact, but your margin percentage is lower than before.

Is that enough? It depends on your other costs. If your shipping, packing, payment fees and ad costs also depend on price or have risen, a flat rupee profit may be too thin. Many sellers want to keep the margin percentage because their overheads scale with the business.

Keeping the 60 percent margin

To hold margin at 60 percent, cost must be 40 percent of the selling price. So the price is cost divided by 0.4.

Rs 115 divided by 0.4 is Rs 287.50.

That is an increase of Rs 37.50, more than double the Rs 15 cost rise. It surprises people, but the maths is right: a 60 percent margin means each extra rupee of cost needs Rs 2.50 of extra price.

Choose a real price

Rs 287.50 is not a price anyone will see on a listing. Round it sensibly.

• At Rs 289, profit is Rs 174 and margin is about 60.2 percent.
• At Rs 299, profit is Rs 184 and margin is about 61.5 percent.
• At Rs 279, profit is Rs 164 and margin is about 58.8 percent.

Pick the one that fits your customers and brand. If your price sits in a range customers expect, a smaller rise may be wiser even if it costs you a point or two of margin.

Other ways to respond

You do not have to pass on the whole increase.

• Negotiate. Ask the supplier whether a larger or repeated order earns you the old rate.
• Find a second supplier for comparison.
• Adjust pack size or contents slightly, being honest about it in the description.
• Raise prices only on the products where customers are least price-sensitive.
• Sell down existing stock first at the old price, since you bought it at the old cost, and use the new price only for the next batch.

When you do raise prices, do not apologise at length. Keep the notice short, and let the quality speak.

If you want the formula behind the 287.50, see pricing from a target margin. To check you are not mixing up two common terms, read markup versus margin. And if prices have changed more than once, landed cost per unit explained helps you recount your real cost.