A supplier raises the price of wax. A new carton costs more. Hourly production labor changes. The retail price stays exactly where it was.
That quiet mismatch is how a product can slip below its intended gross margin without anyone making an obvious product pricing decision. The price may still look familiar in the store, wholesale sheet, marketplace, and promotion calendar, but it is now attached to a different cost.
A cost-change price audit finds those exceptions. Recalculate the current markup and margin at each active price, measure the gap from the approved target, and decide what must change.
Start with the current cost—not the cost you remember
Choose one documented unit-cost basis and give it an effective date. It may include materials, direct production labor, packaging, labels, and manufacturing costs. Keep marketplace fees, commissions, fulfillment, or shipping support visible as separate channel costs when they are not included.
Use the same basis everywhere. A retail price compared with current production cost cannot be fairly compared with a wholesale price measured against last season’s cost.
Suppose an eight-ounce candle previously cost $9.60 per unit. After wax, fragrance, vessel, label, and labor updates, its documented cost is $11.20. The business still sells it for $28 direct, $17 wholesale, and $23.80 during a planned 15% promotion.
The IRS explains how inventory and cost of goods sold affect gross profit in Publication 334. Your internal pricing basis may include additional management assumptions, so label it clearly and confirm accounting treatment with a qualified professional when needed.
Recalculate markup and margin without mixing them up
The difference in markup vs margin is the denominator:
- Markup percentage = (selling price − cost) ÷ cost
- Gross margin percentage = (selling price − cost) ÷ selling price
The foundational guide to markup and margin explains the formulas in detail. For this audit, calculate both but use gross margin to compare each active price with the approved target.
At the new $11.20 cost:
| Active price | Gross profit per unit | Markup | Gross margin |
|---|---|---|---|
| $28 direct | $16.80 | 150.0% | 60.0% |
| $23.80 promotion | $12.60 | 112.5% | 52.9% |
| $17 wholesale | $5.80 | 51.8% | 34.1% |
If the approved targets were 60% direct, 52% promotional, and 40% wholesale, the direct and promotional prices still clear their targets. Wholesale does not. The business has a specific exception rather than a vague feeling that “margins are getting tight.”
Build a margin-exception table
Run the audit across active SKUs and channels. Do not begin with every discontinued variation or one-off custom product. Start with high-volume items, products with recent supplier changes, and prices that are reused in wholesale sheets or promotion templates.
Use these columns:
| SKU and channel | Current cost | Active price | Current margin | Target margin | Gap |
|---|---|---|---|---|---|
| Candle, direct | $11.20 | $28.00 | 60.0% | 60.0% | 0.0 points |
| Candle, promotion | $11.20 | $23.80 | 52.9% | 52.0% | +0.9 points |
| Candle, wholesale | $11.20 | $17.00 | 34.1% | 40.0% | −5.9 points |
Add the cost effective date, last price-review date, price owner, and next decision date. Those fields turn the table into an operating record rather than a one-time spreadsheet.
A negative gap is a review trigger, not an automatic order to raise prices. It tells the team where an intentional decision is missing.
Assign one of four decisions to each exception
1. Change the selling price
Calculate the price required for the target margin:
Required price = cost ÷ (1 − target margin)
At an $11.20 cost and 40% wholesale target, the required price is $18.67. The business might round to a channel-appropriate amount after reviewing customer expectations, case packs, retailer economics, and contracts.
Use the price-ladder guide to connect standard retail, wholesale, promotional, and approval-floor prices to one cost basis.
2. Change the cost or product specification
A price increase is not the only lever. Review supplier terms, order quantities, expected yield, rework, packaging configuration, production time, and material waste. Do not cut a quality or safety requirement merely to recover margin. Document any real specification change and recalculate before approval.
3. Change the channel or assortment decision
A product may work in direct sales but not at the current wholesale price. The answer could be a different case pack, channel-specific package, minimum order, assortment, or decision not to offer that SKU in that channel.
This is why the best seller is not always the best business decision. The guide on why a best-selling product may not be the most profitable helps extend the review to product mix and contribution.
4. Approve a temporary exception
Sometimes the business intentionally accepts a lower margin: a defined launch, inventory closeout, contract transition, or customer recovery decision. Record the reason, owner, quantity or date limit, and review point. An exception without an end condition quietly becomes the new normal.
Test promotions separately
A promotion uses the same product cost but a lower selling price. If the cost rose after the promotion was designed, the discount may cross the approval floor even when the standard retail price remains healthy.
Recalculate the exact discounted price, then add payment fees, marketplace charges, shipping support, affiliate commission, special inserts, and extra fulfillment work. The article on when discounts grow revenue but shrink profit shows how to calculate the additional unit volume needed to preserve contribution.
One of the easiest pricing mistakes is approving a discount percentage from the old price-and-cost relationship. Audit scheduled promotions whenever a meaningful cost increase lands.
Make the audit repeatable
Run a full review on a regular schedule, then trigger a smaller review when a major input changes. Good triggers include a supplier increase, wage update, package redesign, formula change, marketplace fee change, or new wholesale agreement.
Keep five controls:
- One named owner for the cost basis.
- One effective date for every updated cost.
- One approved target margin by channel or price level.
- One exception report ranked by sales volume, margin gap, or gross-profit dollars at risk.
- One decision owner and due date for each flagged row.
The SBA’s example on why not all sales are equal illustrates how product mix and different margins can change the bottom line. The practical lesson is not to chase one universal percentage. It is to know which sales still support the business under current costs.
Frequently asked questions
Should every cost increase trigger a price increase?
No. It should trigger a review. The decision may be to raise price, reduce a controllable cost, change the product or channel, accept a time-limited exception, or stop offering an uneconomic combination.
Is markup or margin better for this audit?
Calculate both if they help your team, but compare current gross margin with the approved target margin. Markup starts from cost; margin shows gross profit as a share of selling price.
What if wholesale falls below target margin but retail does not?
Review wholesale as its own decision. Recalculate the required price, channel costs, case requirements, minimums, and product fit rather than raising every price automatically.
How often should product prices be audited?
Set a regular review cadence and add event-based checks after meaningful changes to materials, labor, packaging, fees, fulfillment, formulas, or channel terms.
Practical takeaway
Choose one high-volume SKU and list every active price. Replace the remembered cost with the documented current cost, recalculate markup and margin, and flag each channel below target.
Then give every exception one decision, one owner, and one deadline. The goal is not constant price changes. It is to stop old prices and new costs from drifting apart without anyone noticing.
