Price is the primary medium to determine profit or loss. If the selling price is higher than the cost price, that product will provide profits. On the other hand, if the selling price is less, that business will face loss. That is why pricing is very vital for any business. And for the same reason, one of the most asked questions remains how to calculate the selling price of a product.
Any business is a sum of some products or services. Depending on the product, the price range from a very little amount to a high amount.
However, the actual price or the cost price usually lies below the selling price so that the outcome is a profit.
However, you cannot just set any selling price for your product. As customers compare the price of the same product from different companies, an unusual high selling price will lead you to a loss, instead of a huge profit.
That is why it is important to know how to price products for profit.
In the next paragraphs, we will try to cover all aspects regarding how to calculate selling price of a product the price for your service. We will also discuss some factors that affect this pricing.
Besides, the article will also include some strategies. But our main and utmost target will be to inform you of how to price products for profit.
Hopefully, at the end of the article, you will get the perfect formula for pricing and be able to do the calculation yourself.
How to calculate a product price?
Pricing products is not as easy as it seems. It is much more complicated than one can expect.
To determine the price of your product, you have to follow some necessary steps. Also, you will have to follow a specific pricing strategy.
By following the steps given below, you can price your product easily on the marketplace.
First thing first: research
Here, research means researching both the market and the product you are finding the selling price of. On the whole, you will have to understand the market of your product.
At first, determine the niche of your product. What does it offer? What aspects of our lives does it include? Does it solve any of our life problems or is it just one type of luxury?
What more or less does it offer compared to other products in the market? And most importantly, how is the sales of typical products of the same kind in the market?
Knowing the answers to these questions is vital for your pricing and markup. We will talk about markup in detail later.
Based on your research, you can do the necessary pricing and calculate the appropriate selling price for your product.
And hopefully, that pricing will boost your sales and maximize your profits. Your research should also find the type of product your one is.
If that is something common in daily life, you need to differentiate it from others so that you can set a higher price for higher facilities.
On the other hand, if your product or service is something very similar to others or common, you will have to compete on the pricing.
We will discuss more on these different aspects of pricing later in the article throughout the steps.
Determining your costs
You have to keep in mind that the basic objective of pricing is to gain profits. And to ensure that, you must know your costs of generating that service or product.
Only then can you expect to set up the selling price.
As you select either of many pricing methods, you will surely want to have high margins so that a slight change in your costs or the market doesn’t affect your profit.
At first, you will have to consider the initial costs for the startup.
Depending on your business type, your cost will vary. For instance, if your business is something unique, you will need high developmental costs upfront.
On the other hand, if that is the follow-up or copy of something else, your startup costs will lower to quite some extent.
Then comes another necessary part of costs- the manufacturing.
It includes various parts, like the price of the raw materials, labor fees in the case of physical products, and hourly rates in the case of virtual products.
Then come some other expenditure that many forget to include in their calculation.
If you are using some online marketplace to sell your services, that should also be considered under your cost price.
While determining costs, you should keep in mind that the costs are not static.
While the first shipment of your products may cost a little more, the next may cost less.
The opposite can happen as well. Also, based on the manufacturer and the raw materials used from time to time, the cost will vary.
But the main change occurs in the shipment cost of the materials and the marketplace.
Selecting a pricing strategy
There is no single selling price formula. You will have to calculate the selling price from a wide pricing strategy variety.
However, not every pricing strategy will help you earn the same profit.
Some will lower the profit rate, while some other method will let you get the highest profit considering all the aspects of your business and the cost price.
Some pricing methods will even be far from the realistic situation.
Nevertheless, we are sharing some pricing methods. You can choose the one that suits you the most among them.
Pricing based on the value
The basic principle of this pricing method is to maximize your profit margins to their highest but not scaring the customers off. Let’s put it like this.
As you want to buy someone, you have a fixed mindset of paying a maximum amount of price for that.
If the price is within that maximum price, you buy it. And if it is more than that, you do not.
Now think of another person who wants to buy this product or needs it. They often agree to pay more than that range.
On the other hand, some people, who just sort of what that item, will buy it only if its price is quite low.
Therefore, if you market this product at a comparatively low price, maybe 40 or 50 out of 100 people will buy it. But then, your profit will be very marginal per sale.
On the other hand, if you do marketing of your product at a higher price, maybe the number of people buying it will lessen.
But your profit margin will be more per sale than that of the previous scenario.
Therefore, you can set your selling price at such an amount that exceeds the total profit of that of 40 or 50 people.
But you must not set the price too high as that will push a number of potential buyers away.
Through this method, you will find such pricing that will give you the highest profit without scaring your customers away.
Top brands, like Apple, profits in this way.
Although their annual sales are not as much as many other companies, their profit per sale is quite higher than most other companies.
Pricing based on cost
Here is another pricing strategy for your question of how to calculate the selling price of a product.
This type of pricing deals with the minimum selling price you can afford to offer to your customers.
If you don’t want to spend much in calculating selling price, this method is a perfect choice. Also, market research is required at a minimal level.
This pricing strategy calculates the cost price of the product and adds a markup price with it. And thus you get the final selling price.
However, there are some drawbacks to this strategy as well. It only tends to cover the costs but ignores the extra amount your customers are ready to pay.
This way, although you do not face a loss, you lose the chance to earn more profit from your customers.
Furthermore, this method does not think about the competitors, i.e., the market.
How much selling price your competitors are determining plays a vital role in your setup of selling price. But this method does not consider that.
Another name of this type of pricing is markup pricing. It means that after the cost pricing, an extra amount is added with that.
This extra amount is the profit margin included in the selling price.
An example of this type of pricing is if the cost price of your product is $40, then you add a 25% markup pricing.
Therefore, the ultimate selling price becomes $50. If you are one of those who ask how much should I mark up my product, this might help you.
How much should I mark up my product?
As we already discussed, markup means the profit margin you want to have. It depends on quite some factors. From the location of your business to its type, it includes all.
Let us discuss some selling price factors. That will help you understand how much profit margin you should have when you price your product.
At first, there is the price a buyer is ready or willing to pay. Based on the type of the product, this will vary.
It also depends upon the genuineness of your service. Also, if your targeted customers are rich, they will usually agree to a higher price.
Hence, customers play a vital role in the calculation of your selling price. We will discuss a little more about customers in one of the next paragraphs.
The second factor is how much selling price you, as a seller, are willing to accept.
Even after a threshold profit margin, the selling price does not look good to the seller.
And finally, there is the selling price your competitors are offering in the market.
It also affects your selling price quite a lot. When the competitors’ price is lower than yours, there is much possibility that your sales will fall.
On the other hand, if your selling price is much lower than theirs, there is a risk that customers will think that your product is not of good quality.
Hence, you should think both ways. Let’s get back to customers.
As we mentioned, targeted customers from a high class naturally tend to pay a higher price for the service.
On the other hand, customers from a low class will tend to pay less unless the service is a necessary one. Hence, your pricing strategy should rely upon the type and needs of customers.
How to compute the price of a product?
Before we talk about any more pricing strategies, let us move to the next part- calculating the actual selling price your product has.
The basic formula is, selling price = cost price + profit margin (markup price).
We have already discussed how to calculate the cost price and the markup or profit margin.
Now, let’s calculate the selling price per unit. You will have to follow the next procedures.
At first, determine the total cost of all products purchased. Now, divide this cost price by the number of products you purchased.
And finally, use the formula of calculating selling price, selling price = cost price + profit margin. The resultant is your selling price per product unit.
We have discussed the necessary steps of pricing strategy. Keep your customers in mind. Don’t make the price a burden for them.
Instead, make it customer-friendly. Also, consider your market and the competitors.
Based on your number of competitors and their strategy, your strategy will have to vary.
Most importantly, set such a price that will give you the highest profit without losing any potential customers.
Hopefully, at the end of the article, you have got the necessary information to start earning huge profits.