How do you set your prices? Do you use a formula to calculate them? In reality, there are many businesses that do not have a structure for calculating prices. If this is true of your business, you should read this article because we will give you a quick and easy guide for calculating the right selling price for your products.
Why is it so important to correctly calculate the selling prices of your products?
The answer is obvious: the growth of your business depends on it. What's more, for many merchants, an error in calculating their prices can lead them to give up before seeing their business flourish.
If your prices are too low, you will never make the profits you need to expand your business. However, if they are too high, you will end up scaring away your customers.
What are the most common product pricing mistakes to avoid?
Before explaining what you should keep in mind when calculating your selling prices, you need to identify the 5 most common mistakes you could be making:
- You don't take into account the value that the products have in the market
- You use your competitors' prices as the only reference.
- You sell at a price that is lower than your costs.
- You don't consider discounts and promotions.
- You rely solely on low prices to attract and retain customers.
Do any of these situations sound familiar to you? If so, don't worry, right now you'll learn the keys to getting your pricing right.
Here's what you need to consider when calculating the selling prices for your products
Cost of sale
This is the sum of the costs involved in obtaining or manufacturing a product in a given time, as explained by Economipedia.
This site also points out that the expenses you should consider in the cost of sales include
- Raw materials used.
The gross margin or profit margin is neither more nor less than the compass that should guide your decisions when calculating the price of any product, since the profitability of your business depends on it.
The logic is simple: the higher the profit margin, the more possibilities you will have to generate discounts, promotions and any other action that will help you to improve the attractiveness of your store in the eyes of your customers.
Formula for calculating gross margin
According to the Nubox platform for accountants and SMEs, you must do the following:
- Subtract from your net revenue the cost of sales and as a result you will have the gross profit (the total revenue before taxes and other expenses related to your activity).
- Divide the gross profit value by the revenue.
- Multiply that result by 100 to get the percentage.
Example: If your annual revenue from the sale of a product is 50,000,000 and your cost of sales is 30,000,000, the formula is expressed as follows:
- 50,000,000 (revenue) - 30,000,000 (costs) = 20,000,000 (gross profit).
- 20.000.000 / 50.000.000= 0.4.
- 0.4 x 100= 40%.
This means that your profit margin is 40%.
Once you have calculated this, you may notice that this profit margin is not enough to cover all your costs and provide the profit you want. So, in addition to reducing your costs and expenses, you can also adjust your selling prices.
For example, if you want your profit margin to be 50% you should do the following.
Formula for setting selling prices
If you the cost of sales for your product is 10,000 and you need to obtain a 50% profit margin to cover your costs and the profit you want to make, apply this formula:
- Multiply the cost of the product by the profit margin you need to obtain.
- Add the result to the cost of the product.
So, to take the same example, the figures would look like this:
- 10,000 (cost of sale) x 50% (profit margin)= 5,000.
- 5,000+10,000= 15,000 (selling price).
Now, as you may have noticed, the key is to determine the expected profit margin, but to do so you also have to consider the margin suggested by your suppliers, the sales prices of your competitors, the market in which you develop your business and the type of product you sell, according to the FundaPymes site.
You already know!
The formulas presented here are not the only ones that exist, but they are the ones that best suit the needs of businesses that sell products from wholesale companies. So we suggest you use them and then take into account both the results you obtain from the calculation and the circumstances of your products and the market when setting your prices.
Finally, you may want to consider using digital tools that will help you keep your store in order and integrate you into a business community with which you can continue to grow. You don't have to be alone in this!
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