If you have a business, whether it is an online store where you sell items, or a company that offers services, you need to know how to calculate the cost of a product or how to calculate the price of a service, respectively.
Calculating the right selling price for your product or service is one of the most important decisions you, as an entrepreneur or business owner, must make if your goal is to make money instead of losing it.
As you know, at Boardfy we like to help you as much as we can.
That’s why, in this article, we explain how to calculate the RRP of a product, we discuss different types of strategies you can use to set the price and, in addition, we give you a general formula so that you yourself will be able to perform this price calculation.
As always, with examples so that you can understand everything without any problems.
Let’s get to it.
How do you know at what price to sell a product?
To answer this question, and set your prices with full knowledge of the facts, you must take into account 4 main factors:
- Your production costs (direct and indirect expenses).Item 2.
- Your competitors’ prices (market research).
- Who your customers are (define your buyer persona).
- Your desired profit margin (pricing strategy).
In addition, other factors such as brand value, product quality and market demand are also important.
Does it seem complicated to you?
How to calculate the selling price of a product is not easy, but if you take it step by step, it will seem easier than you think:
1- Calculate the costs
Before calculating the price of a product, you must first calculate the total cost of production or acquisition, which is the sum of direct and indirect costs (both fixed and variable).
Below, we explain them one by one.
Variable costs Variable costs are all costs that change depending on the quantity of products produced, the quantity of products purchased or any other factor.
For example, shipping costs, advertising costs, reimbursem*nt costs, etc.
Fixed costs Fixed costs do not vary, i.e. they are always the same.
The most common are: rent, salaries, insurance, maintenance costs, taxes, telecommunications, utilities, etc..
Direct costs Direct costs are related to the production or acquisition of a product.
For example, materials, labor, transportation costs and/or the purchase price of the product (if you do not manufacture it yourself).
Indirect costs Indirect costs, ideally, you should also pass them on.
They are, for example, the costs of advertising, marketing, taxes, utility bills, bank charges, etc.
Both variable expenses and costs (direct and indirect) should be calculated on a per unit produced basis.
If you add up all these expenses over several months or a year, you will be able to calculate what you need approximately to achieve a certain profit and create a strategy to help you do so.
2- Make a study of your competitors’ prices.
Once you have calculated your costs, you must study your competitors.
Knowing your competitors’ prices will help you determine if the price of your products is competitive and, therefore, a good offer for the market; or if, on the contrary, you are above average.
3- Take into account who your potential customer is
Another determining factor for pricing your products is to correctly identify your potential customers.
A thorough study of your buyer persona will help you know how much he or she is willing to pay for your product and, thus, be able to calculate prices according to that figure.
How to define your buyer persona?
The buyer persona is a portrait of your ideal customers.
You can define them by asking yourself questions such as: what are their wants and needs, what motivates them, what are their problems, and so on.
Find the answer to these questions to find out what the potential customer’s expectations are. If you understand your target audience better, it will be easier for you to know whether or not your product is priced appropriately.
Few businesses ask this question, but it is a fundamental part of a good marketing plan and market research.
4- Define your profit margin
Once you have determined the costs and the price your customer is willing to pay, you must define your margin. In other words, what profit you want to make on each product sold according to your strategy.
Remember that you must exceed all your expenses (direct and indirect) to obtain a net profit.
Formula for pricing a product
As we have already mentioned, pricing a product is an important but complex task.
The way to calculate it will vary depending on the pricing strategy chosen and your type of business.
As a guideline, you can use this formula to establish the selling price of your product or service:
Selling price = Direct costs + Indirect costs + Profit margin.
Here is an example to make it easier.
Example of how to calculate the selling price
Let’s continue with the example we have already used in other articles about ROI and ROAS. You can take a look at them to know where the calculations come from in more detail.
In that case, it was about an e-commerce that made a campaign to promote a pair of sneakers.
Let’s assume that the campaign has not yet taken place and that they have to set the price first.
On the one hand, it is necessary to know the direct and indirect costs. In a very simplified way they would be the following:
- The agency fees are 500€ for carrying out the campaign.the prices of your competitors (market research).
- The advertising cost is estimated to be around 1.000€ to be able to sell the whole lot.Your desired profit margin (pricing strategy).
- The purchase price of each shoe is 10€/unit and you buy a lot of 500 units (5.000€).
Thus, we can say that the total cost of this batch of 500 units will amount to €6,500.
To calculate the price per unit, we only need to divide the total cost by the number of units:
Price per unit = 6.500€ / 500 pcs = 13€/piece
Now we know the real cost of each shoe and we only need to define the profit margin.
This margin will depend on the market price, the pricing strategy defined, etc.
Let’s think that it was a very good offer that you got or that only you sell that model, so you can afford to put a very large margin, for example 150% (15€).
Therefore, if we apply the formula on how to calculate a selling price: Selling price =10€ + 3€+ 15€ = 28€/piece. Now we would have the selling price. Remember to apply the respective VAT that corresponds to the product or service.
How to price a product: types of pricing strategies
Keeping costs under control is essential to be sure that at no time are you selling below that margin.
It would also be very interesting to carry out a good price analysis before defining which strategy to follow.
In any case, here are some of the best pricing strategies you can apply:
Penetration pricing strategy
It is used to introduce a new product, applying low prices that will increase as your customers get to know it.
Promotional pricing strategy
Used to stimulate demand. Promotional prices are reduced prices that, on a temporary or permanent basis, are used to attract new customers or retain old ones.
Premium pricing strategy
Applied to luxury or high-end products. It is usually accompanied by strong branding and marketing efforts. They manage to associate a high price as a synonym of quality and prestige.
Psychological pricing strategy
This strategy aims to draw in the customer’s mind that the price is cheaper than it is. For example, put €99 instead of €100.
Batch pricing strategy
The objective is to sell a group of products at the same time, arguing that the price the customer will pay is lower than if these products were sold individually.
Price skimming strategy
Prices decrease as the product life cycle progresses. They are very useful for getting rid of older models or those with low turnover.
As you can see, there are many types of pricing strategies.
And think that here we have only named some of them.
You should choose the one that best suits your business or your specific objective.
You can also alternate or combine them. Test them until you find the perfect combination.
Now you know how to price a product?
Well, after reading this post, we hope that the next time you ask yourself “how much should I sell a product for?”, you will have the basics to be able to set its price.
Remember that doing it correctly is key to your business.
It can be difficult at first, but with the right information and a little practice, you’re sure to succeed.
And speaking of information.
Knowing at all times where you stand as a competitor is essential to be able to apply the pricing strategy that will bring you the most benefits at all times…
Did you know that Boardfy helps you increase your profit margin?
Boardfy is the fastest price monitoring and Dynamic pricing tool in the world. It is also equipped with artificial intelligence.
Thanks to Boardfy you will be able to:
Monitor your competitor’s prices in real time. the advertising cost is estimated to be around 1.000€ to be able to sell the whole lot.your desired profit margin (pricing strategy). Make the necessary price adjustments automatically to be the best competitor at all times (if your margin and your set strategy allow you to do so). Apply smart pricing strategies. Optimize your Google Shopping campaigns to lower your costs and increase your sales. Don’t believe it? Try us for free and then decide!
