When creating a business strategy, it’s essential to understand how to calculate the selling price. The reason is that by setting the right selling price, you can maximize profits. However, if you make a mistake in determining the price, it could be very detrimental. To avoid confusion, let’s take a look at the formulas for calculating the selling price below.
Before diving into business, you need to know that the selling price is a formula or figure that is charged to consumers, where the value of the selling price is obtained by calculating the total cost of production, non-production costs, and the desired profit from the sale.
The following are several selling price formulas that you can apply when offering goods or services:
The first formula is the Break-Even Pricing. This calculation focuses more on market demand and production costs. If sales results exceed the break-even point, the business makes a profit. On the other hand, if sales fall below the break-even point, the business incurs a loss.
To use this method, you need to categorize costs into fixed and variable expenses, ensure that all items are sold and that the fluctuating cost per unit is consistent with the price of each product.
The second formula is Cost-Plus Pricing. In this formula, you first calculate the capital requirements and then add a profit margin to the total cost.
Generally, the surplus is calculated as a percentage, so in addition to the cost of raw materials, operational expenses must also be included in the capital component of the cost-plus pricing formula.
A simpler version of the formula is:
Cost-Plus Pricing = Capital + Desired Profit Percentage
The third formula is Mark-Up Pricing. This is similar to cost-plus pricing, however, the key difference is that in cost-plus pricing, the percentage is used to calculate the desired profit, while mark-up pricing involves determining the total profit or amount you want to earn as a business owner.
In simpler terms, the formula for mark-up pricing is:
Mark-Up Pricing = Capital + Desired Mark-Up
Also Read: Understanding Cost of Goods Sold (COGS) and How to Calculate It
The fourth formula refers to Manufacturer Suggested Retail Pricing (MSRP). This technique is commonly used in manufacturing industries such as electronics, vehicles, and others.
This method does not need you to do complicated calculations, rather, you simply follow the retail price suggested by the manufacturer. However, there are still recommendations regarding the prices that should be offered to customers.
For example, distributors like retailers or dealers can increase the selling price to achieve higher profits.
The fifth formula is based on Market Pricing. This method is where the necessary capital to offer a product or service is used as the main reference point. The market price is the cost charged to customers when purchasing similar goods or services in your area.
The sixth formula is Value-Based Pricing. This formula emphasizes the value or purchasing power of potential customers, however, this method is more challenging as it lacks clear information on the price that customers are willing to pay.
Therefore, you need to conduct research or surveys with potential consumers. If you don’t get clear answers, you can start by offering your product at a high price.
If potential buyers are not comfortable with the price, they can negotiate. This method is commonly used in selling antiques or unique items, such as art or vehicles from a private collection.
The seventh formula is Keystone Pricing. This formula involves selling at twice the cost price. This method may seem greedy, but many retail businesses use it to maximize profit.
However, you need to be cautious when using this technique, as if the product doesn’t meet the high price set, customers may become dissatisfied and leave bad reviews for your business, which could potentially harm your business's reputation, especially if it’s still new.
Also Read: The Easy Way to Create Financial Reports for MSMEs
Internal factors that affect the selling price formula include the cost of producing goods or services. Simple examples of this include the cost of employee wages, operational expenses such as office electricity bills, and raw materials. All of these factors impact the final pricing of the product or service.
External factors are elements outside the control of the business or the person setting the selling price. These usually include factors like:
These are just some factors on how to determine the selling price for a product or service when running a business.
To avoid losses, it is crucial to calculate the selling price accurately, because by doing so, you can maximize the profits your business generates. Moreover, to support the growth of your business, ensure that you use a digital-based system for managing it.
In this case, you can use Youtap POS, a digital cashier application from Youtap Indonesia, to streamline your business management.
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e-mail: halo@youtap.id
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Direktorat Jenderal Perlindungan Konsumen dan Tertib Niaga Kementerian Perdagangan Republik Indonesia
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