The selling price is a determining factor in the commercial relationship. It should not be decided randomly, but with regard to the reality of the market and the added value provided by the product or service. The selling price must therefore be set as accurately as possible in order to satisfy the consumer and allow the company to be profitable.
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Determining the right price is not always easy, so it is essential to be familiar with the different methods of calculating the selling price which, in parallel, will also influence the margin generated by the company.
What is the sale price?
The selling price refers to the value of a product or service, namely the amount that the consumer will have to pay if he wishes to acquire it. It is set by the company and must be sufficient to cover production-related expenses. It is generally expressed in monetary unit such as the euro or the dollar.
Formula to calculate the selling price
To determine a selling price, the company has several possible choices. It can decide to base itself on the cost of production (or design) of its product or service and on the profit which it wishes to obtain.
In this case, the unit selling price = (unit cost price + desired gain) x (1 + VAT).
Example: a company produces 1,000 pens with a cost price of €10 excluding tax per unit. It needs €200 gross margin to operate.
The unit sale price will be equal to: (€10 + [200 ÷ 1 000]) x 1.2 = €12.24.
In some areas of activity, it is not always possible to rely on a stable cost base. In this case, it is preferable to set the selling price according to the gross margin rate necessary for the proper functioning of the business.
The unit selling price = purchase price excluding VAT x (1 + gross margin rate) x VAT.
Example: a company wishes to apply a gross margin rate of 20% to a product purchased for €10.
The unit sale price will be equal to: (€10 x [1 + 0,2]) x 1.2 = €14.4.
Finally, there is a last method which consists in applying a multiplier coefficient to the purchase price to obtain the selling price of the product or service. This is calculated according to the margin that the company wishes to obtain.
The unit selling price = purchase cost excluding tax x multiplier coefficient.
Example: a company buys a product at €100 and wishes to obtain a gross margin of €20, the multiplier coefficient will then be 1.2.
The unit sale price will be equal to €100 x 1.2 = €120.
How to set the selling price of a product or service?
Define the marketing strategy
The first step in setting the selling price of a product or service is to define the company’s marketing strategy.
It may be a question of positioning oneself in a new market with the desire to quickly acquire market share or of maximizing profits by seeking to generate a comfortable gross margin. In these two cases, the pricing policy will be different.
At the end of this first phase of reflection, the company must have determined to whom it wishes to sell and how it wishes to place itself in its market (leader, expert, premium or even inexpensive).
Study the prices of the competition
Studying the prices charged by the competition makes it possible to determine a fair selling price to attract the consumer.
For this, it is necessary to know all the market players and the prices they charge for products similar to those of the company.
Indeed, a price higher than that of competitors risks being prohibitive for the customer accustomed to a lower price, while a lower price will certainly attract the consumer, but this could also cause the company to lose money. could have sold for more.
Of course, this is only valid if the products have the same characteristics as those of the competition. If they have competitive advantages and provide real added value, then it will be possible to market them at a higher price.
Know the psychological price
The psychological dimension plays a determining role in the act of purchase. When two identical products are sold at different prices, it would be logical to think that the consumer will turn to the cheaper product.
However, this is not always the case. Very often, in the mind of the customer, a more expensive product is considered to be of better quality, while conversely, a product sold at a lower price is perceived as of lower quality.
It is therefore important to define the psychological price, that is to say the one that the consumer will deem adequate according to the quality that he expects of the product.
Estimate the cost price
The cost price corresponds to the sum of all the expenses incurred to create a product. It is therefore a question of knowing well:
- The cost of purchasing raw materials.
- The production cost.
- The distribution cost.
- The cost of promotion.
The calculation of the cost price is an essential element, because it corresponds to the minimum price below which the company must not go if it wishes to remain profitable.
Set the right price
The last step is to take all the elements and determine the right price of the product or service.
It should be set:
- Depending on the demand and the supply already present on the market.
- By ensuring that the cost price is covered and that the margin generated is acceptable.
We must not forget that the price of a product can vary over time if the results are not there, for example. In this case, it will probably be revised downwards and the company will have to renegotiate with the suppliers so as not to impact its profitability too much. The price can also be increased if the product brings real added value to customers.
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