Determining the selling price of a product is one of the crucial steps in running a business. The appropriate product selling price is the key to business success. If you set your prices too low, not only will you lose money, but your product could also be considered cheap and unreliable. On the other hand, setting prices too high risks losing market share.
So, how do you determine the correct selling price for a product? Find the answer here!
What is Product Selling Price?
Quoting the Product Marketing Alliance page, the selling price of a product is the amount that is charged or must be paid by customers to get a product or service.
The amount varies, depending on how much the customer is willing to pay, how much the seller is willing to accept, and how competitive the price is compared to other businesses.
And when it comes to product selling prices, you can’t separate it from pricing strategy—which determines the quantitative value of a product based on internal and external factors.
This has a direct impact on the overall success of the business, from cash flow, profit margins, to customer demand.
Why is setting the selling price so important?
To better understand why the process of determining product selling prices is considered crucial, here are several impacts that will explain it.
1. Business Profitability
As mentioned previously, a selling price that is too low can reduce profit margins and affect the product image. Meanwhile, setting a price that is too high can make the product difficult to sell.
2. Market Competitiveness
The selling price of a product can also reflect the value of the product itself. After being launched on the market and paired with other products, the selling price can determine market competitiveness, the direction of competition, and the ability to attract consumers.
3. Business Sustainability
Setting the right prices can help businesses operate healthily and remain competitive in the long term. This allows for larger and more profitable business growth.
4. Market Perception
Price can also influence consumer perceptions of product quality. Well-set prices reflect value and quality that meet consumer expectations—without underpricing or overpricing.
5. Marketing Strategy
Furthermore, how to determine the selling price will also influence how a business carries out its marketing actions. For example, by giving discounts, setting bundling prices, or using other promotions. Good pricing allows flexibility in promotions without hurting the business.
How to Determine Product Selling Prices
Pricing is a strategic decision that needs to be made carefully. In principle, it is about adding up all the costs involved and then adding the expected profit margin. In marketing science, this is called cost-plus pricing—one of the simplest ways to set product prices. To do this, please follow the following seven steps.
1. Calculate Direct Costs
Direct costs are costs directly incurred to produce products or provide services. This includes raw material costs and direct labor costs.
Direct costs = Raw material costs + Labor costs
2. Calculate Cost of Goods Sold
The cost of goods sold is the cost of producing products or providing services that are ready to be sold.
A simple way to calculate it is to add up direct costs with amortization costs or depreciation costs, and factory overhead costs.
COGS = Direct costs + Amortization costs + Factory overhead costs
Meanwhile, for wholesalers or distributors, HPP can be formulated as follows:
COGS = Direct costs + Inventory + Amortization costs + Facility overhead costs
Then, if you want to know gross profit, this formula can be used:
Gross profit = Total revenue – COGS
Next, you can use this to calculate gross margin with the following formula:
Gross margin = (Gross profit / Revenue) x 100
3. Calculate the Break Even Point
The break even point provides a good understanding of how to recover costs by selling products that have already been made. This provides information about how much sales volume must be achieved so that the company can reach the break-even point—not making a loss but not yet making a profit.
BEP = Overhead costs / Gross margin
Example:
Untung Group earned income of IDR 100,000,000.00 after selling 10,000 units at a price of IDR 10,000 per unit. Imagine if the company has a gross margin of 65% and overcharges of IDR 25,000,000.00. So:
BEP (in sales) = Rp 25,000,000 : 65%
= Rp 38.461.538,00
BEP (in units) = BEP (in sales) / Selling price
= Rp 38.461.538,00 / Rp 10.000,00
= 3.846 unit
This means that Untung Group was able to recover its cost of goods sold and overhead costs after selling products worth IDR 38,461,538.00 or the equivalent of 3,846 units. But remember, the company will not make a profit at this level of sales.
4. Determine Markup
Markup is the difference between the selling price and production costs and this is the source of profit from selling products or services. Markup is usually expressed as a percentage.
Markup is useful for ensuring that the company receives a gross margin that is high enough so that it is able to pay costs while obtaining targeted profits.
To calculate markup, you can use the following formula:
Markup = Gross profit per unit / Selling price per unit x 100%
Example, continuing the previous illustration:
It is known that Untung Group has overhead costs of IDR 25,000,000.00 and is targeting an operating profit of IDR 10,000,000.00. They also hope to sell 3,000 units, which is below their break-even volume if the selling price is IDR 10,000,000.00 per unit.
It is known that the cost of goods sold per unit is IDR 6,500.00 and the gross profit is IDR 3,500.00. This means, they have to set a higher selling price and recalculate the markup so they can get the expected operating profit. So:
- Step 1: calculate the current markup per unit
Markup = (Rp. 6,500.00 / Rp. 3,500.00) x 100%
= 186%
- Step 2: calculate the new price
Selling price = [(Rp. 3,500.00 x 3,000 units) + Rp. 25,000,000.00 + Rp. 10,000,000.00] / 3,000 units
= Rp 45,500,000.00/ 3,000 units
= Rp 15.166,00 per unit
- Step 3: check the new markup
Markup = (Rp 15.166,00 – Rp 3.500,00) / Rp 3.500,00) x 100%
= 333%
That way, to realize the expected scenario Untung Group needs to set a product price of IDR 15,166.00 per unit (with a markup of 333%).
5. Study Consumer Purchasing Power
Apart from using mathematical calculations as above, companies also need to study consumer purchasing power.
Is the selling price you set “able” to be paid by your target consumers? It’s true that it’s good if the profits are big, but what’s the point if the sales target is never achieved because your target market can’t afford it—because it’s expensive.
To get around this situation, there are two strategies that can be used, namely:
- Lower the sales volume target but set a higher price. This is suitable for exclusive items.
- Keep prices low but target larger sales volumes.
6. Study Competitors’ Strategies
Because competitors’ prices can have a direct impact on sales, it’s important to learn about your competitors. Including knowing what price they offer.
That will give you an idea of the current prices as well as some ideas for highlighting the unique selling points that you offer.
7. Evaluate Prices Periodically
The business environment continues to change, as do world economic conditions. Even though it’s not direct, this can influence your target market and the profit margin you expect.
Maka dari itu, lakukan evaluasi harga secara berkala dan cek apakah harga jual saat ini masih relevan atau mungkin perlu disesuaikan.
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