How To Price Your Product.How much is your product or service worth? Pricing a job is one of the most complicated tasks for beginning entrepreneurs.Charging cheaper than the competition may attract more customers, but the profit is compromised. On the other hand, charging more expensive reduces the interest of consumers and leaves your company in a more difficult condition of competition.
It is for this reason that prices should not be set without basing or simply copying what the competitor does. The final price must be fair and in order for you to assign this value you must take into account a number of variables.
How To Price Your Product
The first item you need to know about is variable costs. They are easier to identify, as they are usually directly related to the manufacture or purchase of the product. We say that they are variable because, according to the quantity, the values may vary.
For example: when buying 10 pieces from a supplier, each piece costs R $ 10; however, if you buy 20, the unit cost drops to R $ 9. Therefore, the base of your price is the unit cost of the piece, added to the freight value so that it can be delivered to your store. Your seller’s commission on the final price will also need to be considered.
2. Fixed costs
Since fixed costs are those that depend on the value of goods . They need to be covered even if the product in question is not sold. This is the case with rent, telephone, water, electricity and wages. All of these values need to be prorated and included in the cost of your product.
It is for this reason, for example, that many stores have higher costs on certain products compared to those that sell online. This is because virtual stores have lower costs with rent and wages , although they have other additional costs, such as servers and systems.
3. Tax regime
After considering your fixed and variable costs, you need to pay attention to your company’s tax regime . Different companies may have different taxes on the same product – and this is one more reason why you should not simply “copy” the price of another.
A simple example: a publisher, which provides a service to a customer, will collect 7% tax if its social contract indicates this as its main activity. However, a marketing agency, which is able to do a similar service, will have taxes that can reach 20%. These costs need to be taken into account when forming the final price.
4. Profit margin
Once these three factors have been considered, then you should have an almost set price. It’s time to think about the profit margin . The profit margin is the amount that you will effectively earn in a given transaction. All we’ve seen so far is costs.
So, if that R $ 9 product from our first example, adding fixed costs and taxes is now R $ 14, know that this is just cost. If you choose a 10% profit margin, then the R $ 14 becomes R $ 15.40, with R $ 1.40 being your profit.
5. Breakeven Point
This concept is not directly related only to the price of a product or service, but to your company as a whole. Every company must find out what its equilibrium point is , that is, the minimum amount that it needs to invoice every month in order to avoid losses.
For this, we add all the company’s costs – fixed, variable and taxes. The sum of your billing has to be, at least, equal to the costs for you to reach the break-even point. Billing below the breakeven point means losing money; bill up, profit.
After analyzing all the variables above it is time to look at the price of the competition. Let’s say that in your accounts you have found that the ideal price for an item is $ 17, but all your competitors are selling the product in question for $ 15. What to do?
It’s time to go back to your spreadsheet and understand your costs better . You may need to reduce operating costs to reach a lower value. Or it may be that your tax regime is not the most appropriate to compete in that market. By understanding how your price is formed you also understand where you can change to get higher margins or lower costs.
Formulas that help pricing
There are several ways to arrive at the final price of a product. Using established mathematical formulas is one of them. Note the following:
PV = Unit Cost / 100% – (% DV +% DF +% ML)
In the formula,
PV = selling price
DV = variable expenses
DF = fixed expenses
ML = profit margin
Let’s go to an example indicated by Sebrae. Consider the following indices:
- Product Cost = R $ 10.00
- Variable Expenses = 15%
- Fixed Expenses = 25%
- Value of Fixed Expenses / Total Sales Value – R $ 2,500.00 / R $ 10,000.00
- Profit Margin = 10%
Substituting the data in the formula, we have:
PV = R $ 10.00 / 100% – (% 15 +% 25 +% 10) = R $ 20.00
The best price is relative
When a company sells a product at a lower or higher price it does not necessarily mean that it is earning less or earning more. This is because we do not know how price formation occurs in each company. For that reason, simply “copying” someone’s price is not a good idea.
By understanding how a price is formed, we start to give more value not only to the services we provide, but we reflect on the internal processes that generate costs. Reducing costs is the dream of any entrepreneur , but to what extent is it possible to do this without losing competitiveness?
It is for this reason that it is important to know these concepts and apply them to your business. The more detailed and accurate you are in your calculations, the greater the chances that you will get fair prices and understand what needs to be done to become more competitive.