One of the things that is as valuable as manufacturing a product for businesses is pricing. Incorrect pricing can cause businesses to suffer losses or loss of customer and reputation. It is aimed to increase the sales figures and profitability by determining the correct selling price for the products. However, if the strategy is not formed considering all factors in price determination, it is possible to encounter an opposite effect. Therefore, businesses should be very careful about price determination. While determining the sales prices, the objectives of the business, the expectations of the customers and the market situation are taken into consideration.
Why Determining Selling Price is So Important?
The prices of the products are of great importance when it comes to the preferences of the customers. One of the things people focus most on when they decide to buy a product is price. Especially in an environment where competition is intensified and it is possible to find a large amount of the same product or similar, determining the wrong price strategy may cause damage. Therefore, a great sensitivity should be taken when determining selling price. Products that have higher quality than competitors’ products may remain due to sales errors and failures in price determination.
Setting a Selling Price Strategy
Enterprises should consider certain issues and set their strategies within the framework of these issues when determining selling price. It is possible to list some of these issues as follows:
- Knowing the Audience: What matters to customers is not always the low price. It is also possible to pay high prices due to the quality or brand value of the product produced. In this regard, the importance of knowing the customer base comes to the fore.
- Tracking Costs: In order to profit from the sale of a product, it must be sold at a price higher than the product cost. However, when it comes to cost, only money spent for production should not be understood. Salaries of employees involved in production, money spent on activities such as warehousing and marketing, and the budgets allocated for the distribution and logistics network are all included in the product cost. Therefore, making good cost planning is an indispensable part of determining the right price.
- Determining Profit Target: Enterprises should set a certain profit target according to the product they produce. This profit target should not be astronomical enough to kidnap the customer or cheap enough to give the image that the brand is of poor quality. Also, the profit target should be maintained and no compromise should be made unless profit is necessary.
- Making the Right Competition Analysis: In order to make the right decision when determining the sales price, it is necessary to analyze other competitors operating in the same market. Customers often search the prices of different companies regarding the product they will buy. In order to be prominent during this research, competitive prices should be determined.
You may also like; What is Variable Cost?
Formula of Selling Price
Setting a selling price for products is not a simple process that can be done by hitting labels on them. There are some formulas that are frequently used for price determination. It is possible to have the opportunity to determine the best price by using these formulas that draw their power from mathematics. However, while making this calculation, the profit rate determination and the sale price determination should not be confused.
The basic formula used to set prices for sales is to increase the purchase or production cost of a good by the amount of earnings. For example, to determine the selling price of a product that costs $ 100, the rate of profit must first be determined. Considering that this product will be sold with a 20 percent profit, it is necessary to first collect the cost and profit target (100 + 20) and then divide it by 100 to find the percentage. This percentage is multiplied by the cost of the product and the sales figure is revealed. The sales price for this product in the example is calculated as $ 120.
You may also like; What is Fixed Cost?