Abstract / Resumen
Calculating the selling price of a product is an extremely important task, but it is not always easy. When it comes to setting the price for an imported item, the job can become more complicated, because not only do formulas have to be applied, but a number of determining factors have to be taken into account.
Contrary to what we sometimes believe, the selling price of a product is not set for the sole purpose of making sales. Remember that your products must be profitable. Putting a product on the market without sufficient profit margin may initially increase your sales volume, but it will not allow you to achieve your desired goals.
Regardless of whether your sales are to wholesalers (B2B) or end consumers (B2C), there are a number of factors to consider when calculating the selling price of a product and, of course, the first thing to consider is the cost of production.
What costs does the product incur?
The first step in pricing a product is to know how much it costs me to produce or buy it. To be clear about this aspect, it is necessary to take into account both direct and indirect costs, since in one way or another they affect the company’s investment.
The direct expenses associated with the product are those that clearly derive from its purchase and/or manufacture; for example, the cost of the raw material, transport to the warehouse, the logistics of getting it to the customer, the packaging or the marketing campaigns necessary to attract sales. In addition, in the case of imported products, we cannot forget to include the sourcing agent’s fees or the expenses derived from currency exchange or customs, among other factors.
As for indirect costs, this is a very broad group that not all companies want to take into account when calculating the price. This group includes, for example, the payment of taxes, the cost of maintaining an e-commerce operation or the invoices for our company’s supplies, among others.
It is important to bear in mind that, whatever formula you choose, you cannot establish the price of a product without knowing its unit cost, so it is important to dedicate time to this first step.
Calculate on gross profit or contribution margin basis
Generally speaking, there are two ways of calculating the price of a product: the gross profit method and the contribution margin method. Each company will choose the one that seems most appropriate, but it must be borne in mind that the figure that comes out of these calculations is an approximation that must be rounded based on other business and market aspects.
The gross profit method is based on the idea of establishing the profit margin that should be charged to the product; in other words, the desired profit margin is established (which is determined by the country, the sector, the target public, our position as a company, etc.) and the cost of the unit purchase (or production) of the product is added to it.
The contribution margin method is approached quite differently and starts from the question of what percentage of profit we want this product to make for our company. Based on the answer, we calculate the price of the new product (contribution margin = price – costs generated by the sale of the product).
Other aspects to be taken into account when determining the price
As you can imagine, beyond the mathematical operations that allow us to deduce at what price we should sell our products, it is necessary to use common sense and, of course, to have previously carried out a good market study.
Different aspects must be taken into account, from the current position of our brand (it is not the same to sell a product when we have a powerful branding strategy as when we are unknown) to very decisive factors, such as the competition or the profile of our target audience (the buyer persona).
The final selling price of our product will also be influenced by something as variable as supply and demand; in fact, these factors can vary the price of our catalogue over time, as it is not the same to sell a product in high demand when there is hardly any competition as it is to sell an article for which there are hardly any orders.
Finally, and equally important, we must take into account what value our product brings to the market, and we are not only talking about how it manages to satisfy the consumer’s needs, but also how our company contributes to increasing its added value (for example, with personalised manuals or tutorials, with a telephone after-sales service or with an extended warranty).
As we have seen, setting the selling price of a product is a task that, in some cases, can be very difficult. Finding the balance between a fair, competitive and profitable price can be one of our biggest challenges when introducing a new product to the market.