How to calculate the price of a product in 4 steps

How to calculate the price of a product in 4 steps

How to calculate the price of a product

Learning how to price a product is critical to the financial health of your business.

Setting a very low value may make it difficult for you to cover costs and make a profit. If you set a very high value , it can scare customers and face market instability.

Fortunately, there are some easy methods to determine the sale price . In this article, you will find the main theories behind the figures and a step by step to put the sales formula into practice .

Methods to determine sale price

How to calculate the price of a product? This depends on the theory you adopt. Based on consumer theory and marketing studies , we highlight three types of strategies you can use.

1. Gross Profit

Common among retailers and wholesalers, this method calculates the price of a product by multiplying the purchase cost by the percentage of profit you want to make. Then, the result obtained is added to the purchase cost.

Sales formula example: gross profit

Suppose you own a clothing store and buy t-shirts from a wholesale company for $ 5 a piece. You decide that the percentage of profit of a product in your store is 40%. Based on gross profit, you must:

  • Multiply the purchase cost ($ 5) by the profit percentage you defined (40%). This is $ 2.
  • Then add the cost ($ 5) to the profit ($ 2) and get the selling price. This is the total the customer will pay: $ 7.

2. Perceived value

When reflecting on how to calculate the price of a product, some brands choose to adopt the perceived value strategy. It is the practice of setting the price based not only on the product and its costs, but on the experience it allows to have .

It is very common with luxury companies like Tiffany, Chanel, Balmain, and others. In this case, there is no specific rule on how to perform the calculation. The important thing is to offer an unforgettable experience.

3. Social orientation

Some products, although they are legally marketed, are not recommended for consumption. This is the case with cigarettes and alcoholic beverages, for example.

In these cases, learning how to calculate the price of a product can be a bit more complicated, since you must take into account specific government fees.

They are usually high and raise the final price, as their goal is to discourage specific social attitudes and behaviors.

How to calculate the price of a product?

Follow this step by step to determine the sale price of your products and services with ease.

Step 1: Discover the variable cost per product

To learn how to price a product, start by identifying the costs involved from sourcing to marketing.

If you buy your products from other companies, you probably already know how much each unit costs you. If you create your products on your own, you should examine the cost of raw materials, packages and the labor time invested to make them.

If you are in doubt about how much your time is worth, try setting an hourly rate. Then divide that number by the number of items produced in that period to get the cost of your time per unit produced.

Example of variable costs of a product

Unit cost of the product (produced by you or purchased from a third party) 4 dollars
Production time 2 dollars
Packaging 0.50 cents
Promotional materials 0.25 cents
Shipment 7 dollars
commissions 3 dollars
Total cost per product $ 16.75

Step 2: Set the profit margin

As the name suggests, the markup is the percentage of profit on a product . Let’s say you want to obtain a 20% profit on the value of the variable costs that we calculated in the previous item.

Take your total variable costs and divide them by 100% minus your desired profit margin, expressed as a decimal. For a 20% profit margin, you will divide your variable costs by 0.8.

In our example, the account would look like this: 16.75 ÷ 0.8 = $ 20.9375. You can round this value up to $ 21.

Step 3: Identify fixed costs

Keep in mind that so far the price of the product that we calculate only covers the variable costs and the profits that you want to obtain. We haven’t put fixed costs on the tip of the pencil yet.

Fixed costs are the expenses you have to pay no matter what happens , and they stay the same whether you sell 10 or 1 million products.

Rent, water, electricity, internet are just some examples of values ​​that you should include in your sales formula when you learn how to calculate the price of a product. Here is a formula:

Minimum product price = Fixed costs ÷ (average product price – variable costs)

Step 4: Compare the prices adopted by the competition

Once you have learned how to calculate the price of a product and found a value that makes sense for the reality of your business, it is time to look at the market.

Compare the value of your items with that of the competition and make sure you are within the average. If your price is lower, consumers may be suspicious of the quality of the product. If the price is high, they may be discouraged from buying.

Put your sales formula into practice with Zendesk

According to Zendesk’s 2021 Trends Report , 65% of consumers want to buy from companies that facilitate online transactions and allow them to be fast.

And more:  7 out of 10 people are willing to spend more on companies that offer them a good customer experience .

If you want to drive profit and satisfaction with your business at the same time, Zendesk’s customer service solution can help. With that tool you can:

  • Provide support on your customers’ favorite channels;
  • Offer a personalized experience at all points of contact;
  • Manage and answer queries from a single interface;
  • Get reports and analysis on the behavior of your audience to make better business decisions.