Affect all the elements of the business to say it is no exaggeration to set the selling price of goods. It is one of the critical decisions to run a business. It’s a deciding factor in everything from cash flow to profitability and how much you can cover.
It’s easy to stick to your selling pricing strategy when launching a new shop or to establish a product, but your decision mustn’t interfere with your launch. The “best price” is what you get by actually selling the product to your customers, but in any case, you must first start selling at a reasonable price. Here, we’ll take up that theme as “Ask Shopify.”
Table of Contents
How Should The Selling Price Of a Product Be Set?
Every time I look up how to price a product, I’m always buried in a massive amount of articles and books. Is there a simple way to price a product? If not, what do you think you should focus on first?
Pricing affects every aspect of the business, so it’s no wonder that the amount of relevant material is huge. From managing your business’s money to positioning your products in the market (such as timeless products, custom-made products, or short-lived trending products ), there are many things to consider. Furthermore, online sales sites (English) Do not have to think about what makes a profit. Pricing is a strategic decision that is key to your business, requiring both rational and creative thinking.
However, setting the selling price of a product is not a one-time decision.
If you want to find the right selling price for your product, you can also set a quick and straightforward starting price. Also, you don’t have to use the selling price you adopted at the time of launch forever.
To set the starting price, add up the costs required to sell the item and add the profit margin. It’s no wonder some people think that’s too simple. So let’s take a closer look at how prices work.
Setting a selling price is not a one-time decision.
Why This Selling Pricing Approach Works
The most crucial factor in the selling price is that the business’s survival depends on the selling price. Pricing that causes losses or raises unsustainable rates of return makes it difficult to grow and expand your business.
Other factors to consider when pricing include selling prices compared to competitors and the significance of pricing of sale strategies concerning business and customer expectations. But before you worry about that, the first step is to set a sustainable base price.
How To Set The Selling Price Of a Product
- Add variable costs (by-product)
- Add profit margin
- Don’t forget to consider fixed costs
Calculating the selling price of a sustainable product requires three simple steps:
Add variable costs (by-product) First and foremost, it’s essential to know all the costs involved in selling your product.
If you are purchasing products for sale, each product’s purchase price is simply the product cost.
If you are manufacturing a product, you will need a little more complex numbers. Calculate how much a certain amount of raw material costs and how many products can be manufactured from that fixed amount of raw material, and estimate the product cost for each product.
The important thing here is to remember to consider the ” working hours” spent on the business. To convert time into expenses, set the hourly rate you want to earn as a business and divide that amount by the number of products you can manufacture within an hour. To set a sustainable price, make sure that the time spent on such labor is included in the price as a variable cost of the product.
Below Is An Example Of the Costs That Can Be Incurred For Each Product.
Commodity cost – 325 yen
Manufacturing time – 200 yen
packing – 178 yen
Promotional materials – 75 yen
delivery – 450 yen
Related fees – 200 yen
Total Expenses By-Product 1,428 yen
In this example, the cost per item is $ 14.28.
Are you wondering what promotional materials to use to promote your product? The most common in e-commerce are marketing materials and additional gifts that upgrade the packaging and opening experience of e-commerce products.
Add The Rate Of Return.
Now that you have calculated the total variable costs for each product, let’s look at corporate profits.
For example, suppose you want to add a 20% rate of return to the variable costs for each product. When determining the rate of return, it is essential to consider the following two points.
- Fixed costs are not yet included at this point. So keep in mind that other costs must be covered in addition to variable costs.
- When setting prices, you need to consider the price range of the entire market and make sure that the price, including the profits you set, is “acceptable” in that market. If the set price is about twice as high as a competitor’s price, it may not be easy to increase sales depending on the product category.
- Once you have the numbers you need for pricing, divide the total variable costs by (1 – the desired rate of return in the minority). For example, if the expected rate of return is 20%, it will be 0.2 in decimal notation. Divide the variable cost by ” 0.8 “, which is the sum of 1 minus it.
In this case, the item’s base price is $ 17.85 and can be moved up to $ 18.00.
Target price = (variable cost by product) / (1 – desired rate of return in decimal notation)
Don’t Forget To Consider Fixed Costs
When pricing, be sure to keep in mind that there are other costs to consider in addition to variable costs.
Fixed costs are the costs that are indispensable to business operations and must be paid no matter what. Whether you sell 10 or 100 items, the price doesn’t change. And the goal here is to cover that amount with the sales of the product.
How to incorporate fixed costs when deciding the unit price of a product is very difficult. So, as one of the simple approaches, you can enter the already calculated variable costs into this “break even point calculation spreadsheet.” To edit the spreadsheet, select File> Make a copy to save the File that only you can access.
With this spreadsheet, you can see fixed and variable costs at once and know how many of each product you need to sell at the set unit price to reach the breakeven point. By adopting these calculation methods, it is possible to determine a well-informed and balanced price that is manageable and competitive while covering fixed costs.
Practice a breakeven analysis to when, from being careful, up to the editing method of how to interpret and numbers, why not examine all of you should know that.
Actually, Release And Try The Selling Price Repeatedly.
Don’t hesitate to set up a shop because you’re afraid to set “wrong” selling prices. Selling price settings evolve with your business. If the selling price covers the cost and makes a little profit, you can try the price and adjust it accordingly as you proceed with the company. Sometimes price comparison (English) was carried out, it would be good to make sure it is working.
The key to setting selling prices is finding prices that help you build a sustainable business. By practicing this approach, you will be able to find reliable prices and be confident that you will launch new shops and new products. And with the feedback and data we get from our customers, we will be able to modify our future pricing strategies.