How to Calculate the Selling Price Correctly

How to Calculate the Selling Price Correctly.

One of the secrets to success in running a business is understanding how to correctly calculate the selling price of goods. This time we will learn how to calculate the selling price so that the business we are running can reap big profits and grow.

Your goal of running a business, of course, is to earn income. Of course, in earning income or money in selling products or services, the income must be sufficient to cover the costs incurred and must earn a profit, even to develop a business.

Our general tendency is that we want to sell goods at high prices and get a very large profit, can this be done? Of course, this is usually possible if you sell luxury goods; therefore, brand value is very important to increase revenue and profit.

If the item you are selling is in the Luxury category, Congratulations you are “FREE” to provide the selling price according to your brand value. Maybe you can sell ten or even 100 times the capital or the cost of buying/producing the goods you produce.

Read also: Differences in Purchase Order and Invoice, Definition and Benefits

This time we will focus on describing how to determine the selling price of a product and service in general. Determining the price per unit of goods or services, although it looks easy, in practice, it can be not easy, because generally there are 2 (two) challenges.

  1. The selling price is too low, with the low price we can sell more. But unfortunately, we can’t make more profit and even lose. This method occurs, for example, due to a miscalculation of costs incurred.
  2. The selling price is too high, automatically when we predict the selling price that is too expensive -because it is compared to other goods or other sellers. Our customers are not willing to spend as much money as you offer compared to the benefits they will get from the goods you are selling. Also selling goods is too expensive because you miscalculated your selling costs or bought goods from a more expensive supplier, so your capital price is higher than your competitors

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How to Calculate the Selling Price of Goods?

From the two cases above, it appears that determining the selling price is very important. It is closely related to the capital price or purchase cost, or the price of raw materials if you make a production such as selling food that consists of many raw materials.

Here are some ways to determine the selling price of an item:

Price Markup

Markup is usually calculated as a percentage of the product acquisition cost. The cost can be the cost of purchasing goods or services or a production cost.

The first step in adding a markup percentage to a product’s cost is deciding how much markup is for your benefit. Once you have chosen the markup percentage, determine the cost of the product, which includes the cost of the goods and the overhead if there are production costs, selling costs, general expenses, and administrative costs, including allowances for things like damaged goods and lost items.

Sale Price = Purchase Price = Purchase Price + (Purchase Price x% Markup)

The following is an example of calculating the selling price using the markup price method, for example, you have a Meatballs restaurant that costs 15,000 IDR for a portion, by calculating all costs such as raw materials (noodles, meatballs, spices), production costs such as employees, gas, electricity, rent. Place until the risk of the goods not sold. So if you want to get a 25% profit this means your selling price will be:

Selling price = 15,000 IDR + (15,000 IDR x 25%)
Selling price = 18,750 IDR

Thus you make a profit of 3,750 IDR per serving, then you multiply it by your sales target per day, per month and pay attention to this calculation whether you make enough profit selling 18,750 IDR per serving.

Read also: Definition of Stock Take Count and Its Purpose

Margin Price

We often use these words; what is the margin? So it is different from markup where our markup price adds a percentage to the acquisition price (capital). Still, the percentage price margin is obtained from comparing the selling price and the acquisition price (capital).

Margin pricing is generally used because we already know what price we want. But it is important to calculate the margin because to compare the selling price we are trying to determine the acquisition price so that our price is not too low because there is a lot of competition so that we lose or are too expensive so that it does not compete.
The following is the formula for calculating the margin price:
Margin = (Selling Price – Cost) / Selling Price

The example we will use is the same as the calculation example using the markup price method. The following example is calculating the selling price using the margin price method. You have determined that the selling price for the Bakso you want to sell is 18,750 IDR and the cost is 15,000, so the margin you get will be:

Margin = (18,750 IDR – 15,000 IDR) / 18,750 IDR
Margin = 0.2 or 20%

Keystone Prices

It is a pricing method in which merchandise is priced for resale at twice the wholesale price or cost of the product. In Indonesia, this method is often found in consignment businesses where the goods sold are stored in Department Stores.

The keystone price is the same as the markup, but the difference in markup value is very large, for example, the selling price is two times the cost of the acquisition or the markup is 100%. Even in certain industries, it can reach three times the cost of acquisition, this is not because you want to get a fold profit, but there are factors such as unsold goods that will be returned, resulting in excessive stock or cannot be sold. This risk becomes higher if the items being sold have a trend such as fashion-dependent fashion.

Read also: 3 Types of Accounts Receivable and Their Meanings You Should Know

Brand Owner Recommended Price

If you sell goods at a price recommended by the brand owner or called MSRP (Manufacturing Suggested Retail Price), that doesn’t mean you are following it. But you still have to calculate the cost of the item. Therefore, the calculation method that will be very helpful is to use the margin pricing method to know your profit. By selling at the standard price, you already know how much your competitors are selling.

Do all sellers follow the price suggested by the brand owner? Of course not, because if the retail business is run efficiently and can save costs, it can automatically sell at a more competitive price. But if your costs are too great and you have to sell above the recommended price, you should be careful because the customer may find out about these things and think you want to make a big profit. This will impact buyers from buying goods and affect the purchase of other goods because they think all the goods you sell are more expensive.

The several methods of determining the selling price that has been discussed should be used for each item you sell, and each can have a different valuation. For example, suppose you choose the markup pricing method, it doesn’t mean all the items you sell are at 25% markup. There may be a higher one because the item is selling well and is hard on the market, or no other competitor is selling. There are also items whose margins are very small because they are available everywhere.

The sales volume factor is of course no less important, it becomes a factor for determining the selling price, you can sell with a smaller margin, but the number of items sold is more so that in the end, your sales increase with profits which of course increase.
May be useful.

What is SAP Business One?