How to price a product: Basic calculation formulas

Pricing your products is one of the most important decisions you'll make as a small business owner or entrepreneur. You don't want to lose money, but you don't want to overprice your product and drive customers away either. Before looking into the different pricing strategies and tactics, it is essential to understand the basics of pricing.

How to calculate profitable and attractive prices

Pricing decisions require careful consideration and understanding of basic price calculation formulas. An inappropriate price can result in loss of customers and low-profit margins.  By setting the right price, you can retain customers, improve profit margins, and positively influence the overall success of your business. Here are five easy and simple steps for setting prices based on costs and desired GM. Steps 2 and 3 can vary depending on your chosen pricing strategy. 

Step 1 Calculate your costs

Begin by understanding all the costs of your produt. This includes production costs, labor costs, packaging, shipping, overheads, and any other related expenses. Once you have all costs identified, you can determine your Cost of Goods Sold (COGS)

Read more on calculating costs:
The cost Analysis guide: Understanding expenses and pricing structures

Step 2 Decide on your profit margin

The profit margin is the amount of profit you want to make for each unit sold. It's usually a percentage of the COGS. This percentage may vary depending on your business objectives, competition, and market demand. It's important to do market research and understand the profit margins of other similar products.

Read more on different pricing strategies:
Pricing objectives are a roadmap to profitability | Academy 4 Pricing
Most common pricing strategies | Academy 4 Pricing 

Step 3 Determine your selling price

Once you have your COGS and profit margin, you can calculate the selling price of your product and create price lists. This is done by adding the cost of goods sold to your desired profit margin percentage. Your selling price should not only cover your costs but also generate a profit for your business.

Read more on different options how to set the price:
Understanding customer willingness to pay: A Key to profitable pricing

Step 4 Consider discounts

Discounts can be used to increase sales or clear inventory. It's super important to have a clear understanding of how these discounts impact your business's profitability. Too many discounts can negatively impact your business by decreasing profit margins. You should be carefull in giving discounts to ensure sustainability of your business. 

Step 5 Review and adjust your prices

As the market changes, so should your prices. Monitor your competition's prices, change in costs, and customers' demand. You can adjust your prices accordingly to remain competitive.
 

Download Top 5 formulas workbook

Pricing your products can be a tricky process, but with a basic understanding of key calculations, you'll be able to come up with a pricing strategy that makes sense for your business. By calculating your selling price, markup, discount, and gross margin, you can ensure that you're making a profit while also remaining competitive. Our workbook answers the following questions with clear examples:

• How to calculate a selling price with 20% GM?
• How to calculate a selling price with a 20% markup?
• How to give a 10% discount?
• What is the GM%?
• How to increase the GM by 10%?

It is important to remember that pricing may need to be adjusted based on changes in costs, competition, and market demand. With some careful consideration and experimentation, you'll be able to determine the best pricing formula that fits your products or services!

Read more on cost based pricing: A guide to cost-based pricing for business owners | Academy 4 Pricing