Business

How to calculate the right price for a product

How to set a price

The right price is crucial! Too high or too low prices for your offer will harm your business in the long run so you need to calculate the right price for a product. You have an idea for a great product that you want to bring to the market and wonder at what price you can offer it? How do you calculate your selling price correctly, what is your profit margin? These are the questions that every founder asks himself at the beginning of his independence.

1. What is price calculation?

Whether it’s a boutique, carpentry or café– if you want to open your own shop and run it successfully, you need to calculate reasonable sales prices to see a plus in your account at the end of the day. If you rely solely on your gut feeling when calculating the price of your selling price, or if you are too competitive, you run the risk that you will not end up doing enough with your selling price. Be it because it is too high and therefore customers do not buy. Or it’s too low and you don’t work to cover costs. The price calculation can therefore gladly put one or the other stone in the way of founders, because there is a lot to consider. So take sufficient time for the quotation calculation.

A good price calculation is everything

Do you want to achieve a reasonable profit margin with your business? Then to calculate the right price for a product is indispensable. The price of your products or service should be attractive to your potential customers, but of course also competitive and ultimately yield profit for you. The following questions will help you calculate your pricing:

  1. What price does my target group expect?
  2. Is there a minimum price that my product or service must have?
  3. What is the price of my competition?
  4. How is my offer different from that of my competitors?
  5. Is my target group receptive to threshold prices and discount promotions?
  6. What additional costs do I have to calculate in the sales price?
  7. Can I save costs at one point or another in order to reduce the price?

In the next sections, read about how the price calculation for catering, craftsmen, products and service providers is done in detail and what you should pay attention to when calculating the selling price.Tip

Calculate the right price for a product even if you do not have room for manoeuvre for pricing. You get transparency, know where you stand, and can implement improvements at an early stage.

2. The 3 calculation models of the price calculation

In the past, to calculate the right price for a product was a very cost-driven affair. But now the marketing experts are also speaking a crucial word, because a price too high can destroy the entire image of a company, and the pricing can be influenced by a few marketing tricks. The three classic methods of price calculation are divided into:

1. Demand-oriented pricing

The price is based on the response of the customers in this price calculation. This method asks potential buyers how much they would be willing to pay for your product. However, the data collection is extremely vague and not meaningful enough. Because when you ask someone personally what the amount to be paid looks like, the answer is usually more generous than it really is. That means you basically don’t want to know what your customers would be willing to pay, but for what price they are actually buying.

With this variant, it is difficult to access reliable data. Because the price of the product is based on the estimated value of the customer, regardless of cost aspects. It is therefore not recommended to rely specifically on this quotation calculation.

2. Cost-oriented pricing

Normally, it is about the maximum price a customer would pay for a product or service. However, cost-oriented pricing turns the tables: this is where the minimum selling price at which a company can sell its own product is sought. Here, great competitiveness is a great advantage over the other methods. The product immediately appeals to customers who buy directly. However, the company must first achieve some sales success in order for production to be profitable at all. In addition, the company has little to no potential to respond to a downward spiral in the market, as the price is already exhausted.

The priceis therefore based on the cost of the product. But if things don’t go well, there’s also the fact that no one is willing to buy the product at that price, or that the market would accept a much higher price.

3. Competitive pricing

When a product is introduced that is available in a similar form on the market, most entrepreneurs often follow competition and try to undercut it in order to make it more attractive to customers. Of course, customers find the new price for the supposedly almost identical product positive, sales are increasing and the company’s image is improving. But of course your competitors also get that and react with price reductions. A so-called downward spiral is set in motion, from which it is difficult to escape again. Some people try to escape the pricing policy and offer special discount promotions instead.

This pricing is therefore based on the prices of the competitors. Especially for new start-ups, the prices estimated by the competition can provide important clues for pricing. But you should always think about your costs and your effort. Compare offers and whether your sales prices are realistic.

Which pricing model is right for me?

The question is not so easy to answer. Unfortunately, companies do not have too much room for manoeuvre when it may be price-making, because prices are usually set by the market. however, it should be noted that in your pricing calculation you should try to take all the pricing methods listed here into account at the same time and appropriately

Our tip: approach the price calculation pragmatically, as they have only a limited influence on factors such as the purchase price. Just as little as the image and brand factor, where you can only build up limited room for manoeuvre at first.

1. Price calculation for a product

The sales price is an essential element in your marketing strategy. Competition and cost play a decisive role in the quotation calculation.

You must your calculate your costs for the planned sales quantity. This is how you get the cost. You can then add your targeted profit margin. In the next step of pricing, you can also consider discounts and discounts. 

After that, however, you should compare the sales price determined in the price calculation with the price of the competitors. Product positioning is helpful. If your price is higher than that of your competitors, without your offer offering any added value, you will hardly be able to enforce the price. Since the price calculation is based on Excel, you can simply play with the individual control variables and make a new quotation calculation.

2. Price calculation for services

If you are not selling products, but primarily services – i.e. your working time such as as a designer or consultant – you should approach the calculation of the selling price differently. Personnel costs must be taken into account and you must not forget that you also have to invest time in marketing. You should consider these and possibly other costs when calculating the price of services.

3. Price calculation in the creative and arts sector

The same applies to the quotation calculation in the craft sector. In addition to personnel costs, however, material costs often play a major role if you want to calculate the price. Craftsmen should also take into account that not all hours can be charged in full.

4. Price calculation in the catering sector

Know your costs: Especially in the catering sector, you should not neglect a correct price calculation. It is therefore very important that you calculate the prices of food and drink correctly if you want to be successful. And this should be done regularly, because the price calculation should be subject to constant review and adjusted.

Don’t just look at what your competition is doing and never accept their prices unchecked on the assumption that they have calculated correctly.

5. What factors do you need to consider when selling the selling price?

In addition to the correctly calculated price, the price calculation and the final sales price also depend on other factors that you should consider.

Once you have determined your sales price, you can trim it from a sales psychological point of view. For example, if your calculated price is 12.34 euros, you round up the price to 12.99 euros if possible. In the best case, you can try to estimate a higher price for each of your products than the price calculation results. Of course, you may be surrounded by many competitors, which can force you to lower your prices so as not to lose customers. If this is the case, you should check which screws you can turn on to avoid losing. Due to seasonal fluctuations, you may need to change your prices a little. Here you should try to raise the prices at season time significantly above the calculated price and in the low season not to go more than 20-30% below the calculated selling price.

There are products, such as picture frames, where low prices work because the consumer is so used to them. The situation is different, for example, with watches. When selling a Rolex, consumers expect high prices, and anything else would quickly arouse mistrust in terms of quality. So calculate right at the beginning to avoid image damage later, because you turn at your price every few months. Because to bring products to the market that do not yield any profit or lead to loss for you in the long term, you should avoid doing so.

Also important: the competitive analysis. Your competitors in the market play a major role in your pricing. Orient yourself to them, you may notice that your initially calculated price is not competitive at all. If this is the case, you can try to squeeze the cost or profit margin. In addition to your competition, you should always keep an eye on your target group. Depending on how you align, whether international or more local, you should pay attention to what your audience wants.

6. Competitive? 3 tips for your pricing 

In addition to the cost side, you must of course also not forget the competition. Is the price you have determined realistic and competitive? Would customers be willing to pay this price and can the price compete? Compare with competitors! If the determined price is too high, there are various adjusting screws:

  • Increase in sales: If you can increase your utilization by e.g. 10% by a price reduction (e.g. special discount) of e.g. 5%, then the price reduction is worthwhile.
  • Reduce costs: Consider where you can save costs if necessary (especially on the personnel side; if necessary, performance-oriented compensation makes sense for the staff)
  • Reduce profit margin: You may need to adjust your profit expectations to remain competitive

Tip

To find the optimal price, create a bankable financial plan, and business plan through pricing, you can use the help of an experienced consultant. The consulting services are supported by up to 80%. 

7. Errors in pricing that you should avoid

Price calculation is not easy, especially for new start-ups, which is why critical mistakes are often made in the initial phase. Probably the most common mistake is to only give estimates a la “that’s fine” – this is exactly the strategy that puts you in the wrong direction and, in the worst case, can break your neck. Don’t set your price unthinkingly “out of your belly”.

In addition, you must not forget to include costs for personnel, cost, etc. in your price calculation. Otherwise, you will be appalled and in the end there will be nothing left of the previously determined profit. Another mistake that is made is the igoring or even copying of competitors. Always find out which prices are well received on the market. But at the same time, be careful not to copy prices blindly. You need to find your own pricing strategy to establish yourself on the market. In this context, however, always remember that a competitor can come at any time, who undercuts you in the price and thus “snaps away” your customers. Prepare for such cases and have a plan ready for how to keep up with the market and where you can still screw in your pricing.

And last but not least: make realistic assessments. All entrepreneurs expect a high profit in their price calculation. But don’t set those expectations too high. It’s better to start small and get off to a good start, rather than demand too much and sell nothing.

8. No profit without price calculation

We now need to define a pricing strategy. The correct pricing of your products is of great importance, because ultimately it is responsible for ensuring that customers buy and that a decent profit remains for you.

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