How to calculate selling price for your products

It’s daunting when calculating selling price and finding that sweet spot. This article will help you tackle this challenge and find the best pricing strategy for your manufacturing business.

Leather manufacturer learning how to calculate selling price on her shop floor.
Published: 22.10.2021

This is one of the hardest things to get right in any business.

You’ve worked hard manufacturing your goods, and your items are ready to hit the market. But, when it comes to the price you’ve set, are you undervaluing your goods? Or are you way overpricing them?

Failing to get your pricing right can drive away customers and conversions on your e-commerce site.

That’s why we’ve put together this article so you can learn how to calculate the selling price of a product.

The longer you leave this question unanswered, the longer you’ll be losing money. Setting the right price is essential since your efforts will be undone by not focusing on this. By the end of this article, you’ll be able to calculate your selling prices and the best techniques for implementing them.

How to calculate selling price with Katana

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How to calculate selling price of a product

  1. What is selling price?
  2. What is the average selling price?
  3. How to calculate selling price of a product formula
  4. Types of selling price calculations
  5. How to find the best pricing strategy
  6. Pricing strategy case study
  7. Pricing strategy quickfire tips
  8. Combine a great selling price strategy with production software
Grocery store with shelves filled with products and their selling price is clearly highlighted.

What is selling price?

The selling price, be that of a product or service, is the customer or client’s final price.

It’s extremely important to know how to calculate selling price because if you don’t make a profit while also securing a position in the market, your business will not survive. In short, successfully knowing how to calculate selling price of a product is a win-win for you and your customer. If done right — they get a good deal, and you get a fair price.

For direct-to-consumer brands, there’s a chance you can charge more if your brand image is in high demand like many clothing brands do, such as Adidas or Nike.

Still, you’ll need a solid portfolio to back up your prices or a powerful marketing campaign.

Nikon cameras in a window or glass case display. They were showing prices to give you a clue how the sellers calculated their selling price.

What is the average selling price?

The average selling price (or ASP for short) is the price you charge your clients for your goods or service.

So, regardless of if you sell an item with 10 SKU variants or 100, you calculate selling price ASP by looking at the total revenue earned from those sales and dividing the amount by the total number of units sold. It’s critical to calculate your average selling price as it allows you to monitor trends and make predictions on the marketplace. If you’re a start-up manufacturer, it can be a great way to determine a pricing strategy.

Cost Price Vs. Selling Price

Cost Price: The price 3rd party sellers pay and incur for purchasing items from a manufacturer.

Selling Price: The amount the 3rd party sells the item to their customers.

NOTE: If you sell directly to consumers, you’ll be looking at the selling price too.

Stacks of pennies and some loose coins on a table.

How to calculate selling price of a product formula 

To cut a long story short, you’re always aiming to make a profit. Otherwise, your business won’t grow.

Now, the longer version. As a manufacturer calculating selling price, you’re going to need first to calculate your cost price, otherwise known as manufacturing costs, using this formula:

Cost price = Raw Materials + Direct Labor + Allocated Manufacturing Overhead

Let’s say the cost price of an item is $50.

The short answer is you need to charge more than this figure to make a profit. However, a rule of thumb is to add a 25% mark-up — a technique known as cost-plus or mark-up pricing. Your selling price formula will look something like this:

Selling price = Cost price x 1.25
SP = 50 x 1.25

In this case, the selling price would be $62.50. However, you need to consider other factors, such as:

  • Competitors prices
  • Are you selling premium or value products
  • Your marketing tactics
Keys of an antique cash register.

Types of selling price calculations

1. Planned profit pricing

Planned profit pricing combines your cost per unit with projected output for your business.

You can use it to work out if your business will be profitable at your current pricing strategy. If not, you can increase prices or increase output. The flexibility makes it suitable for manufacturing businesses.

2. What the market will bear (WTMWB)

This pricing charges the maximum (or very close to the maximum) for what the market allows.

If an item costs $100 to manufacture, and the most a customer will pay for it is $500 — this is the market limit. This is a pricing strategy that can lead to the highest profit margins. But beware — this is not a sustainable strategy — charging at the upper limits of what the market can bear leaves the field open for a wily competitor to undercut your prices easily.

In short, it leaves you vulnerable to your competitors’ pricing strategy.

3. Gross profit margin target (GPMT)

After you know how to calculate the selling price, you can work out the GPMT of your business.

Say a company has $10,000 in revenue, and the COGS is $6,000. $10,000 minus $6,000 leaves you with a $4,000 gross profit. Dividing this with the original $10,000 leaves you with a gross profit margin of 0.4.

Many manufacturing businesses aim for a GPMT of at least 20%, but this depends on your industry and costs. You can use this metric to analyze progress to your ideal gross profit margin and adjust your pricing strategy accordingly.

Gross Profit = Total Revenue – Cost of Goods Sold
Gross Profit Margin = Gross Profit / Revenue

4. Most significant digit pricing

This is why a retailer is more likely to price a product at $19.99 rather than $20.00.

Customers are more likely to make a purchase when it is $19.99 because our brains tell us — “This is less than $20.00? it’s a bargain.” Other industries tend to use this technique, such as those in real estate. You can try it yourself.

Take the previous price of $62.50. Would $59.95 be the more enticing price that leads to higher profits?

How to find the best pricing strategy

If your pricing strategy and your competitor’s pricing strategy are the same, then it’s like missing out on utilizing a helpful tool.

Like it or not, customers infer a lot of information about your business from your prices. Another thing — the results of price changes are not always linear. For example, a company could raise its prices by 1% and see overall profits increase by far more than that, even if demand remained the same.

The best strategy you can apply is a flexible one.

For example, WTMWB (What the Market Will Bear) is better during short periods when you need to recoup costs quickly, such as releasing a new SKU after a period of R&D. Cost-plus pricing is how to calculate selling price per unit. In contrast, GPMT helps you decide if this approach can scale up.

Once you come up with a suitable price, you can apply most significant digit pricing.

Commit to changing your price for a set minimum time and stick to that plan. Don’t keep changing prices, as this could reduce your customers’ trust in you.

Leather maker stood at workstation with laptop and bags looking pleased they learned how to calculate selling costs.

Pricing strategy case study

Let’s use the example of furniture manufacturers to illustrate the steps to finding a pricing strategy.

You know your manufacturing costs and resources spent, but is this enough to add a markup and call it a day? No. Pricing is contingent on the current state of the marketplace and where your products fit into it.

First, you need to understand your market.

Do all the research you can on the criteria of furniture pricing. These could be:

  • Direct-to-consumer prices
  • Wholesale prices
  • Consignment prices
  • Any area that deals with selling furniture

You need to figure out how your product fits into the current landscape.

It’s good to set a minimum price that you will not go below. If you think of boundaries like this, it helps you think clearly in the stressful tasks of pricing and negotiation. Don’t undersell yourself or go below your minimum price.

Cakes on store counter with prices clearly labeled and workers busy in the background.

Pricing strategy quickfire tips

  1. Have a strategy, and stick to it
  2. Use pricing analytics to record market trends and predict future market changes
  3. Look at the whole picture, not just on a transaction-by-transaction basis
  4. Adopt a value-based approach to customer satisfaction
  5. Don’t use a one-size-fits-all approach to pricing. Be adaptable. Create pricing plans and product variations for customers with different needs
Coffee manufacturer in warehouse stood up using a laptop beginning to understand how to calculate selling price with Katana manufacturing ERP.

Automatic cost calculations with ERP software

Katana ERP manufacturing software helps manufacturers maintain control of inventory and costs in real-time. Check it out here for free.
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Combine a great selling price strategy with ERP software

Now you know why finding the right pricing strategy for your business is so important.

You need to invest the time to do your business justice. However, performing audits, even regular ones, can slow down your business or even reveal that you’ve been pricing your items incorrectly. The best solution to determining how to calculate selling price is to adopt an ERP system with real-time monitoring and automatic cost price calculations, such as Katana ERP manufacturing.

Katana helps manufacturers take control over their production, carrying costs, and work-in-progress costs, but also helps with calculating selling price too by looking into:

  • Your material costs
  • Production operation costs

This will allow you to quickly get a better overview of your costs and make better pricing decisions.

You can check out the video below for a better understanding of how to track costs of materials and products in Katana:

 

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