How to Calculate Selling Price the Right Way
Stella Soomlais is completely open and transparent about her costs and margins. She shows how they are all represented in the final selling price on her website. It is a good case study on how to calculate selling price of a product you stock. You should be equally methodical when creating your pricing strategy.
The big question.
This is one of the hardest things to get right in any business:
How to calculate selling price for your products.
How can you tell if it’s too high, too low, or just right?
Are you undervaluing your goods? Maybe your sweating every day in your workshop to create goods that you’re practically giving away.
On the other side of the coin, going too high with your prices can also be a risk. You don’t want to price yourself out of sales.
Failing to get your pricing right can lose you customers and conversions on your e-commerce site. It is also a huge opportunity cost as you search for answers while you could be developing your business.
Not just physical factors like material costs, and markets affect your pricing, but psychological factors too.
There is a knack to finding the right pricing strategy for your business.
In fact, it’s part art, part science.
That’s right — pricing may seem simple at first, but can be difficult to hit that sweet spot.
It’s about creating the best deals for your customer, that also accurately values your work.
In short, successfully answering the question of how to calculate selling price is a win-win for you and your customer:
They get a good deal, and you get a fair price.
So it pays to know the lay of the land when it comes to pricing strategies.
Discover how to find your ideal pricing strategy below.
How to Calculate Selling Price
You might be up half the night wondering how to calculate the selling price of your product.
Well, here is the answer that caters to the scaling manufacturers.
You are not a retailer or reseller. You make your own products with craftsmanship and expertise.
Do you adequately consider the value of this when it comes to pricing your products?
It’s easy to incorporate physical costs like materials and labor. You simply add up the cost of bringing your products to market, like cost of goods sold.
But how do you value your craftsmanship, and what kind of profit margin should you go for?
The answer to how to calculate selling price per unit depends on the type of business you have and your goals.
There are some accepted conventions however, like popular pricing strategies for manufacturers who want to know how to calculate selling price:
1. Cost-plus Pricing or Mark-up Pricing
Calculated by adding together all your costs, then adding a mark-up percentage that creates your profit margin.
If a product costs $50 to produce, and you want to apply a mark-up of 25% you multiply 50 by 1.25.
The selling price would be $62.50.
2. Planned Profit Pricing
This 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.
3. What the Market Will Bear (WTMWB)
This pricing is charging the maximum (or very close to the maximum) for what the market allows. If an object costs $100 to manufacture, and the maximum a customer will pay for it is $500 — this is the market limit. This is a pricing strategy that can lead to very high 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 easily undercut your prices. In short, it leaves you vulnerable to your competitors’ pricing strategy.
4. Gross Profit Margin Target (GPMT)
After you know how to calculate selling price of a unit, you can scale this up to work out the GPMT of your business. Say a business has $10,000 in revenue and the COGS is $6,000.
$10,000 minus $6,000 leaves you with $4,000 gross profit.
Dividing this with the original $10,000 leaves you with the 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.
5.Most Significant Digit Pricing
This is the reason 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!”
This technique is used in other industries, like 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
There is no one-size-fits-all approach to finding the best pricing technique.
If there were, it would sure be easier to find it, wouldn’t it?
But the obvious downside is that it would be harder for your business to stand out from the crowd.
If your pricing strategy and your competitor’s pricing strategy are the same then it’s like missing out on utilizing a useful 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 their 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 is best applied 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, whereas GPMT is a helps you decide if this approach can scale up.
Once you come up with a suitable price you can apply Most Significant Digit Pricing.
Make sure you give your new pricing strategy a fair go. Commit to changing your price for a minimum time and stick to that plan. Don’t keep changing prices, as this could reduce your customers’ trust in you.
Direct materials and labor, overheads, and profit margin are all essential components when learning how to calculate selling price per unit. Although you should consider market trends, don’t obsess over competitors pricing strategy. Your pricing is unique to your product and the value it brings to the customer.
Pricing Strategy Case Study
Let’s use the example of art to illustrate how you can find a pricing strategy in the real world. Don’t worry, this relates to your manufacturing business. You’ll see how in a minute.
Say you’re an artist and are wondering how to price your artworks.
You know the cost of your materials, and the time it took you, so you can just add a markup for a reasonable prof...
Whoa, not so fast.
Pricing in the art world is contingent on the current state of the marketplace and where your art fits into that.
So that’s why it’s so important to approach the question of how to price your art works from the right perspective.
First, you need to understand your market. Do all the research you can on the criteria of art pricing. These could be galleries, dealers, auction houses, critics, buyers, collectors, and your competitors’ pricing strategy.
You need to figure out how your work fits into the current landscape.
You might have an idea on what you think your art is worth. That’s good. You have a price expectation. You can use this to decide if the selling market is right for you at the moment.
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.
Maybe the market is not good at the moment, so you decide not to sell. It’s fine to wait for a more favorable time. This is why coming up with a plan on how to price your art is so important.
This applies to your craft or artisan business. Remember you are in control. Use the pricing strategies outlined above and approach pricing with the mindset of this budding artist.
Don’t undersell yourself or feel pressured to go below your minimum price. It might take some time to find your ideal pricing strategy but keep going — it’ll be well worth it when you get there.
Artistic goods aren’t subject to strict pricing strategy rules. A good strategy is to work out how much value your artwork brings to your potential customers. How much is a reasonable amount to pay for the skill and artistry on show, that won’t price out your target customer? Artisan and craft businesses can learn from this attitude. If you are not sure how to calculate selling price based on the craftsmanship you are offering, make sure you don’t undervalue your product.
Pricing Strategy Quickfire Tips
Have a Strategy, and Stick to it;
Use Pricing Analytics to record market trends and predict future market changes;
Look at the whole picture, not just on a transaction by transaction basis;
Adopt a value-based approach to customer satisfaction. Why should a customer choose you? and;
Don’t use a one-size-fits all approach to pricing. Be adaptable. Create pricing plans and product variations for customers with different needs.
The Right Pricing Strategy is the Difference Between Flourishing and Floundering
You have the theory: the rules of thumb, the industry knowledge, and manufacturer’s wisdom. It’s now up to you to find how to calculate selling price for your business.
So 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.
Don’t skimp on this or just copy from somewhere else like competitors’ pricing strategy. Nor do you need to spend money on financial advisers or fancy courses.
You just need to put in your time, common sense, and some good old-fashioned elbow grease.
The right pricing strategy is just like a cherry on top of a cupcake.
Don’t let it be underrated. You might not miss it if it’s not there. But if there is a juicy cherry on top, it makes the cupcake way more appealing.
That’s what the right pricing strategy can do for your products.
Now your ideal pricing strategy is in place, you can get all the other parts of your business to fall into place too.
You don’t need to learn any new skills or read any manuals.
Or spend any money up-front.
Katana is the Smart Manufacturing Software for scaling manufacturers.
It helps you become the best manager you can be, so you can spend more time doing what you really excel at.