The definition of the appropriate selling price of a product/service with the market depends on the balance between the market price and the calculated value, depending on its costs and expenses.
The amount must cover the direct cost of the merchandise/product/service, plus the proportional variable and fixed expenses. In addition, it should generate a net profit. To define the selling price of a product and/or service, the entrepreneur must consider two aspects: the marketing (external) and the financial (internal).
For the marketing aspect, the selling price should be close to that practiced by direct competitors of the same product and quality category. Factors such as brand awareness, time to market, sales volume already achieved, and aggressive competition also have a direct influence on the value of the product.
In the case of the financial aspect, the selling price should cover the direct cost of the goods/product/service sold, the variable expenses (for example, salesperson’s commissions), the fixed expenses (such as rent, water, electricity, telephone, wages). The remaining balance will be net income.
If the price dictated by the market is lower than that found from the company’s internal costs, the entrepreneur must redo the financial calculations to assess the feasibility of his practice. In other words, in order to balance the selling price, the company must reduce direct costs, fixed expenses or accept a lower net profit.
To calculate the forecast of sales of products / services, the company must follow some alternatives:
Based on the internal information, analyze the behavior of sales made in a certain period and project it for the same following period. Some aspects may interfere with this projection, such as competitors, new products, new consumer habits and special events, such as parties, Olympics, elections, World Cup, etc .;
Through market research, conduct a study of the demand for goods / products / services that could be met by the company. External variables, such as population, economic activity, political situation, level of income and employment, competition, new products, etc., must be considered.
Sales pricing objectives
Would you know how to list the main objectives for fixing the selling price? See below what they are:
– Market penetration: the company sets the price in order to achieve a large market share.
– Select the market: the company sets the price in order to reach specific market segments.
– Prompt cash recovery: generally companies in financial difficulties establish a price that allows a quick cash return.
– Promote product line: in this case, the price is used in order to promote the sale of all products in the line.
– Maximize profit: the price is established with a view to maximizing the return for the company.
– Eliminate competition: the price established is for the purpose of eliminating competition, with, in some cases, the use or practice of do dumping (export at a price lower than that prevailing in the domestic market to conquer markets or give vent to excess supply; or sale at a price below cost to keep competitors away).
How to form the selling price?
In addition to the financial aspect, the definition of the selling price must take into account the marketing aspect. The price should be close to that practiced by direct competitors of the same product and quality category. The level of brand awareness, the time to market, the volume of sales already achieved, and the aggressiveness of the competition must also be considered.
If the price charged by the market is lower than that found from the company’s internal costs, the entrepreneur must redo the financial calculations to assess the viability of his business.
Some manufacturers establish the price that the distributor should charge its customers, probably industry or retail trade. Others only offer a reference value, leaving the decision to the distributor for the price to be charged. Therefore, this depends on the negotiation between manufacturers and distributors.
Sales price formation tips
– When defining the selling price, the particularities of the operating segment must be taken into account;
– It is necessary to have good planning, with clear goals of profitability and dimensioning of sales capacity;
– There is no point in getting into the game of predatory competitors, who fail to differentiate themselves and bring prices down. It is better to invest in differentials;
– Stocks can be minimized by increasing the product line;
– The turn should be maximized. Preference should be given to items that complement the current line, thus increasing sales and product turnover;
– Worth investing in communication. Customers should be informed about new items sold, which should be displayed in a more attractive way, facilitating consumer acceptance.
– The product line must be maintained. The interruption results in a loss of credibility with consumers;
– The lack of products has to be avoided. If necessary, they should be replaced with similar ones.
Sales price formation example
Below is a simple model of formation of the sale price, with fictitious values that will help you to visualize everything that has been said so far. Watch:
– Variable Direct Cost = US$ 20.00;
– Variable Expenses = 7%;
– Fixed Expenses = 30%;
– Net profit = 8%;
– Sale Price = US$ 20.00 / (100% – 7% – 30% – 8%) = US$ 20.00 / 55% = US$ 36.36.
– Selling Price = US$ 36.36 (100%);
– Variable Direct Cost = US$ 20.00 (55%);
– Variable Expenses = US$ 2.54 (7%);
– Fixed Expenses = US$ 10.91 (30%);
= Net Income = US$ 2.91 (8%).