One of the great challenges of entrepreneurs is to set the price of their products or services, often just do a headcount and believe that everything is fine.
However, this is a very important part of your business, the price that reaches the final consumer needs to be carefully thought out so as not to be so low as to generate embezzlement in the company’s accounts, nor be so high as to drive customers away.
Many factors need to be taken into accounts, such as the cost of the product, the expenses it generates for the company, the profit you want to obtain and the price charged by competitors in the market.
To help you define fair values for the company and for the final consumer, we prepare a list with the main points to be taken into consideration when pricing your products or services.
Final price
The final price of your product is the one that customers will find on the shelf, or on the website, i.e. the amount that the final consumer will pay.
This can be one of the main factors in the competitiveness with your competitors, that’s why it is so important and can define the destiny of your company.
Remember that this amount needs to be enough to cover the costs of your production, the expenses generated to carry out the sale and ultimately generate a profit margin sufficient for the growth of the company.
We will better understand each of the items that will help you define the final value of your product:
Costs
The costs are included all the values involved with the manufacture of the product, i.e. labor, rental of machinery, raw material, etc..
Expenses
The expenses are calculated by the sum of all the values involved in the sales process of the product, i.e. transportation, salespeople, marketing strategies, among others.
Profit
Finally, profit is the company’s return on the entire sales process. This part may vary but must be sufficient to meet the company’s growth expectations.
The profit margin is usually calculated as a percentage on top of the cost values, which can be between 25% and 100% depending on each case.
Finally, the final price of the product will be the sum of these three factors:
COSTS + EXPENSES + PROFIT = FINAL PRICE.
Putting it into practice
It is important that you understand this process in practice, for this, we will use the example of a sportswear store and as a final product we will think of a personalized football shirt:
If to produce the t-shirt has spent a total of 30 dollars, considering the labor and the raw material and the total expenses with the sale is 10 dollars, you calculate the profit only on the cost value, in other words, if the profit is 50% it will be 15 dollars.
So, applying the rule we defined above the account would be:
$30 + $10 + $15 = $55.
That is, the price that the consumer will pay for a custom soccer shirt in your company will be 55 dollars.
Define the value of a service
To define the value of service the thought is very similar to the way of choosing a price for a product, however, in the cost value the most important factor to be taken into account is the labor.
Therefore, at this moment the important thing is to calculate the amounts spent to keep this professional, for example, in a company that provides cleaning services in offices, if a two-hour service costs you 30 dollars of labor, plus 15 dollars with expenses and your profit margin is 50% we will have the following result:
$30 + $15 + $15 = $60
Soon the price to be charged, to the final consumer, for an office cleaning service, for two hours, is 60 dollars.
Don’t devalue your business
Once this rule is applied, conduct market research to verify the values practiced by your competitors and consider the need to lower your profit margin, or even increase it.
Be careful not to engage in unfair price competition, many companies work with inferior products or services, and you should not let yourself be threatened by them.
Make sure the quality of your products or services matches the price you are charging for them and practice fair values for the consumer.