Pricing a product is mostly simple math. (Pricing a service requires you to do quite a bit more research, contact me if you have questions)
- Find out what the cost of goods sold as a percentage of sales for your (or a similar) business or industry by checking with industry trade groups or looking in the RMA Annual Statement Studies or Financial Studies of the Small Business.
- Find the markup factor associated with the percentage. (Either look up on table or calculate using formula 1/COGS%)
- Multiply your cost of making the product available for sale (what it cost you to buy the product and pay for any changes to it before you sell it) by the markup factor.
- Fine tune the price by considering:
- Unfair sales practices
- Estimated warranty costs after the sale
- Competitors prices
- Recommended price
- Advantages or disadvantages of location (i.e. selling beer in a sports stadium or gasoline two gas stations away from high traffic area)
- Use of loss leaders
- Use of higher markup factor when you get a really good price from your supplier
- Cutting prices on slow moving items or items becoming obsolete
One final consideration is how will a small change in price affect the demand for your product. When demand drops significantly with a small increase in price, be very careful about increasing prices.
A small sporting goods store wants to know how much to charge for some new team jerseys they buy from their supplier for $19.15 apiece.
Step 1 – Industry COGS for <$250K sales per year is 63.94%
Step 2 – Markup factor is between 1.67 and 1.54. Using formula 1/COGS% the factor equals 1.56.
Step 3 – No additional costs so simply multiply 19.15 x 1.56 = $29.87
Step 4 – Area sports team is in playoff finals. Result is increased demand and increased number of suppliers. Consider dropping price and using as loss leader. With lots of competition keep track of competitors advertised prices and adjust yours to remain competitive.
With competition charging between $30 – $35 consider pricing at $29.50 or $28.95.
Note that using 1.67 factor would result in $31.98 price and 1.54 factor would result in $29.49 price.
|COGS %||Markup Factor|