On many occasions we have run across colleagues whose first choice for increasing sales is to reduce their price, offering discounts ranging from 10% to unimaginable amounts.
At first this strategy offers a certain measure of results, since currently there are certain customer segments whose patronage is based on the prices they pay.
Then all of the sudden there are numerous companies centering their strategy on reducing prices, and they actually succeed in achieving good sales volume. The only problem is that, at the end of the month when they check their profit and loss statements, the reality of the situation jumps out at to hit them in the face. Despite having obtained an increase in their sales, their profit margins end up being lower than ever.
In hopes that things will go better for them in the next month they continue using their price reduction strategy, maintaining good sales volume -- only to discover in the next month or months, that these lean profits have now turned into losses.
This situation occurs for not having considered your costs and expenses, for getting caught up in the competition’s schemes without knowing the conditions under which the discounts are being offered, or for not knowing how the competition is structuring the retail price. Or simply for not having made the adjustments to your operation that would allow you to reduce your expenses without affecting your profit margins.
For these reasons, I would like to provide a simple yet practical explanation of how to calculate your retail price so that readers who are not very involved in administration will have a basis for making better decisions.
PRICE STRUCTURE:-
The structure of a price has three equal parts, all of which do their part in determining the final price to be charged your customers.
The first of these parts is the COST OF SALE, which represents what we pay in order to obtain the raw material to produce a product (foods and beverages, among others).
The second part is the COST OF OPERATION, which represents all the expenses we pay in order to prepare or produce the first part, or the raw material (employee payroll, fuel, uniforms, equipment replacement, rentals, etc.).
The third part is OUR PROFIT, or what we consider we should charge for our services so that our business is profitable.
The percentage participation of each of the above parts could be 33.33% for the first, another 33.33% for the second part, and 33.34% for the third part, which adds up to a total of 100%.
If we put these percentages in money, we would have 100.00, which will be equivalent to the retail price of any product.
FORMULAS:-
There are various formulas we can use to help us calculate the retail price. One of them is to simply multiply the cost of sale (raw material, or the first part) by 3, to give us the final price:
Example: $25.00 (raw material) x 3 = $75.00 retail price
Another formula is to simply divide the cost of sale by the percentage of cost with which we want to sell our product, and this will give us the retail price.
Example: $25.00/33.33%= $75.00 retail price
Don’t forget that you will have to add the percentage of your area’s taxes to the final price so that your expenses and operating profit are net.
It should also be emphasized that, even though the retail price should include the three parts we mentioned, it can be favorably affected if your sales are well-handled and if you maintain tight control over your costs and expenses, which will allow you to reduce your final prices and be more competitive without adversely affecting your profit percentages.
Finally, as with any retail price, you will also have to consider your direct competition, the location, and your strategies for marketing and positioning your product on the market. In other words, you will have to think about whether you have created the perception of quality and differentiation in your customers’ mind in such a way that, when they make their visits or purchases, the retail price is not the most important consideration, rather it is the product itself.
At first this strategy offers a certain measure of results, since currently there are certain customer segments whose patronage is based on the prices they pay.
Then all of the sudden there are numerous companies centering their strategy on reducing prices, and they actually succeed in achieving good sales volume. The only problem is that, at the end of the month when they check their profit and loss statements, the reality of the situation jumps out at to hit them in the face. Despite having obtained an increase in their sales, their profit margins end up being lower than ever.
In hopes that things will go better for them in the next month they continue using their price reduction strategy, maintaining good sales volume -- only to discover in the next month or months, that these lean profits have now turned into losses.
This situation occurs for not having considered your costs and expenses, for getting caught up in the competition’s schemes without knowing the conditions under which the discounts are being offered, or for not knowing how the competition is structuring the retail price. Or simply for not having made the adjustments to your operation that would allow you to reduce your expenses without affecting your profit margins.
For these reasons, I would like to provide a simple yet practical explanation of how to calculate your retail price so that readers who are not very involved in administration will have a basis for making better decisions.
PRICE STRUCTURE:-
The structure of a price has three equal parts, all of which do their part in determining the final price to be charged your customers.
The first of these parts is the COST OF SALE, which represents what we pay in order to obtain the raw material to produce a product (foods and beverages, among others).
The second part is the COST OF OPERATION, which represents all the expenses we pay in order to prepare or produce the first part, or the raw material (employee payroll, fuel, uniforms, equipment replacement, rentals, etc.).
The third part is OUR PROFIT, or what we consider we should charge for our services so that our business is profitable.
The percentage participation of each of the above parts could be 33.33% for the first, another 33.33% for the second part, and 33.34% for the third part, which adds up to a total of 100%.
If we put these percentages in money, we would have 100.00, which will be equivalent to the retail price of any product.
FORMULAS:-
There are various formulas we can use to help us calculate the retail price. One of them is to simply multiply the cost of sale (raw material, or the first part) by 3, to give us the final price:
Example: $25.00 (raw material) x 3 = $75.00 retail price
Another formula is to simply divide the cost of sale by the percentage of cost with which we want to sell our product, and this will give us the retail price.
Example: $25.00/33.33%= $75.00 retail price
Don’t forget that you will have to add the percentage of your area’s taxes to the final price so that your expenses and operating profit are net.
It should also be emphasized that, even though the retail price should include the three parts we mentioned, it can be favorably affected if your sales are well-handled and if you maintain tight control over your costs and expenses, which will allow you to reduce your final prices and be more competitive without adversely affecting your profit percentages.
Finally, as with any retail price, you will also have to consider your direct competition, the location, and your strategies for marketing and positioning your product on the market. In other words, you will have to think about whether you have created the perception of quality and differentiation in your customers’ mind in such a way that, when they make their visits or purchases, the retail price is not the most important consideration, rather it is the product itself.
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