Learn how to set a pricing policy that allows your business to flourish!
The CacloPolis selling price calculator is a handy tool that can quicken the process of having to adjust your selling price every time your production cost increases.
The point here is to maintain a relatively fixed profit margin or markup depending on the total cost of a produced item to maintain a stable revenue.
To know how this can affect your profitability, you first need to understand the selling price and why it should change based on the cost of your product.
What Is the Selling Price?
The selling price is how much you charge the customer per purchase of a certain item. This price should depend on how much profit you’re planning to make on each transaction.
The profit you intend to make can be calculated based on two relatively similar approaches, either by using a certain margin or a certain markup.
How to Calculate the Selling Price?
Before getting into the calculation process, you need to understand the difference between the grand M-words, Margin, and Markup.
The margin describes how much of each sale can be counted as profit.
Let’s say that we have a product that costs $50 to produce. That product was then sold at a $125 price tag, yielding a profit of $75.
The question here is: Why was the selling price of that product set at $125? The answer is simple; the final price was determined either to meet a certain margin or a certain markup.
In both scenarios, there will be a formula that uses the profit (which is the cost subtracted from the price) as a numerator. However, the denominator will differ depending on whether you seek the margin or the markup.
We’ll break this down a bit more.
How to calculate the selling price using the desired margin?
Let’s start by calculating the profit margin of our previous example. To do so, we’ll use this formula:
Margin = (Selling Price - Purchase Price) / Selling Price * 100%
which translates into = 0.6 or 60% margin.
So, in our example, we got a 60% profit from selling our $50 product at $125.
But what if we want to sell a $1000 product and still make 60% as a profit margin?
This is where our CacloPolis selling price calculator comes into play. All you have to do is to enter the cost and the profit margin you seek in the corresponding boxes, and the calculator will automatically perform the formula and give you the result.
So, to make a 60% profit from a $1000 dollar product, you’ll have to sell it at $2500. Keep in mind that additional costs to the product (like labor and transportation) also need to be factored in the production costs if they weren’t already.
Markup is how much you add to the cost of your product in order to make a profit. For consistency, we’ll still use the same product that costs us $50 to produce and sells at $125.
Let’s figure out the profit markup we made from that sale.
How to calculate the selling price using the desired markup?
Now that we understand the basics, let’s go ahead and show the markup formula right away:
Markup = (Selling Price - Purchase Price) / Purchase Price * 100%
By substituting the previous formula, we can calculate the profit markup in our example as follows: = 1.5 or 150% markup. This means that if you want to sell a product that costs you $50 to gain a 150% markup, then you have to sell it at $125.
Let’s try to sell a product that costs $2000 to manufacture while still seeking that same 150% markup.
By using the CacloPolis selling price calculator, we get the price of $5000. So, to make a 150% markup from a $2000 product, sell it at $5000.
How to Set up a Good Pricing Policy?
You should base your pricing policy on the dependent variable, which could either be the profit or the revenue. What we mean by “dependent variable” is the factor that can change depending on the formula used.
For example, if you want profit to be the dependent variable, then you should formulate your pricing policy around margins. If you want revenue to be the dependent variable, then think in terms of markup.
Keep in mind that production cost doesn’t just include the materials used for manufacturing. You may think that it’s possible to sell at a much lower price than your competitors, but you might be missing important cost factors in your calculations.
Examples of these cost factors are:
Transportation will cost you in terms of fuel and delivery time. You should add this cost to your formula before deciding the profit you seek.
Many hands go into creating, delivering, and displaying your product before the customer can purchase it. These working people require salaries and, in the case of bigger companies, insurance coverage.
This might not be an issue for smaller or starting businesses, but bigger companies often have a much larger stock than what’s on display.
It’s important to factor in the cost of warehouses and the expenses of the workers there in your pricing policy.
Accidents lost shipments, and damaged goods are all accidents that can happen at any time.
While it’s difficult to anticipate those or adequately incorporate them into your pricing policy, your final product price should take into consideration that some of the profit will be needed to cover negative income.