One of the most complex moments for every entrepreneur is learning how to calculate the price of a product and then keeping it constantly monitored. Added to that is that there is no single way to fix it!
That is why we are going to present you the range of possibilities that you have to take into account when calculating the prices of your online store.
You’ll even be able to download your own pricing sheet for free at the end of this article. Shall we start?
Some clarifications before calculating the price of a product
👉 Define who you want to sell to
Wholesalers, distributors, final consumer? Many entrepreneurs start with a retail price and, when stores appear (), they do not have defined what discount to apply on the retail price or what commercial conditions to establish.
👉 Investigate the margins of the market where you want to sell
One of the most common mistakes is calculating prices without first having investigated what margins drive the market.
Therefore, you have to keep in mind that each market has different margins and you need to investigate it before launching to sell your products.
For example, when we started in the decoration market, we asked for catalogs from other brands and we saw the margins established between the suggested price and the wholesale price.
In most cases it was 100%, that is, the product that a brand sold for $500 at wholesale price, in the store it sold for $1000.
Over time we realized that in the decorative objects market, where there are not many renowned brands, this is very subjective.
Why? Because the premises have their own pricing policy and rarely respect the suggested price, this mainly happens because the fixed costs they manage are different.
So, we found merchants who increased the price of their products by 150% and others who, because they were in cheaper areas, such as the interior of the country, only increased by 80%.
Another factor to take into account is that many stores are , therefore they do not charge 21% VAT on products. But the conclusion is that a suggested price must include this tax and on average we would be talking about a margin of 121%.
Understanding this, let’s move on to review the pricing methods that are frequently used.
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Pricing methods
When it comes to wholesale sales, there are 3 methods to determine the sale prices of products:
- Absorption prices: all costs are reflected in the price of the product.
- Differentiated: it has to do with the acceptance of buyers. Price is what customers are willing to pay for a product.
- Mixed strategy: different prices depending on whether the sale is wholesale or online.
When it comes to retail alone, here are 3 of the most commonly used pricing methods in business, regardless of industry.
1- Based on costs or gross profit: in this case, a specific margin is established that is added to the cost. For example, if my cost is $500, and my policy is to sell at 100%, my product will be worth $1,000.
2- Based on the competition: here you have to ask yourself some questions such as: are you a price setter or a taker? If brand X raises the price, do you raise it? If it lowers it, does your brand lower it more?
3- Based on demand: in this case, the price is set in relation to the perception of the final consumer, taking into account how much they are willing to pay for your product.
- Niche strategy: the price that is established is high, although the sales are few, the profit margins will be high.
- Volume strategy: low prices are set with a high volume of orders in mind.
Despite being very different methods, the ideal is not to opt for one or the other but to merge the 3 formulas. This tactic is the one that will be most effective for you.
A product that gives you the desired margin, but that is at such a high price that your final consumer is not willing to pay, does not make sense. In the same way, a good price for the consumer and a very low margin for the producer do not make sense either.
In any case, keep in mind that the issue is complex: in a product line, perhaps not all of them have the same profit margin and it is an analysis that you have to do with each particular product.
Other formulas to calculate the price of a product
- Keystone Price: Double the wholesale cost to determine the selling price.
- Multiple Pricing: Sell multiple products at a single price.
- Discount prices: seasonal discounts to increase store traffic.
- Psychological prices: prices that end in 9, since they usually have a positive perception.
- Anchor Pricing: List selling price and original price to quantify customer savings.
brand value
It is important to highlight another factor to take into account when looking at our possible competitors.
What does it consist of? Understand that a product can have not only functional and perceptible benefits, but also a symbolic and intangible value, such as the value of one that is already established.
Keep in mind that the price of a product is the monetary expression of the perceived value and much of it is given by the brand.
So how to calculate the price of my product?
To calculate the sale price of a product in a simple way, we present the following formula, with the brand percentage being what the seller considers according to brand value:
Sale price = x 100
If you are looking to create a personalized formula for your business, we delve into some concepts and we recommend answering these questions as an exercise:
- What are the price levels/bands in the market?
For example: if you have a printed mug as a product, it is useful to know, on the one hand, how much the cheapest ones are on the market and, on the other hand, the most expensive ones distributed in shopping malls and decoration houses. From there you will be able to know what the average price is.
- Who is the cost leader?
That is, who has the lowest price in the market.
What brands add value to that mug, what makes it stand out from the competition.
- What pricing policies do competitors apply?
Beyond investigating how much your competitor sells the cup for, you have to know if they establish one in this regard.
For example, being the price fixer and having the most expensive mug on the market or offering discounts to wholesalers for purchases over a certain amount.
- What is my variable cost to produce one unit?
The are those that are modified according to the variations of the volume of production, that is, the higher the volume of production and sales, the higher the variable cost.
To calculate the price of a product, you first need to know what the variable cost of producing each unit is.
It would be ideal that before setting a price you are very clear about all the costs of producing a certain object, calculating not only the cost of the raw material, but also the cost of logistics, labor, etc.
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Next, we answer some of the most frequent questions when calculating the sale price of a product.
What is the difference between variable and fixed costs? Fixed costs are all those expenses that remain over time regardless of production, and that must be paid no matter what happens, while variable costs are those that change according to the sales of the product or service.
Elements to take into account in variable costs:
- Advertising
- payment tools
Elements to take into account in fixed costs:
- Wages
- Services
- Platform
How to calculate the profit margin?
To find the ideal, an exhaustive analysis of the competition, the market and potential clients is necessary, since, as its name says, the profit margin is the percentage of profit of a product.
Once this margin is established, you have to add the fixed and variable costs to determine the income objective.
That objective divided by the number of products results in a complete estimate of the price to assign to the products.
How to calculate the price of a product in excel?
Open Microsoft Excel and create a new spreadsheet. Then you have to create a column with all the costs and apply the profit margin that you have decided. The result will be the sale price.
If you need help putting together your cost sheet, we invite you to download it for free here:
In summary, to calculate the sale price of a product you have to:
- Discover the variable cost per product and identify the fixed costs.
- Meet the customer ().
- Research competitor prices.
- Set a profit margin and revenue goal.
When thinking about the selling price of a product and before making any decision, it is necessary to carry out a series of calculations and analyses, which allow all aspects of the business to be considered.
So if you need help creating your pricing spreadsheet, don’t miss this opportunity!
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