Starting a new business often involves critical decisions, one of which is setting the right selling price. Pricing too low may reduce profits, while pricing too high can drive customers away. Therefore, it’s essential to develop a strategic approach to pricing.
As a financing company that supports business growth, BFI Finance offers this guide on setting the right selling price for business owners. Read on for details below.
1. Calculating Production Costs
Before determining the selling price, you need to understand how to calculate production costs. According to detikfinance, the cost of goods sold (COGS) represents the base cost incurred to produce a unit of product. Simply put, production costs are the expenses that arise from the production process of a company in creating goods to be sold. To calculate production costs, you should know these terms:
1.1 Fixed Costs
These are stable costs that remain unaffected by changes in production quantity or activity levels.
1.2 Variable Costs
These costs fluctuate with the volume of activity. If production volume increases, variable costs rise as well. This includes:
- Direct Materials Cost: The raw material costs involved in the production process.
- Overhead Costs: Costs other than direct materials and labor, such as indirect materials.
- Direct Labor Cost: The wages paid to employees involved in production.
1.3 Product Value
After understanding the costs, you should also understand the ‘value’ of your product as determined by your target market. This factor can affect the selling price of your product. Survey your target market to gauge quality, scarcity, and popularity of similar products.
2. Tips and Tricks for Setting the Right Selling Price
Setting an optimal selling price is essential. Here are some ways to determine the best price, adapted from Yahoo! Finance:
2.1 Define Your Brand Identity
First, define your brand identity. Do you want your brand to be seen as 'premium' or more affordable? Identifying your target market will help you understand your brand identity.
2.2 Think Like a Consumer
Think like your target consumers. Is the price you’re offering reasonable for them? What unique value does your product offer that attracts buyers? Compare your pricing with competitors, considering features, quality, and services.
2.3 Know Your Costs
You should understand all incurred costs. Avoid setting a selling price below your costs. Calculate production, marketing, and distribution expenses.
2.4 Choose the Right Pricing Strategy
Choose a pricing strategy that aligns with your brand identity. You have three main options:
- Premium Pricing: Ideal for high-quality or unique products. Prices are usually above market rates to give an exclusive impression. This also aims to increase profit margins. Examples of brands using this strategy include Louis Vuitton, Mercedes-Benz, and Lexus.
- Value Pricing: Combines competitive pricing with high value. It emphasizes the product’s features and benefits, offering additional value beyond production costs. Examples include Starbucks, Apple, and Rolex.
- Economy Pricing: Competitive, usually sacrificing quality. Suited for price-sensitive products, it aims to attract as many consumers as possible. Examples include Indomie, Uniqlo, and Xiaomi.
2.5 Be Flexible
Price setting should not be static; conduct regular market research and be prepared to adjust prices when market shifts occur.
3. Formulas for Calculating Production and Sales Costs
Image Source: Freepik
Formulas used for production cost calculations vary by production process complexity. Here are some commonly used formulas:
3.1 Total Production Cost
Total Production Cost = Fixed Costs + Variable Costs
This basic formula helps calculate production costs.
3.2 Production Cost per Unit
Production Cost per Unit = Total Production Cost / Number of Units Produced
This formula shows the cost of producing a single unit.
3.3 Cost of Goods Sold (COGS)
COGS = Production Cost per Unit + Sales Cost
This calculates the total cost of producing and selling one unit.
4. Case Study
To understand how these formulas apply, consider the following example:
A coffee shop called "The Sea" offers a variety of coffee drinks and also sells coffee beans for at-home brewing.
4.1 Costs
Fixed Costs:
- Rent: Rp4,500,000/month
- Employee Salaries (3 people): Rp2,000,000 each = Rp6,000,000
- Electricity and Water: Rp1,000,000/month
- Promotions: Rp500,000/month
- Equipment Depreciation: Rp300,000/month
TOTAL FIXED COSTS: Rp12,300,000/month
Variable Cost per Coffee:
- Coffee Beans: Rp5,000/cup
- Milk, Sugar, Add-ons: Rp2,000/cup
- Packaging: Rp500/cup
- Coffee Making: Rp1,000/cup
TOTAL VARIABLE COST PER COFFEE: Rp8,500
Total monthly coffee sales: 3,000 cups
4.2 Calculations
Total Monthly Production Cost of Coffee
Total Production Cost = Fixed Costs + (Variable Cost per Unit x Number of Units)
= Rp12,300,000 + (Rp8,500 x 3,000)
= Rp12,300,000 + Rp25,500,000
= Rp37,800,000
Production Cost per Coffee
Production Cost per Unit = Total Production Cost / Number of Units
= Rp37,800,000 / 3,000
= Rp12,600/cup
Cost of Goods Sold (COGS) per Coffee
Assuming sales cost per cup (seating and service) is Rp2,000/cup
COGS = Production Cost per Unit + Sales Cost
= Rp12,600 + Rp2,000
= Rp14,600/cup
4.3 Interpretation
The average production cost per coffee is Rp12,600.
Selling 3,000 cups monthly requires a total production cost of Rp37,800,000.
To make a profit, "The Sea" must sell each cup for more than Rp14,600.
Note: These calculations are estimates and may vary depending on local factors like raw materials, employee wages, etc. This guide is intended for educational purposes.
BFI Finance hopes this guide helps you set the right selling price. Business owners should stay updated on current prices and understand their products to set the right pricing strategy.
If initial capital is a barrier, BFI Finance offers loans with collateral options like motorcycle and car ownership documents, as well as property certificates, with competitive interest rates and extended terms. Make your business dreams a reality with BFI Finance. #SelaluAdaJalan with BFI Finance
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