6 How to Determine the Selling Price of a Product Correctly and Profitably

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Determine the Selling Price

Gealena – The Determine the Selling Price is an important decision in business. Because the selling price will have a big influence on the product or service marketing strategy. Then, how do you determine the right selling price? The answer is in this article.

What will you learn from this article?

  • First, the reason why science determines the selling price is important.
  • Second, the components that determine the selling price of the product or service.
  • Third, understand the purpose of determining the selling price.
  • Fourth, 7 ways to determine the selling price of a product or service.
  • Finally, the beginner’s mistake in determining the selling price.

If you want to be able to Determine the Selling Price a good sale price, you’ll be sure to love the handy guide in this article. Let’s get started!

Determine the Selling Price
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Why is it important to know how to set a selling price?

The selling price is actually formed from a price and value comparison.

  • Price is how much money consumers have to spend.
  • Value is how much benefit consumers receive.

So, in that way, learning how to determine the selling price is the same as weighing the value you sell for the price you love. As simple as that!

Let’s dive deeper into consumer psychology. There are usually 2 scenarios when buying and selling:

  • First, this product or service is too expensive. I don’t want to buy. In this scenario, consumers actually feel the value they get is less than the price they pay.
  • Second, this product or service is cheap. I want to buy. In this scenario, consumers actually feel the value they get is greater than the price they pay.

After all, then the selling price is not tied (fixed) to a nominal amount, isn’t it? Exactly, there are times when a $10 / $100 product or service is cheap.

And there are times when a product with a price of 500 is expensive. All perceptions of expensive and cheap are formed from the comparison of value vs price.

Note:Focus on added value, communicate to consumers, and BOOM !, your sales increase.

At this point, Determine the Selling Price do you understand?

So, what’s the point in learning how to set a selling price? Why should entrepreneurs always be aware of value vs price?

  • First, you can sell your product or service with maximum profit. So, your business will make a big profit.
  • Second, you can define an efficient marketing strategy to communicate value to the right consumers.
  • Third, you can increase the number of sales significantly.
  • Finally, you can build a branding image of the products or services that you manage.

Want to know in more detail the secrets of how to determine the selling price of a professional entrepreneur? Come on, read on.

But before that, you must first understand the components that determine the selling price.

Components to determine the selling price of products and services

When a novice entrepreneur has come to the discussion about selling prices, he suddenly gets a headache. He is confused about the price of his product or service.

  • Is the selling price too cheap?
  • Is the selling price too expensive?
  • Will this selling price sell in the market?

Entrepreneurs are not gamblers, so don’t overly assume / gamble.

Learn to calculate the components that determine the selling price. After that, calculate the value of your product or service.

And finally, test your assumptions by selling to consumers.

Components Determining Product Selling Prices

For the internal components of the product sale price, I usually enter these 4 things:

  • Raw material prices.
  • Production costs.
  • Packaging costs.
  • Management fee.

For the external component of the product sale price, I added these 3 things:

  • The purchasing power of consumers.
  • Consumer behavior.
  • Competitors.

Then, where do the advertising costs go?

Well, in my opinion, advertising is an investment to build branding. So, I don’t include these costs in the selling price of the product.

If my product branding is good, the value I communicate will reach consumers. That way, consumers will not protest if I increase the selling price of the product.

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Determine the Selling Price
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Components for Determine the Selling Price of Services

For the internal component of the selling price for services, I usually include these 2 things:

  • Value base on the result. How much profit can I make for the client?
  • Positioning. What level of service do I belong to? Beginner, expert, specialist, or celebrity authority? The higher your skill, the higher the selling price for your services.

For the external component of the selling price, I usually add these 3 things:

  • The purchasing power of consumers.
  • Consumer behavior.
  • Similar competitors.

These services include intangible products (products without a form). So, you can increase the selling price by up to 200%.

Don’t forget to consider the positioning, supply & demand, and the value you have.

Read more: 5 Important things for Starting a Dropship Business, Tips for Success 2021

Understand the Purpose of Determining the Selling Price of a Product

Before discussing how to set prices, it’s a good idea to first know what goals we want to achieve by pricing these products.

In general, there are 4 goals that give the price for the products we sell.

To Make A Profit

This goal is of course to increase the product price to the highest or most expensive level. However, in its application, it must be limited to the target profit so that our products are not too expensive for consumers.

To Enlarge Sales Figures

The same is the case with the first goal, but the second one is more focused on the size of the product sold. Generally, the price set for the product will be cheaper than if it is oriented to the first goal.

To Increase Pamor

For this third purpose, the price will generally be cheaper with the aim of attracting customer interest. If the price is cheap, consumers will think that our products are very affordable.

To Maintain Price Stability

This price-fixing also aims to make our product prices stable with product prices in general on the market.

7 Ways to Determine the Selling Price of Products and Services

Determining the selling price should be included in your product or service marketing strategy. So, don’t stand alone.

Why? Because one of the psychological factors of sales is the right selling price.

Special for today, I will reveal 7 secrets of how to determine the selling price of a professional entrepreneur’s product or service.

Want? Let’s dive in!

Price to Your Competition

How to determine the selling price using the “price to your competition” technique is often used by entrepreneurs who sell commodity products.

For example entrepreneurs in rice, corn, wheat, coffee, soybeans, sugar, mining products, etc.

Entrepreneurs who are involved in the commodity business usually do the following three things:

First, equalizing product prices with competitors’ prices.

Already, just the same as the competitors, that’s all! Later profit from the sales quantity.

So, if your competitor’s price goes up, your product’s price will go up as well. And if your competitors’ prices go down, your product prices will go down too.

Second, take the average price of the three competitors.

Beginners entrepreneurs who don’t have a name, usually determine the selling price of the product by an average of three competitors in their area.

Example:

  • Entrepreneur A sells organic brown rice for $18,9 / kg.
  • Entrepreneur B sells organic brown rice for $26,5 / kg.
  • Entrepreneur C sells organic brown rice for $35,9 / kg.

The average of the three selling prices was $26,9. That way, this budding entrepreneur will sell his products at a price of $27 / kg.

Third, selling at high prices on rare or trending market commodities.

Professional entrepreneurs who understand trends and product scarcity always use the FOMO (fear of missing out) technique.

He monopolized the market for a short time before many competitors realized the commodity he was selling. That way, these entrepreneurs will get maximum profit.

Advantages Deficiency
Entrepreneurs don’t need to bother in formulating the right price. Consumers are educated to buy goods at the lowest price because all commodity goods in the market are the same.
Entrepreneurs do not need to pay large marketing costs. Cannot get big profit.
Note: If you choose this technique, make sure you become the market leader. Don't be a follower!

Price to Pay the Bills

How to determine the selling price using the “price to pay the bills” technique is very often used by entrepreneurs who are testing the market.

The entrepreneur provides an MVP product (minimum viable product) and determines the selling price with a break-even point (BEP) benchmark.

In essence, the selling price of the product can cover the price of raw materials, production costs, packaging costs. Anyway, you can return on investment (BEP). The important thing is that entrepreneurs get data about consumer interactions with products.

The focus of this technique is to find out the market response to the products he offers. After being proven successful, he just made products with premium quality.

An example of the calculation determine the selling price is like this:

Japan’s Otsuka Pharmaceutical company wants to enter the packaged beverage market. He has an MVP (minimum viable product) with the name Pocari Sweat. MVP products have a small packaging and design that is not so premium.

Calculation details:

  • Raw material costs + production costs + packaging costs: $1 per bottle.
  • Distribution fee: $0,5 per bottle.
  • The selling price of break-even point (BEP): 1,5 per bottle.

With these calculations, PT. Otsuka dared to sell Pocari Sweat drink products for @2,5 per bottle for the first 6 months.

He made no profit at all from the sale. However, he did not lose too much, because the proceeds from the sale had already entered the BEP.

Advantages Deficiency
Quickly get a response from consumers. Entrepreneurs make no profit at all.
Can target consumers from various groups. Educated consumers to buy cheap products.
Note: If you choose this technique, make sure to analyze the market response correctly. 
Because if this technique is successful, you can immediately follow up with premium products that promise higher profits.

Price to Time

How to determine the selling price using the “price to time” technique often occurs in service businesses. For example Accountant services, lawyer services, private coaching services, freelancers, etc.

The price of your service is determined by how much time you spend with the client. So, you can get a rate per hour, per day, or per week.

For more details, just look at the expert rates on the Upwork website.

How to fix a selling price with this technique? For starters, the hourly rate follows the minimum wage in each region. For expert and specialist workers, they can increase the hourly rate at will.

As long as the client agrees, it doesn’t matter what rate it is.

Example:

  • The selling price of a beginner digital marketing service in America is $ 7 / hour. This price refers to the minimum wage standard for workers in America.
  • Alex’s first year worked for $ 7. Then, he studied e-commerce marketing for more than 5 years to a specialist level in e-commerce. Then, Alex gradually increased the rates to $ 1,000 per hour.
Advantages Deficiency
The application is very easy. And you can increase rates gradually according to the skills & experience you have. There are frequent conflicts between service providers and clients. Because the client does not get the maximum result from the service he pays per hour.

Note: Always be careful when using the price to time techniques, as there will always be a conflict of mistrust between the client and the service provider.

Price to Cost Plus

How to determine the selling price using the “price to cost-plus” technique is often used by cake manufacturers, suppliers, retailers, snack resellers, contractors, etc.

Characteristics, entrepreneurs take advantage of the difference between the selling price and the cost of goods manufactured.

There are 2 ways to calculate the price to the cost-plus technique, namely: markup pricing and margin pricing.

Determine the Selling Price

Pricing markup.

A technique for calculating the Determine the Selling Price by adding a constant percent of profit. To determine markup pricing, you must first determine what percentage of markup (profit) you want.

The calculation formula is like this:

Selling price = Cost of goods manufactured + (Cost of goods manufactured x% Markup)

Example determine the selling price:

George makes crocodile skin bags under the Crosselder brand. Product COGS: $200. Nia wants to get a 50% markup. How much is the selling price of the Nia crocodile leather bag?

Selling price = 200 + (,00 x 50%) = $300.

Margin pricing.

In the commodity business, entrepreneurs cannot get a constant markup. Because the selling price of the product is very much influenced by market conditions. Under these conditions, you can use margin pricing calculations.

The calculation formula is as below:

  • Margin = Profit: Retail Price.
  • % Margin = Margin x 100%.

Example:

Siska is a rice seller at a market stall. Siska sells rice at a price of 11,00 / kg. Siska buys from a large distributor at a price of 9,70 / kg. How much margin does Siska earn?

  • Selling price: 11,00.
  • Profit: 11,00 – 9,70 = 1,30.
  • Retail Price: 9,70.

Calculation:

Margin = 1,30: 9,70 = 0.134.

%Margin = 0.134 x 100% = 13,4%.

Advantages Deficiency
The selling price calculation is very easy. If the markup is too large, the sales volume will be sufficient.
Note:The price to cost-plus technique is perfect for property entrepreneurs and contractors. 
Because the selling price of the product is constant and tends to increase from year to year.

Price to the Package

Price to the package is one way to determine the selling price by combining many items at once. His simple language is a thrifty package.

For example an SME website creation package, a family KFC chicken package, a smart casual fashion package, etc. The entrepreneur seems to give a discount, but in fact, he is after a bigger profit.

Example determine the selling price:

I sell SME website creation packages. You will get servers, domains, custom themes, 10 landing pages, 15 blog posts, 25 email follow-ups.

If you buy a unit you have to pay 2,000
If you buy the complete package price, you only need to pay 1,500

Advantages Deficiency
Sales volume will increase rapidly. You will sacrifice profit from some of the products in the sales package.
Note:You need to be prepared to stock more of the product to tackle a sales boom.

Price to Positioning

Price to positioning is a way of Determine the Selling Price based on your position in an industry. Where is your position?

A specialist & celebrity authority will have a very high selling price for services. Whether it’s professional services, public speaking, or consulting services.

Because the price to the position is closely related to the law of supply & demand, they can charge very high rates. Where, the time for a specialist or celebrity authority is limited, while market demand for their services is high.

No picture yet? Here’s an example:

  • Ariana Grande works as a Singer/celebrity.
  • Conan O’Brien works as a Presenter.

  • Christiano Ronaldo as a Soccer Player.

The three of them are celebrity authorities who have a very high selling price.

  • The price of Ariana Grande’s host services for one episode can reach $48 million.
  • The cost of a Presenter for Conan O’Brien’s services for one episode can reach $95 million.
  • The price of Cristiano Ronaldo’s host services for one episode can reach $225 million

Now, why would anyone want to pay celebrity authority at such a price? The answer is simple because many people need their services.

And it is the highest bid they take. As a result, every day, the higher the client’s bargaining value for their services.

Advantages Deficiency
You can get very high selling prices for services. Low sales volume.
Note: When using price-to-positioning techniques, make sure you don't get into a legal case. 
Because your good name will affect your selling point.

Price to Value

Price to value is a way of Determine the Selling Price based on the end result of the achievement. This technique is often used by business consultants, tax consultants, digital marketing consultants, etc.

Still abstract, huh? I will give you an example to make it clearer.

Alex is an SME business consultant. He has a lot of experience in scaling-up SME businesses.

Instead of setting an hourly consultation rate, Rika chose to sell her services using a price-to-value technique. Where Rika offers a solution to increase client profits 3-5x in a span of 3 years.

For payment, Rika asks for a commission from the client’s profit during the 3-year period. The nominal amount is around 5-10% (depending on the agreement).

Determine the selling price Calculation details:

  • First-year profit: 20 million.
  • Second-year profit: 30 million.
  • Third-year profit: 50 million.
  • Promised commission: 10%

Rika’s total commission is 100 million x 10% = 10 million.

Determine the Selling Price Until here, understand?

So, the price to value technique focuses on the end-result and the commission for the achievement. The bigger the client’s business, the more potential income you will get.

Advantages Deficiency
You and the client have the same passion, namely the achievement of a brilliant end result. Many clients do not want to disclose business profit data transparently.
Note: Don't apply price-to-value techniques to client businesses that have clear measures of business performance. 
Make sure to make a valid written agreement before starting work.

Beginner Mistakes in Determine the Selling Price

When I started my business, I was a person who was blind to value vs price, consumer behavior, and competitors. I don’t even have a business plan.

I can’t do a SWOT analysis (strengths, weaknesses, opportunities, threats). And finally, I set the selling price at random.

Threats anyway!

I only focus on narrow thoughts, namely: sell cheap, sell a lot, just sell out quickly! Haha. Luckily I met the right business mentor. And he opened my horizons on how to determine the correct selling price.

As a thanksgiving, I will share 3 mistakes that I have made in determining the selling price. Hopefully, you don’t repeat the mistakes as I did.

Do not know the Value Value of the goods or services you are selling

My first mistake is not knowing the value of the product or service I’m selling. This leads me to consumers who are inaccurate and uneducated.

So, even if there is a sale, my margin is small. And again, I got a lot of disloyal customers.

Are you dizzy or not? Hehe.

Not Doing Market Research and Consumer Behavior Correctly

The second mistake I made was Determine the Selling Price without market research, without monitoring market prices, and not researching consumer behavior first.

Anyway, I just sell, sell, sell. Cheap, cheap, cheap. Until finally I got tired of myself.

How about profit? Geez, the profits are really thin.

After that, I learned more about market research and consumer behavior. And in the end, back to the topic of value vs price and sales psychology. Starting from there, I just understood the external factors that determine the selling price, for example:

  • The purchasing power of consumers.
  • Consumer behavior.
  • Similar competitors.
  • Added value.

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Do not want to be dizzy thinking about profit, finally, all product margins are flat

The third mistake I made as a budding entrepreneur was determined the selling price product margins in a flat manner. So, I don’t think about product scarcity, product value, and market price considerations.

In essence, I take the same margin percentage for all products. So, for example, if I take a 30% profit, yes, all my products are equalized with a margin of 30%.

Isn’t that crazy? Yes, it is. Hahaha.

In the end, my business cannot grow. I was dragged into unhealthy competition. Prices of goods in the market are also increasingly erratic.

Note: Those are the three mistakes I’ve made. Take it as a lesson and don’t repeat the same mistakes.

Note: Those are the three mistakes I've made. Take it as a lesson and don't repeat the same mistakes.

Conclusion Determine the Selling Price

Thus the discussion of how to determine the selling price of products and services. All guides are flexible and non-binding. You can use one of them or combine several techniques into one (hybrid).

What about me?

If I like the technique of price to time, price to positioning, price to packages, and price to value. Sometimes I use the techniques individually, sometimes, I combine them. Depending on the situation and conditions of sale.

Finally, which way are you currently using to determine the selling price? Write your opinion in the comments column now.

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