The selling price (SP) of a product is the price at which the producer is offering the product on the market. Price fixing can be very complicated if you do not have adequate experience as you need to take into account the following issues among others;
The costs of production and overheads,
Prevailing prices on the market
Efficient production and quality of product
The value the customers attaches to the product or service.
The seller will make or lose money depending on how the above are taken into account when fixing the price.
Costs of the product
Costs of the product include both direct costs and indirect costs (overheads). The direct costs are those costs incurred when producing the product in the factory or workshop like raw materials, factory labour and electricity ready for delivery to the finished products’ store. These costs are only incurred when production is going on. Indirect costs on the other hand are costs which are not directly connected with the product being produced. These include administration costs, maintenance, selling and marketing costs and other indirect costs. These costs are necessary in ensuring the finished product reach the consumer.
Making money is about making a gain on the goods produced. You can only make profit by adding a profit margin on cost of production. In order to make money the selling price must be above the total of both direct and indirect costs. You are making money where the margin is additional to the total cost of production and you are losing money where margin is reducing the total cost of production. Losing money is a situation where you are not able to recover the costs of being in business.
Selling Price formula
If you are in business or you plan to venture into business, it is important to know how the selling price of a product is determined using the selling price formula. The selling price formula is as follows;
Selling Price = Cost + profit
You can only make money by controlling the total costs which are made up of direct costs and indirect costs (overhead). It is important to ensure that the cost of production is properly calculated as it provides a basis for adding the profit margin or gain in order to arrive at the selling price. The incorrect calculation of the total costs will create serious exposures which can either make the product cheaper or expensive in a competitive market where the margins are usually quite small.
Profit margin or gain
It is important for you to determine or establish in advance the planned profit margins to be added on the total costs in order to arrive at selling prices. In business the selling prices are often outside your control of the organisation as they are fixed by the market forces. Therefore you are limited by market forces on profit margin you can add total costs.
How can you enhance your profit margin or gain?
In the competitive market the profit margins are quite small and you can only enhance them through efficient production. With efficient production quality standards are adhered to and total costs of the organisation are controlled. The reduced costs and enhanced quality standards gives the producers an advantage when fixing the prices.
In order to make money you should properly apply the selling price formula in order for products to be competitive in the market.