Negosyo Tips: Pricing your Goods and Services
Pricing your products can feel like a magic trick - you want a price that attracts customers and keeps your business afloat. The truth is, there's no one-size-fits-all answer, but there is a process you can follow to land on a price that works for you.
And to help you out, I'll be giving out an example (let's say I'm running a Brownie Bakery). Here's a breakdown of the key factors to consider:
Know Your Costs
Before you can determine your profit, you need to understand your expenses. This includes:
| Ingredients | Cost per kg | Quantity per 24 brownies | Cost per 24 brownies | |
|---|---|---|---|---|
| Eggs | 128 php | 0.125 kg | 16 php | |
| Sugar | 90 php | 0.4 kg | 36 php | |
| Cocoa Powder | 730 php | 0.075 kg | 54.75 php | |
| Oil | 150 php | 0.108 kg | 16.2 php | |
| Vanilla Extract | 1000 php | 0.0042 kg | 4.2 php | |
| Chocolate Bar | 305 php | 0.227 kg | 69.235 php | |
| Flour | 110 php | 0.12 kg | 13.2 php | |
| Total Cost: | 209.585 php |
| Fixed Expenditures | Monthly Cost | |||
|---|---|---|---|---|
| Rent | 10 000 php | |||
| Water | 1 000 php | |||
| Electricity | 4 000 php | |||
| Insurance | 2 000 php | |||
| Total | 17 000 php |
Profit Margin
Your profit margin is the percentage of profit you make on each sale. There's no magic number here, but a healthy margin ensures your business is sustainable. Once you know your costs, desired profit margin, you can use this formula to arrive at a selling price:
Profit Margin = ( (Selling Price - Cost of Goods) / (Cost of Goods) ) x 100
So if 24 of my brownies cost 209.585 php to produce and I want to sell them at 450 php
Profit Margin = [(450 - 209.585) / (209.585)] x 100
Profit Margin = 114.71%
Profit Margin = 114.71%
Competitor Check
Pricing in a vacuum isn't wise. Research what your competitors are charging for similar products. This will give you a baseline and help you decide if you want to position yourself as a budget-friendly option, a premium brand, or somewhere in between.
Let's say that a nearby brownie bakery sells 24 of their brownies at 400 php, then maybe we should reconsider our selling price as well.
Consider Customer Value
Think about the perceived value your product offers to the customer. Does it solve a unique problem? Is it made with high-quality materials? Factor in these elements when determining a price that reflects the benefit your product brings.
If we are confident that our brownies are much better than the competition's, then we can consider putting up a higher price than them. However, quality of your product by itself can't determine if it's gonna sell better than your competitor. Things like marketing, customer loyalty, location, and other important factors will affect the sales of your product
Market Testing
Don't be afraid to experiment! Once you have a base price, consider A/B testing different prices to see how customers respond. You can also offer discounts or promotions to gauge customer behavior.
Reaching Your Breakeven Point
Knowing your Breakeven Point (BEP) is crucial for setting a profitable price. The BEP is the sales volume at which your total revenue equals your total costs (fixed and variable). In other words, it's the point where you're not making a profit, but you're also not losing money.
Breakeven Point (units) = Fixed Costs / (Selling Price - Cost of Goods)
So if I want to know how much brownies I need to sell to breakeven:
Breakeven Point (units) = 17 000 / (450 - 209.585)
Breakeven Point (units) = 70.71 units
Breakeven Point (units) = 70.71 units
So if I want to reach breakeven point, I need to sell 70.71 sets of 24 brownies.
That also means that I need to sell MORE than 70.71 sets of 24 brownies a month to take profit.
Confused by the math? Or want some help with understanding the formulas? Leave comments and ask away! We will try to answer it as soon as we can.
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