Setting the Selling Price
“Pricing” is a crucial factor influencing customer purchasing decisions, often indicating whether your business can thrive or survive from the start. Analyze pricing strategies to ensure they are appropriate for the cost structure, minimizing the chance of losses.
When setting prices, consider market conditions and competitor pricing. While pricing strategies such as matching or undercutting competitors’ prices are common, they can lead many businesses astray. This is particularly true for “price-matching or undercutting,” which may appeal to price-sensitive customers but can fail to cover your own business’s costs and expenses.
Before setting the selling price, it’s essential to understand the proportion of both direct and indirect costs to ensure that selling results in profit rather than loss.
What to Consider Before Setting the Selling Price
To ensure that the selling price covers various costs, it is recommended not to overlook these costs:
Cost of Goods Sold (COGS)
The primary cost of selling consumer goods should be calculated comprehensively, accounting for every detail.
Besides the amount spent on raw materials, remember to consider the quantity of usable raw materials after trimming (yield).
Cost of Labor (COL)
Labor costs should correspond to employees’ expertise and job roles. Properly allocating staff to avoid over- or underemployment is essential for cost control.
If production processes are time-consuming and yield limited quantities, calculate labor costs based on the time spent to ensure profitability before setting the selling price.
Cost of Rent (COR)
Rental costs should align with sales opportunities. Choosing a suitable location based on the product and customer group is crucial for business success.
Operating hours, high rent, low production capacity, and low customer turnout can lead to losses.
Depreciation
Construction, interior decoration, and equipment have a depreciation period. Determine an appropriate payback period for investments to set a selling price that yields profit.
Expensive equipment and shop decorations have a limited lifespan, requiring repair or replacement. Calculate how much to sell to recover costs.
Cost of Energy Consumption:
Ongoing expenses for business operations. Choose equipment wisely to reduce production costs.
The usage of gas overnight or continuous electricity consumption for several hours is a cost that cannot be overlooked.
As each business has different costs and expenses, including other costs beyond those mentioned above in their analysis, using the same pricing principles across the board without customization may lead to neglecting their unique strengths.
Thoroughly analyze the business’s costs to prevent the risk of losses.
