Price calculation – How to find the right price for your product

Are you starting your own business? Now you’ve reached the point where you start thinking about your costs. How do
you set the right price for your products? Which costs do you have to take into account? These and other questions concerning the can present you as a founder with a number of challenges. There are many factors that need to be taken into account when founding a company. company must be taken into account. The price of your products should not only cover costs, but you also want to make a profit and be competitive. In the following, we will give you an overview of how to calculate your calculate your prices correctly.

Before you, as a supplier, can make your product available for sale to a third party, you must you have to think about the price at which you want to sell your product. In plain language this means that you carry out a price calculation. In your measurement for the selling price you have to consider a few things. For example, the willingness to pay for your product plays an important role. Equally important is the price of other suppliers who offer a similar product on the market. A prerequisite for the calculation of the price is therefore, that you as a supplier know all the costs incurred by your company.

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Price calculation – How do I calculate my sales price wisely?

Willingness to pay of my target customers

Your customers should come first and foremost. Because they are your target group and therefore also the people who should buy your products. The customers will only buy if they find the price reasonable. About the willingness to pay of your potential customers at a very early stage. The moment a new product is developed for your company, it must be clear is developed for your company, it must be clear at the same time what the product should cost. For this it is important to get to know your potential customers. A help for this can be the target group analysis for your price calculation. Based on your defined business goals results in your target group. These business goals when planning your self-employment. At the beginning of your target group analysis, you look at the characteristics that are obvious. This you find out what your potential target group, your customers, consists of and who buys your products.

These include:

➢ Demographic characteristics: Place of residence, age, marital status, gender

➢ Socioeconomic characteristics: Occupation, degree/level of education, Salary/income 

➢  Psychographic characteristics: Preferences, lifestyle, religion, interests, Attitudes, loyalty, buying behavior, preferences, brand loyalty, Needs, desires, and communication behavior


But if your customers are corporate clients, other characteristics play an important role:

 

     ➢ Organizational characteristics: Location, company size, Company age

     ➢ Economic characteristics: Profit, turnover, liquidity

     ➢ Purchasing behavior of a company: time of purchase, Company principles, supplier loyalty

     ➢ Personal characteristics of the decision makers in a company: Attitudes, communication

          behavior, Innovativenes

The target group analysis- price stability and buying behavior of my customers

Now you have a first impression of your target group. In the next step, you analyze the price stability and buying behavior of your target group. You will also need these values for your price calculation. 

So you should think about the following questions: 

➢ At what price can your target group afford the products?

          The income available to your target group is an important factor here.

     ➢ At what price is your target group willing to afford the product?

A high income of your target group does by no means that these people are then also willing to spend a high amount on your products. Quite the opposite. It is quite possible that the product you offer is not of great product is not of great importance to your target group. Therefore, it can that these people only want to pay a small price for your products. From this you can conclude whether your potential customers are willing to are willing to pay a little more for your products. A criterion for this could be for example, that quality plays a major role for them. 

To illustrate the theory a bit, here is an example:

The founder Leo has developed a vegetable powder, which consists only of organically grown vegetables and is also produced in an environmentally friendly way. Leo sells the product online.
For Leo, this results in the following target group:

➢ Persons aged 25-60 living alone, living in the city.                                                                        ➢ The income of these persons is slightly above average and they Maintain an environmentally             conscious lifestyle                                                                                                                              ➢ They value a healthy and organic diet                                                                                          ➢ They are willing to spend more money on healthy and organically produced food spend more             money                                                                                                                                                ➢ The target group appreciates very good quality

 You’re probably wondering now how you get this information. You can conduct your market research in two ways. There is the qualitative and the quantitative research. Both ways can be combined.

If you want to do a qualitative market research, you can use the following sources, for example:

Web Analytics
➢ Banks
Auditors
➢ Market research institutes (GfK)
➢ Public studies/industry studies (Statista, Federal Statistical Office)

 And quantitative market research, for example, can include these options:

➢ survey or customer interviews                                                                                              ➢ Market studies (sinus milieus)                                                                                                          ➢ Ethnographic research (Google Analytics)                                                                           ➢ Industry associations 

Competitive analysis – What is my competition doing?

As described above, you want to be competitive. So you should also analyze your competitors. Because your competition is also important for your price calculation. Accordingly, you can find out who your indirect and direct competitors are, as well as view their product offerings and observe their prices. In addition, you have to consider the so-called price-performance ratio. In concrete terms, this means that you have to pay attention to whether and which additional services your competitors offer. This can be, for example, free shipping.

Consequently, questions arise such as:

➢ What does my competition do better than me?                                                                      ➢ What unique selling proposition does my competition have?                                                  ➢ Who is the potential target group of my competition?                                                                      ➢ At what price does my competition sell its products?                                                              ➢ What plans does my competition have regarding the future?                                                ➢ What are the strengths and weaknesses of my competition?

Demand is often assessed too optimistically in terms of price calculation. Often, one assumes a high sales volume and demand. This more material is purchased and produced than is needed in the end. However, if the quantities produced are not sold, the costs are not covered by the calculated price. This is because your actual revenues are no longer then no longer correspond to the price you calculated. In an unfavorable case, your expenses will probably not be covered either. In order to assess the actual demand for your price calculation, you can as a founder industry reports and pay for an advice in addition pull. From this you can then derive the real brand potential.

What are my actual costs?

In the next step of your price calculation you have to determine the actual costs. After all, these should be covered by your sales price. For this you have to determine the costs, which arise from the marketing, manufacturing or service of your product. These are then the cost price of your company. As a rule, these consist of the cost items:

➢ Material costs: operating supplies, auxiliary and raw materials                                                                                                                                          ➢ Manufacturing costs: machinery, production facility (e.g., space costs) production (e.g., energy costs and production wages), development and               Construction costs                                                                                                                                                                                              ➢ Development costs are broken down again separately into: Development and research costs, material assets, personnel, operating resources for       research experimental development and product development                                                                                                                              ➢ Selling and administrative costs: marketing, wages for sales, Accounting, customer service, human resources, depreciation, lease or rent, postage       costs, travel expenses                                                                                                                                                                                                  ➢ Service costs: costs for lease or transport, consulting costs, service and maintenance costs     

Even when you have calculated the price for your product, it is important to check the to check the price regularly. In this way you can see if the price you have calculated price you have calculated still corresponds to current values, or if you need to adjust it need to adjust it. 

To help you, you can ask yourself the following questions:

➢ Have your cost prices changed?                                                                                                      ➢ Were you able to reduce your costs? Or have your costs increased?                                                ➢ Did you hire new personnel for your company?                                                                          ➢  Did you sell less or more of your products than planned?

The price floor – What do I mean by it?

Also important for the start of your business is the price floor. At price floor is a sales value, which must be reached by a company at least must be achieved by a company, so that it does not come to losses. 

Costs, which you consider in your price calculation, you divide into fixed and variable costs. Fixed costs arise for your company without anything happening in production. Fixed costs are for example insurances, salaries or rent. Your variable costs, on the other hand, are dependent on the quantity produced or the service offered. 

The price floor can be divided into the short and long term price floor. In this regard, there are specifics that you need to consider, need to pay attention to.

The short-term price floor:                                                                                                                                                                                                                    It corresponds to your variable costs that your company incurs in production. Keep in mind that the short-term price floor does not take into account any fixed costs are taken into account. For your company, this means that you may incur losses on the sale of your products, if your price is on the same level as the variable costs. With respect to the short term price floor, you can sell your products only for a short period of
time, which is equal to the price of your of your variable costs. This approach only makes sense if you can gain market share through the short term price
floor. The market share is a key figure. With this you determine the share of turnover and sales, which you can document on the market. If your selling price at the variable costs, this corresponds to a loss that you would incur, for example loss that you would incur, for example, if you did not produce or sell any products or sell.

How do you calculate the short-term price floor now? For this you need the average of your variable unit costs. The decisive factor here is which cost function you are dealing with. You can distinguish between a linear and a polynomial cost function. 

The formula for a linear function to calculate the short-term price floor is the following:

Sum of your variable costs / number of pieces

The long-term price floor:                                                                                                                                                                                                        It corresponds to your cost of goods sold and represents a minimum of your average unit costs. For your price calculation, both your variable and your fixed costs are included here. With the long-term price floor, you as an entrepreneur do not incur any losses, but a profit is also excluded, since your costs are exactly covered. When calculating the long-term price floor, you must always keep your fixed costs at the same level. This means that your total costs per unit will increase as the number of units decreases. There are two different ways to
calculate the long-term price floor. possibilities. On the one hand you have the possibility to derive an average cost function. You then set this function to zero. The resulting is again incorporated into the unit cost function. Another possibility is to consider your cost of goods sold.

The following formula will help you:

Unit costs + foxed costs / number of goods produced = long-term price floor

The liquidity-oriented price floor:                                                                                                                                                                                                            Both the short-term and long-term price floors ignore the liquidity point. This leads to problems. By the term liquidity means a judgment about your company’s ability to pay. If your company is liquid, you have sufficient funds to meet your current payment obligations. 

Important for you to know is that it is essential for you as a business to maintain to maintain liquidity. For example, if you cannot sell all your manufactured products you produce, you may find yourself in a financial bottleneck. The same if you receive the money for your sold products at a later date. at a later date. You can then no longer meet your payment obligations. meet your payment obligations. A liquidity-oriented price floor can also be called a short-term price floor. price floor. The liquidity-oriented price floor limits liquidity problems, which can be caused by a short-term price floor. which may be caused by a short-term price floor. Therefore, with the liquidity-oriented price floor, your revenues, your variable costs and your short-term fixed costs and your short-term fixed costs, which are expenditure-effective, are taken into account. By fixed costs that affect expenses you mean, for example, salaries or rent expenses. rent expenses. In summary, these are all fixed costs, which are connected with your production and which amount to expenses for a short period of time. To calculate this liquidity-oriented price floor, you calculate your variable costs and your costs and your fixed costs that result in expenditures. You then divide this by your sales volume. The sales volume is the amount of your volume, is the amount of your services or products sold by your company in a given time. 

Gewinn maximieren

Wie du siehst, gibt es eine Reihe von Punkten zu beachten, um den richtigen Preis zu finden. Du musst wissen, wieviel deine Zielgruppe bereit ist für dein Produkt zu zahlen und dir muss klar sein, wie hoch der Preis  sein muss, damit deine Kosten gedeckt sind. 

Der nächste Schritt besteht darin herauszufinden, durch welchen Preis du deinen Gewinn maximieren kannst. Wenn du dein Produkt günstier anbietetest als die Konkurrenz wirst du möglicherweise …. 

günstiger —>> mehr Verkauf

—>> teuerer : weniger Verkauf aber mehr Einnahme pro Produkt oder Dienstleistung. 

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