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Guidelines on Creating Product Pricing Formulas

written by: Jayant R Row•edited by: Jean Scheid•updated: 5/7/2010

The retail price of any product should adequately cover the cost of the goods and the expenses that are incurred as part of the business. Once this is taken care of, the retailer can then decide on the desired profit, which will allow them to arrive at the correct product pricing formula.

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    Deciding Retail Prices for Products

    retail Setting the right price for any product that is being offered in the retail market is the most vital ingredient for any recipe in retail business profitability. The main elements that make up the price for any product are the cost of the goods themselves and the expenses incurred while maintaining the establishment for the retail business. Product pricing formulas help determine the final price.

    The cost of the goods is generally a simple matter to calculate. It is the cost paid to the wholesaler plus any expenses incurred for shipping, storage, and handling of the product. A good business person needs to leverage their standing in the market to obtain better terms with each supplier which in turn can help to reduce costs. It is also necessary to look for avenues to reduce shipping and handling costs through bulk buying. A good credit standing will help to gain credit, which in itself, will reduce the cost of money being utilized in the business.

    Operating expenses are establishment costs and include rents, mortgage costs in owned premises, staff costs, overhead expenses for utility services and telephones, office supplies and advertising expenses. It's necessary for a profitable business to keep a tight control over all these expenses so that the overall cost of the operating expenses does not skew the product pricing.

    Once these two costs are firmly established the retailer has to then decide on the profit margin they want to make to set the correct product pricing formula.

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    Strategies for Product Pricing

    Once the costs are worked out and prices determined, the retailer should examine how competitors are pricing similar products. A big advantage will be if the price arrived at is lower than competitor’s prices, offering an edge over the competition. However, if prices are higher that a competitors, the need to reexamine costs and find areas where they can be more controlled will help with determining the right price through reanalyzing the product pricing formula.

    Each industry has certain standards to calculate profit margins and the retailer can use these product pricing formulas to work out the final retail price. Once comfortable using such formulas, the same product pricing formula can be applied to all products.

    Some manufacturers suggest maximum retail prices and imprint these on their products. This gives lesser leeway to the retailer for marking up the prices, but retailers should attempt to negotiate with the manufacturer for lower wholesale costs in order to increase profit margins. As a selling strategy, a retailer can also offer to customers discounts on the maximum retail price if cost margins are adequately covered.

    Pricing below the competition is one way to increase turnover and determining the correct product pricing formula can be arrived at only if the retailer is very sure they can negotiate the best wholesale prices and gain a strong control over operating expenses. Some retailers may even opt for pricing their products over the competitor and this is generally to take advantage of a more attractive location, which often adds value to the product.

    There are other product pricing formula strategies such as utilizing odd pricing figures that sound lower than general prices; $9.95 instead of $10 for example. Multiple pricing like offering additional items or offering discounts is also a strategy that works well.