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How To Set Prices?

To be able to set your prices and make financial plans, you need to calculate all the money
needed to operate your business.

Costing is the way you calculate the total cost of making or selling a product, or providing a service. It will allow you to calculate the net profit you can make from your business.

Price is the monetary value of a product or service that you charge to cover your total costs and profit that you desire to receive on each unit of product or service.

In depth…

There are two types of costs associated with running a business, and both of them should be taken into account while setting the price of your product or service:

  • Fixed costs. These are costs that do not change with the level of production. They are incurred even if no production takes place, e.g. rent of premises.
  • Variable costs. These are costs that increase or decrease in direct proportion to the level of production, sales volume or the amount of services you provide, e.g. raw materials, stock, cost of packaging, transport, handling of products and electricity (if machines are used).

To estimate the total cost of each unit of your product/service, you have to add up the variable cost per unit with the fixed cost per unit. You can refer to the International Labour Organization’s Start Your Business: Manual for a detailed explanation on how to calculate both costs.

The final price for your product or service should be set taking into account all of the following:

  • The total cost of your product or service. If your total cost exceeds the price customers would be willing to pay, your product or service is not likely to be profitable.
  • The price customers are willing to pay for it. The amount customers are willing to pay for your products or services also depends on how you market them.
  • The price charged by your competitors. It will be difficult for you to charge higher prices than your competitors for identical products.

In order to increase your profit, you can either increase your revenue or reduce your expenditure. Revenue can be increased by adjusting the marketing 4Ps: product, price, place, and promotion. For example, you can sell more by reducing price, aggressively promoting your product, changing places where it is sold, increasing quality or making it more attractive. Expenditure can be reduced by taking measures on cost components between the producer and consumer, for example through acquiring supplies from more affordable sources or joining with other traders to reduce the cost of transportation or selling costs.

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