What is the best selling price?

Tuesday 23 April 2013, 6:06PM
By Andersen Accountants Limited

Are you charging the right price for your product or service? There are complicated mathematical formulae that can be used to estimate the optimal selling price; however, the answer to this issue is often as much an art as it is a science.

If, for example, your product sells at $10 per unit and each unit has a variable cost of $5, then your profit after variable costs will be $5 per unit. Of course there will be other costs, including fixed costs; however, this means that if you sell 100 units, your selling profit will be $500.

If you reduce your selling price to $7 per unit then this means you will have to sell 250 units to produce the same selling profit of $500.

On the other hand, if you were to increase the price per unit to $15, you would only need to sell 50 units to generate a selling profit of $500.

There is often a complex relationship between selling price, number of units that can be sold, and overall profitability. For some products a price reduction will lead to a disproportionate increase in selling volumes, leading to better overall profitability. For other products, a price reduction may have no effect on numbers sold and the result of any price reduction will be lower profits.

Often finding the right selling price and selling volumes is the result of trial and error, however, it helps to understand your costs and markets before making any decisions. In terms of costs, you should know what your fixed costs are, at what point they might increase (for example, if your sales increase by a large amount you may need a larger warehouse or shop and your fixed costs are therefore likely to increase), whether you can obtain volume discounts from your suppliers if your sales volumes increase, and your long range plans (for example, will lower prices now lead to you become the dominant player in your market segment leaving you free to charge whatever you like in the future?).

What kind of market are you selling in? For some markets a lower selling price will make customers suspicious of your product. For other products, customers are unable to distinguish between the offerings of different sellers and they will choose primarily on price.

Please contact us if you need any assistance with analysing costs or finding the optimal selling price for your business.

Kristina Andersen
Andersen Accountants Limited
Telephone: 09 3695198