How Businesses Calculate Retail Price

How Businesses Calculate Retail Price

Do you wonder how companies calculate retail price? Most people think it’s simply a matter of selling an item for more than it cost to make or acquire. But several things are considered before setting a retail price.

Determining Perceived Value

The Economic Times reports that perceived value of an item affects its retail price. The perceived value means the item is worth however much someone is willing to pay. In this case, the company wants to set a retail price that will bring the most returns but without scaring customers away.

A company might do marketing research to determine the price people are willing to pay. If the product is unique, highly-desirable, or a popular brand, then people are usually willing to pay a high price. Consumers who want the latest and newest items as soon as possible generally aren’t concerned with price.

How Much Does the Business Need to Earn?

One goal when setting a price is to recoup expenses, create cash flow, and turn a profit. The gross profit margin is how much money a company needs to make to pay expenses and generate an income. This number has an effect on the retail price of an item.

Calculating the gross profit margin can be tricky. It’s something students learn in business accounting school, so it’s important. Consulting a trained accountant is a smart idea, but formal training isn’t necessarily required to perform the calculation. According to NASDAQ, the formula is (P-C)/P, with P being price and C being cost of sales. Plug the formula into a spreadsheet and it will adjust as costs change. The formula will recalculate the price and keep it current.

Psychological Factors

There have been several marketing studies showing that potential customers are heavily influenced by numbers. If a person sees a price of $39.95, or even $39.99, they are more likely to buy than if it were $40. Consumers focus on the first digit which in this case is 3. This is called “most significant digit pricing.”

The pattern occurs repeatedly with all numbers. There is an insignificant difference in the prices, but people see the smaller number and perceive the difference as much larger.

Finding Retail Price

It will take some research and experimentation to determine which pricing tactic works best, depending on the product and type of business. In most cases, a business will use a combination of all three tactics to maximize both sales and profit.

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