When you run a business, setting the right prices for the goods or services you sell is a make-or-break task. A selling price that’s too low won't provide enough margin to cover expenses and profit. Put too high a price tag on something, and you drive away customers.
Price and Markup
Start with the gross margin percentage your business needs to cover overhead and profit. Gross margin is the portion of a selling price over and above the cost of acquiring or producing a product.
1. Find the Cost Percentage of a Good
Subtract the gross margin percentage from 100 percent to find the cost of a good stated as a percentage of the price. For example, if the desired gross margin is 40 percent, the cost is 60 percent.
2. Compute the Markup Percentage
Divide gross margin percentage by the cost percentage to compute the markup percentage. A gross margin of 40 percent divided by 60 percent cost percentage yields a markup of 66.7 percent.
3. Set the Price
Multiply the dollar cost of a good by the markup percentage to set the price. Suppose the cost of a good is $45. Multiply $45 by 66.7 percent to set the price of $75.
Choosing Gross Margin Percentage
Choosing a gross margin percentage is a judgment call; no formula is right for every situation. Instead, you must assess your business needs, your customers and your competition in several ways:
- Your business must generate enough gross profit to cover overhead. Estimate how much of your overhead must be allocated to each unit sold based on your expected unit sales volume to figure the minimum gross margin required.
- The characteristics of the people who live in your market area affect their buying choices. Get to know your customers and determine what they want.
- The prices your competitors set for goods and services similar to yours constrains how much you can charge.
Informal Pricing: The Tag Sale
If your business involves selling used goods at tag sales – also known as yard sales or garage sales – consider pricing items that are in good condition at one-third of the original price. Set lower prices for merchandise that's worn or in poor condition. Select asking prices a little higher than you really want to allow you to bargain with customers. Research the market value of collectibles and antiques. Be firm about prices for such "high-end" merchandise. You can always take an item to an antique dealer or put it up for sale on an Internet marketplace if you don't get any takers at your tag sale.