Trade Price Formation Methodology

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Retail Price Formation
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We will see in this article:

See also: Complete Guide to Defining Sales Pricing

Definition

What is it: A pricing is the art of charging prices on products in a way that they correspond to the customers' perception of value, are aligned with the prices practiced by competitors, pay the direct costs of producing the product and allow the company to reach the equilibrium point, that is, get a combination of margin and volume that pays for indirect costs, usually fixed, and leaves it zero-to-zero.

Why pay attention to pricing: Setting the sales price correctly is essential for your business to be sustainable and have a future. This process is complex, and must be based on several factors, such as: analysis of costs, competition and consumer behavior. After all, the main purpose of commerce is to generate income that covers the costs of the business and generates profit.

Trade Pricing

In today's post we'll bring tips to help you price your products properly and increase your business's bottom line. Check out:

Perception of Value

The first thing you need to understand is how well you meet the demands of your target audience in relation to the value they attach to the characteristics of the ideal product. It seems complex, but in reality it is quite simple. Just try to map what customers value most in that market, such as service, terms, quality, price, among others, and analyze who best delivers what the customer needs.

An easy way to do this is by using a value curve. In this curve you will put your main competitors and assign notes to you and them to the main needs of the public:

Value Curve

In this case, the analysis that must be done is:

1) I am better than my competitors in the main attributes - it means that I serve the audience better than the competition, that is, they would not mind paying a little more to consume my products.

2) There are not many differences between me and my competitors - in this case, the market defines the price. If I price above the competition, I will sell less. If I price below, I'll sell more. My spending structure will tell me the price range that I will be able to practice.

3) My competitors are better than me in the main attributes - the business will only be viable if I can price below the competition or if I can improve these attributes quickly.

Download for free a pre-ready model of value curve, by clicking here.

Competition Analysis

The second step in defining your pricing is to analyze the competition and see if you are aligned with them based on the perception of value that has already been verified. This activity is nothing more than doing a good job of price quotation.

At that point you ask yourself, "But will I have to quote prices for all my products in the competition? A trade can have thousands of products! "

No ... it's not necessary. To do this job, I suggest you follow a similar method to what is done in calculating inflation in Brazil. In general, the main indices are calculated from the creation of baskets of widely consumed products.

To start this exercise, think “what are the flagships of my trade? The 20% of products that bring 80% of my revenue ”and develop this exercise analyzing these bestsellers. From that point, you can compare and have something like this report in your result:

Competition Analysis

 

It is also important to pay attention to the positioning of your competitor. If you want to have low prices as a differential and realize that your price is higher than competitors, something is wrong with your strategy or cost management.

A nossa Product Pricing Worksheet can help you in analyzing the competition.

Trade Pricing

Costs management

Once you realize that you have a strong strategy and are aligned to market prices, it's time to see if your cost structure is adequate and plan for change. You can also begin your pricing work by this step, keeping in mind that you will have to plan deep spending cuts if your strategy and the market do not carry the price you want.

To begin to do this analysis, you must classify costs into two categories, fixed and variable, and set a period for analysis, we suggest the term of one month. All expenses that have been incurred by the company must be analyzed:

Variable or Direct Costs

1 Trading Price Training Methodology

The quantity of products sold is directly proportional, that is, the higher the sales volume, the higher the percentage of participation per product. These are: raw material, sales taxes, sales commissions, commissions on forms of payment, etc.

In this case, the price of your product must pay in full the unit values ​​of these costs. In fact, the sum of them defines its minimum price, with no margin to remove the fixed costs and generate the profit of the operation. See the example below:

Contribution Margin

These prices should always be updated so that you readjust your price from changes in the supplier's price. Also remember that you must find units of measure to do this product analysis where it is difficult to define the concept of unit sold. For example, set the value per kg for meat types.

Fixed or Indirect Costs

2 Trading Price Training Methodology

Once you know your unit variable costs, that is, direct costs of each unit sold, you should understand the unit cost concept. Each unit sold of product sold is composed of: 1) direct costs; 2) contribution margin. The contribution margin is what is left over to pay the company's other costs, which are usually fixed or suffer small variations.

The rule of fixed costs is quite simple. You have to always be calculating the value of your break-even point, that is, the number of units you need to sell to stay at a minimum zero-to-zero.

If your product costs an average of R $ 100 and the direct costs add up to R $ 40, you have a contribution margin of R $ 60. If your fixed costs add up to R $ 6.000 per month, you need to sell R $ 6.000 / R $ 60 = 100 units to reach your break-even point.

Point of Equilibrium

The issue that can make all the difference is that, as these costs do not vary much, selling more means that your fixed unit cost, that is, the fixed costs divided by the amount of sales, will be lower. Imagine that you are analyzing a product that costs R $ 100 and it accounts for 50% of your R $ 10.000 billing. Doing the calculation, I realize that I sell about 50 units per month.

It is normal to expect him to bear 50% of the company's fixed costs, since he brings 50% of the revenue. Assuming that fixed costs total $ 5.000, I expect this product to pay $ 2.500 in fixed costs. His fixed unit cost is R $ 2.500 / 50 = R $ 50. If his contribution margin is 50% (R $ 50), I am zero-to-zero with him. If it is higher, it means profit, and less, loss.

Now let's assume that with the same fixed cost structure (R $ 5.000) I increased the sale of it to 100 units per month. Now my billing has gone to $ 15.000 and it represents 66% of billing ($ 10.000). If I want it to pay 66% of the fixed costs, I find the amount of 3.333,33 that divided by the 100 units sold, I find R $ 33,33 of fixed unit cost. A lot smaller than the $ 50 that I needed margin to go out at zero-to-zero.

The learning seen in this example is that the more productive and efficient my company is, but I can set a competitive price without leaving a loss. The golden tip is that every entrepreneur should seek gains of scale: without increasing the structure of expenses, how can we sell more?

I leave you with this reflection ...

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Trade Pricing

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