The Mechanics Of Pricing

Setting prices, then, begins with determining all of the goods and services that go into the manufacture of a product, then multiplying their total cost by a markup factor that will give you the desired Cost of Sales (COS) percentage. The factor itself is determined by dividing the Cost of Sales percentage into 100. Note that Success Pricing automatically performs these mathematical calculations. However, the following examples will give you a basic understanding of the computations involved.

To arrive at the multiplication factor (markup) for a COS of 40%, divide 40 into 100.

The result is a COS factor of 2.5.

To arrive at the multiplication factor (markup) for a COS of 35%, divide 35 into 100.

The result is a COS factor of 2.86.

To arrive at the multiplication factor (markup) for a COS of 30%, divide 30 into 100.

The result is a COS factor of 3.33.

Thus, if production of an item takes $100 worth of materials, its price would be:

At a 40% Cost of Sales: Multiply $100 by 2.5.

The price would be $250.

At a 35% Cost of Sales: Multiply $100 by 2.86.

The price would be $286.

At a 30% Cost of Sales: Multiply $100 by 3.33.

The price would be $333.

Establishing and monitoring your Cost of Sales percentage is an important key to business success, because it allows you to bring discipline to the manufacturing function of your business. If you begin to see a trend toward a higher Cost of Sales over a period of time, then you are alerted to the need to lower your manufacturing cost ratio. Otherwise, you are jeopardizing your bottom line or Net Profit.

There are only three methods of lowering your Cost of Sales: find less costly ways of producing the product; use smaller amounts of goods (such as film) to produce the product; or raise the price of the product.

Using the preceding methods, Success Pricing helps you to properly price each of your products to assure that there are no profit leaks in your business.

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