Price Calculation

The search for the “right” price for your future offer is very important. There are not always competitors’ offers that you can use for orientation. But the general rule is: The revenue must at least cover the costs. That means calculating carefully!

Ask yourself the following questions:

  • How high does a cost-covering price have to be?
  • What profit margin should be calculated?
  • What are the market prices for the product?
  • What prices do my competitors have?
  • How financially strong is my future customer base?

Cost-oriented pricing

The cost-oriented pricing policy combines all variable costs (personnel costs, material costs, energy consumption, etc.) and fixed costs (rent of premises, depreciation of machinery, insurance, etc.) of production. A profit surcharge is then added to these costs. The sum results in a price that must be achieved for the product on the market.

Rule of thumb: All costs (variable and fixed) that arise from the calculated sales are divided by the number of products sold (for services: hours) and a profit mark-up is added. 

Special case: Cost calculation for service providers

Companies that predominantly sell human labour, such as service providers, usually calculate with hourly wages or hourly rates. First the total costs (without material) are determined, then the number of working hours per employee and year. If you now divide the total costs by the billable hours of operation, you receive the hourly rate. Your company has to achieve this rate for orders to at least cover its costs. Another possibility is to divide these costs by the "billable" hours (hours that can be billed to the customer as working time).

Market-oriented pricing
Market-oriented pricing (also: optimum pricing) is not based on the lower price limit, but on

  1. the customers (how much are the customers willing to pay?) and
  2. the competing companies (What prices do they achieve?)

Analysis of customers
Depending on the market and competition, customers differ in their purchasing behaviour. Surveys show that one third of all customers are primarily price-oriented. Such “bargain hunters” also accept slight quality losses for a lower purchase price. Exactly the opposite is true for the group of quality buyers: For them, price only plays a subordinate role. What counts is the performance offered. If a company offers better performance/quality or a higher benefit, this customer group is willing to pay a higher price.

For you as an entrepreneur this means: Get to know your target group in detail so that you can set the price accordingly. High prices for demanding customers or cheap offers for the masses: Both strategies can work. Only the combination of both will lead to you being perceived as a “neither- nor-provider” in the end and not really address any customers.

If a market is not quite as fiercely contested and newcomers do not have to switch to one of the two extremes, a medium price range can also establish itself. However, this is rather an exceptional case.

Price analysis of competing companies
If your competitors already set a price on the market, your calculation cannot be based solely on determining a cost-covering offer price. Rather, you must check whether you are in a position to cover your production costs at the given market prices and, in addition, are able to generate a contribution margin or profit.
An important component of your pricing is therefore the analysis of competing companies. First determine whether and how many competitors there are in your market. If you are not the sole provider, you must be guided by the market prices of the competition. Determine the range in which the market price is moving and the downward and upward deviations. This is important for setting your own price.

As a new market participant, you can position yourself against your competitors with two possible variants: Lower prices for comparable quality (example: budget airlines) or an improved quality at a similar price (example: luxury textiles). These simple connections are often the starting point for the entire business idea or a new business concept.

Pricing in summary
The best way to set your price is by using a combination of cost-oriented and market-oriented price calculation.
You have now thoroughly analysed the market, your competitors and your target group. But what should you do if the cost price (which is economically necessary for you) is higher than the current market price?
Two possibilities are conceivable:

1. Adjustment of the target group
One possibility of achieving the high cost price regardless is to adjust the target group: Prices that cannot be achieved with public clients can be achieved with private customers if necessary. Test it: Is your product characterised by a special additional benefit that justifies a higher price than the competition and is this also achievable?

2. Cost reduction
There is a second possibility to achieve the market price: saving. Check your costs and the service you offer, and look closely at where and how you might make savings. It is important that the fixed price ultimately covers all costs incurred with a calculated turnover and yields a profit from which you can make a living.

Sample text: Price calculation
Due to the comparatively good competitive situation and the unique selling points such as a large range of services and sales through the internet, we can offer a price for our service that is only slightly higher than that of our competitors. Since customers demand high-quality work above all, they are also prepared to pay the slightly higher price.