Pricing: formulas, calculation principles

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:53

The value of price in a market economy is very high. It determines not only the profit and profitability of the organization, but also the structure of production, affects the movement of material flows, the distribution of commodity mass, etc. A well-constructed pricing policy is the key to the efficiency of the organization. For this, special methods, calculations and formulas are used. Pricing is a complex process that will be discussed next.

Pricing challenges

Pricing in the enterprise and in the organization pursues certain goals. To achieve them, certain tasks are set. They are resolved in the course of a certain option or direction of price action.

The list of tasks is usually common for any state. But it may vary. It depends on the stage of development of the economy, the types of processes that develop in it, etc.e. Before considering pricing formulas in foreign trade, in the domestic market, etc., it is necessary to pay attention to the tasks of this process. In general, they look like this:

Coverage of production costs in the process of manufacturing products, as well as its sale. This allows you to provide a profit, the amount of which will be sufficient for the normal operation of the organization.
Determination of the degree of interchangeability of finished products in the process of value formation.
Resolving social issues.
Introduction of environmental practices in the process of building the appropriate policy of the organization.
Solving issues in the foreign policy sphere.

Horizontal connections were a feature of the market development in the early stages. They were established between consumers, producers, as well as intermediaries. During this process, the first two of these tasks were solved. The rest of them face not only production, but also modern society as a whole.

In the context of market development, the following tasks are solved with the help of prices:

Covering the costs of production, which ensures the profit of the company. This is a requirement of both the manufacturer and the intermediary. Each of them must set such a price in order to make a profit, and the enterprise worked profitably. The more favorable the market environment, the higher the cost of production can be. As a result, the company makes big profits.
Recording the interchangeability of goods, works or services. If products with the same properties but different pricesare on sale, the buyer will, of course, choose the cheapest option.

Other tasks arise purely in the conditions of the modern market. Therefore, pricing methods, the formulas of which will be discussed below, make it possible to move from a spontaneous, undeveloped market to its regulated form.

Steps

Before considering the formulas for solving pricing problems, you need to pay attention to the stages of this process:

Setting goals.
Determining the demand for products.
Estimating the number of costs.
Analysis of the cost of competitive products.
Selecting a pricing method.
Formation of the cost of products, the rules for its change.
Accounting for government regulation in the field of pricing.

At the first stage, the economist must decide what problems the appropriate pricing policy will help solve. For example, a company can change the quantity of manufactured products or its structure, capture new markets, achieve a stable assortment, reduce costs, and so on. It may also be required to improve the quality of products or increase the level of profit to the maximum level.

At the second stage, you need to analyze the demand for products. At the same time, it is important to determine how many products an organization can sell at a particular price level. The maximum level of sales at the lowest prices is not always positively reflected in the results of work, and vice versa.

Therefore, when definingpricing in trade, the formula of elasticity and the coefficient of supply and demand is determined necessarily. In this case, the following calculation is applied:

Ke=Growth in demand, % / Decrease in prices, %, where Ke is the coefficient of elasticity of demand.

The supply and demand coefficient is defined as follows:

Ksp=Supply growth, % / Price increase, %.

If demand is elastic, goods are highly dependent on the price level. It depends on the volume of sales. If the cost rises, customers will purchase goods less often. Luxury goods are characterized by elastic demand. Some products are inelastic (e.g. matches, s alt, bread, etc.).

Next steps

Pricing formulas involve costing. They are used to determine the cost of production. This allows us to consider the structure of this indicator, to find reserves for its reduction.

At the fourth stage, competitors' prices are analyzed. This is a complicated procedure, since the issue of pricing at the enterprise is a trade secret. However, this work still needs to be done. It is required to determine the price of indifference, at which the buyer will not care which manufacturer's product to buy.

At the fifth stage, pricing methods are selected. Each of them has its own formulas. The most common methods are:

Low marketing and production costs.
Tools.
Unique product characteristics.
Cost-marketing.
Mixed.

After that, the final price is set. They also establish rules for changing it in the future. At this stage, two tasks are solved:

Create your own system of discounts. You need to learn how to use it correctly.
The price correction mechanism is being determined. This takes into account the stage of the life cycle of goods. You also need to identify inflationary processes.

At this stage, marketing and financial services must create an expedient system of discounts, presenting them to customers. Be sure to determine the degree of impact of discounts on sales policy.

After that, the measures of price regulation by the state are taken into account. It is necessary to predetermine how such actions will affect the level of product cost. The level of profitability may be limited by law. Subsidies are given for some goods, tax sanctions are applied. In some cases, there is a seasonal price reduction.

An assessment of the patent purity of products is also carried out, especially when they are delivered abroad.

Comparison of pricing methods

There are different ways to calculate pricing. They have certain advantages and disadvantages. The main techniques used in carrying out such a process are as follows:

Total cost method. It's also called Cost Plus. The advantage of this approach is that it provides full coverage of variable and fixed costs. This allows you to get the planned level of profit. disadvantagemethodology is the inability to take into account the elasticity of demand. There is also not enough incentive to reduce costs in the enterprise.
Method of determining the cost based on reduced costs. Allows you to revise the structure of the assortment, choosing the optimal nomenclature list. A special formula is applied for the cost method of pricing. An additional list of costs is formed. The disadvantage of the technique is the difficulty of allocating costs to fixed and variable items according to the product range.
ROI method. Allows you to take into account the cost of financial resources, credit funds. The disadvantage of this approach is called high interest rates, their uncertainty, especially when inflation is high.
Return on assets method. The method allows to take into account the effectiveness of the use of certain types of assets in accordance with the issued nomenclature. This ensures the required level of profitability of the company's assets. The disadvantage of the methodology is the difficulty in determining the employment of certain types of property of an organization when using the nomenclature.
Method of marketing estimates. Allows you to take into account market conditions, as well as determine the characteristics of the reaction of buyers to certain changes. The disadvantage of the methodology is some conventionality of quantitative estimates.

Full cost method

Among the pricing formulas in production, the most common is the calculation using the full cost method. In order to reveal all the features of the presentedapproach, it needs to be considered with an example. For example, a company manufactures 10,000 units. products for the reporting period. Production and sales costs are as follows:

Variable production costs (Rper) - 255 thousand rubles. (25.5 rubles per unit).
Fixed overhead costs (Rtot) - 190 thousand rubles. (19 rubles per unit).
Administrative, commercial costs (Rka) - 175 thousand rubles. (17.5 rubles per unit).

Total costs (Rfull) is determined by 620 thousand rubles. (62 rubles per unit). At the same time, the desired profit margin (PJ) is 124 thousand rubles.

When calculating the price using the presented method, you need to add the required profitability indicator to the sum of total costs (variable and fixed). It covers the entire level of costs for the manufacture of products and their sale. Also, the organization receives the desired profit. This technique is widely used in industries with a large stock list.

The methodology involves calculating the rate of return:

R=PJ/Rfull100%=124/620100%=20%.

This is the required level of profitability, on the basis of which the price of products is calculated. In this case, the pricing formula based on the “Cost plus” principle is calculated by the formula:

C=Rfull + RfullR/100.

It is necessary to take into account the data of the unit of production:

C=62 + 6220/100=74.4 rubles

Next, you can determine the cost of an individual product using the same method. The following formula is used for this:

C=R full. / 1 – R.

When usedof the presented pricing formula, the retail price will be the same (74.4 rubles).

Therefore, profitability includes a price that is acceptable to the organization. If for some reason it is impossible to present commercial products on the market at a given cost, you need to look for ways to reduce costs or provide for other profits.

Cost reduction method

We should continue to look at examples of pricing calculations. One of the most common is the method of reduced costs. In this case, the level of required profitability is added to the variable costs. This figure should cover all fixed costs. Putting such profitability into the price of products, the company can make a profit.

In many industries, this method is widely used today. Especially in those organizations where the "direct costing" system is used. In this case, the costs are divided into variable and fixed. The second category includes, for example, depreciation, rent, the amount of interest on loan funds, etc.

Variable costs change proportionally with the volume of production. They are calculated per unit of production. They represent the cost of raw materials, wages of employees involved in production, etc.

To determine the cost of production, you need to calculate the level of profitability:

R=((Pzh + Rtotal + Rka)/Rper)100%.

P=((124 + 190 + 175)/255)100%=191.8%.

Then the cost is determined by the followingcost method formula:

C=Рfull. + РfullР/100.

C=(25.5 + 25.5191.8/100)=74.4 rubles

Pricing is per unit. This method allows you to get the same result as using the full cost method. This is due to the fact that the same inputs are used. If the information is different, then this difference is compensated for by a different level of profitability per unit of production.

ROI method

When considering pricing formulas, it is worth noting the ROI method. Cost is determined by profitability. It must be higher than the price of third-party investment funds.

It is necessary to determine the amount of total costs that form the cost per unit of output. They add the cost of interest on the loan. This allows you to include paid financial resources in the price.

This approach is used by organizations that produce a large list of products. Their production costs are different. This approach allows you to calculate the price of new products. For this, the method of determining the return on investment is well suited. Based on it, the volume of output of such products is calculated.

For example, a company wants to calculate the price of a new product. It is planned to produce annually 40 thousand units of products. Variable costs are 35 rubles / unit. Fixed costs amount to 700 thousand rubles. To release new products,The company needs additional funding. The amount of borrowed funds is 1 million rubles. The bank provides a loan at 17% per annum.

To determine the unit cost of a new product, a simple calculation is made. Fixed costs per product are determined:

700 / 40=17.5 rubles

Total expense is calculated as follows:

17, 5 + 35=52.5 RUB

Desired revenue must be at least the cost of the loan:

(1 million rubles0.17) / 40 thousand rubles.=4, 25 rubles/unit

The minimum unit price will be:

52, 5 + 4, 25=56, 75 RUB

The return on assets method involves adding a percentage to the total manufacturing costs that equals the return on assets. It is set by the company itself. The following formula is used for this:

C=Рfull. + (Р + Сact)/OP, where Сact is the value of the company's property, OP is the expected sales volume in the future (in natural units).

Method of marketing estimates

Other pricing formulas apply. One approach that is suitable in different circumstances is the method of marketing estimates. It involves the use of information about past auctions, competitions. The winner is the manufacturer whose bid price can guarantee acceptable terms for the implementation of the forthcoming work, as well as the quality of the finished product. A reasonable price in this case provides a profit.

This technique is used if it is necessary to conduct a selectionexecutors of the state order or in the process of socially significant work. Another approach can be applied, for example, return on sales. The price in this case is determined by drawing up an estimate of the total costs. Profitability is calculated using the formula:

R=PJ / Rfull100%.

It is possible to form a price using gross profit information. In this case, the full cost method is applied. The profitability included in the cost of production is calculated as follows:

R=(Pzh + Rka)/Roll100%.

Relangi method

When studying pricing formulas, you should pay attention to the relangi method. It is often used in the chemical, light and other individual industries. In this case, the product life cycle is planned. According to the actual terms of such a cycle, the price of a unit of production is also formed.

It is necessary to use this method if you want to observe, constantly monitor the presence of marketable products on the market. For this, the ratio of price and demand is taken into account and even sometimes changes. The application of the presented methodology provides a number of possibilities:

Changing the physical characteristics of commercial products.
Changes in performance.
Making minor stat changes.
Supplement the product with some special services, such as consultations, service and service extensions, etc.
Product update.

At the same time, it is necessary to take into account the fact that in the manufacture of long-lasting products, the period of their usereduced artificially. To do this, simply change the design. At the same time, the range of finished products is expanding, the filling of the distribution network with the organization's products is expanding.

Consumer effect method

This approach involves taking the effect of new products into account when calculating the price. It arises in the field of consumer demand. The pricing formula in this case would be:

C=Cbi + EKt, where: