When setting a retail selling price for your product, many people make the mistake of leaving out some budget for the cost of marketing or for distribution. Most make the direct approach by just considering the profit margin that they want to make and what happens then? The results would be that there would not be any funds to build your brand and to do so would be eating into your profits. What are the costs incurred and percentages to consider to build up to the price that you would like to sell?
Here are some tips on calculating your product cost and the retail selling price to ensure that you not only get to sell your product at the right price but also if the cost is competitive enough to be selling in the market. Remember to include these elements of cost into your price structure
Cost of your product
Needless to say, this cost would serve as the base of your price structure. If you are purchasing a finished product, this would be your purchase price. If you are manufacturing a product, the cost of your raw materials per output would be the base cost.
Depending on the product that you are selling, taxes should have already been included if you are manufacturing or purchasing the finished good locally. If you are importing then you would need to include import tax, import duties and sales taxes where applicable on to your costing
This applies if you are importing the finished product. It would be good to put in a fixed exchange rate and review every month or quarter or set a percentage of change which would impact your profit margins for easier calculations.
Transport or Handling charges
This is the part of the cost where if you are importing, the charges that the freight forwarder charges you or if you are purchasing a finished good, are there any transportation costs involved
What is the gross profit margin that you would like to make per product? What is the margin that you are comfortable with for your company go operate smoothly as this is just the gross margin which in this table does not include costs such as your office expenses or cost human resources
Include in a certain percentage of marketing funds so that you can use these funds to promote your product.
Wholesale or Distributor Margin
Let’s face it, you can’t and won’t be able to distribute to the whole entire country and therefore need the help of local distributors and wholesalers to distribute to places you won’t be able to reach. Allocating a certain percentage for them would be wise. If you are looking at the Malaysia supermarket retail, a good 10% would be the minimum advisable percentage to kick start the negotiation
Retailers would also usually require a certain percentage of profit margin to sell your product. Depending on your product segment, the margin varies from a minimum of 10% to a whopping 30% (based on Malaysia’s supermarket retail). Personal care products usually requires a minimum 20% – 25% whereas for food products, non basic necessities such as snacks or ready to drink products would need a minimum of 15% to 25%.
With that, a sample of the price structure would be like below. The Retail Selling Price of Product ABC would be the total calculation from A to K
Are there elements that I’ve missed out? Let me know on the comments below!