The value of prices 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, distribution of commodity stock, etc. A well-formed pricing policy is the key to the effectiveness of the organization. For this, special methods, calculations and formulas are used. Pricing is a complex process that will be discussed later.
Pricing Challenges
Pricing in the enterprise and in the organization pursues certain goals. To achieve them, certain tasks are set. They are solved in the course of a particular option or direction of price behavior.
The list of tasks is usually general for any state. But it can vary. It depends on the stage of development of the economy, the types of processes that develop in it, etc. Before you consider the pricing formulas in foreign trade, the domestic market, etc., you need to pay attention to the tasks of this process. In general terms, they look like this:
- Coverage of production costs during the manufacturing process, as well as its implementation. This allows you to ensure profit, the size of which will be sufficient for the normal operation of the organization.
- Determining the degree of interchangeability of finished products in the process of value formation.
- Solving social issues.
- Implementation of environmental techniques in the process of constructing an appropriate organization policy.
- The solution of questions in the foreign policy sphere.
A feature of market development in the early stages was horizontal connections. They were established between consumers, manufacturers, as well as intermediaries. During this process, the first two of these problems were solved. The rest of them are facing not only production, but also modern society as a whole.
In the conditions of market development, with the help of prices they solve the following problems:
- Covering production costs, 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. As a result, the company makes big profits.
- Accounting for the interchangeability of goods, works or services. If products with the same properties but at different prices are on sale, the buyer, of course, will choose the cheapest option.
Other tasks arise purely in the conditions of the modern market. Therefore, pricing methods, the formulas of which will be considered later, allow you to move from a spontaneous, undeveloped market to its regulated form.
Stages
Before considering the formulas for solving problems of pricing, you need to pay attention to the stages of this process:
- Setting goals.
- Determination of demand for products.
- Estimation of the amount of costs.
- Cost analysis of competitive products.
- Choosing a pricing method.
- Formation of the value of products, the rules for changing it.
- Accounting for government regulation in the field of pricing.
At the first stage, the economist must decide what tasks the appropriate pricing policy will help to solve. For example, a company can change the number of manufactured products or its structure, capture new markets, achieve a stable assortment, reduce costs and more. It may also be required to improve product quality or raise profit margins to the maximum level.
In the second stage, you need to analyze the demand for products. In this case, it is important to determine how much products the organization will be able to sell at one or another price level. The maximum sales level at the lowest prices is not always positively reflected in the results of work, and vice versa.
Therefore, when determining pricing in trade, the formula for elasticity and the coefficient of supply and demand is determined necessarily. In this case, the following calculation is applied:
Ke = Growth in demand,% / Price reduction,%, where Ke is the coefficient of elasticity of demand.
The coefficient of supply and demand is determined as follows:
KSP = Supply volume growth,% / Price increase,%.
If demand is elastic, goods are highly dependent on price levels. Sales volume depends on it. If the cost rises, buyers will purchase goods less frequently. Luxury goods are characterized by elastic demand. Some products are inelastic (e.g. matches, salt, bread, etc.).
Subsequent steps
Formulas for calculating pricing involve the calculation of costs. With their help determine the cost of production. This allows you to consider the structure of this indicator, find reserves for its reduction.
At the fourth stage, competitor prices are analyzed. This is a complex procedure, as the issue of pricing at the enterprise is a trade secret. However, such work still needs to be done. It is required to determine the price of indifference, at which the buyer will not care what product manufacturer to buy.
At the fifth stage, pricing methods are selected. Each of them has its own formulas. The most common methods are:
- Low cost of sales and production.
- Fixtures.
- Uniqueness of product characteristics.
- Cost-marketing.
- Mixed.
After that, the final price is set. They also establish the rules for changing it in the future. At this stage, two tasks are solved:
- Create your own system of discounts. She needs to learn how to use it correctly.
- The mechanism of price correction is determined. This takes into account the stage of the life cycle of goods. It is also necessary to determine inflationary processes.
At this stage, marketing and financial services should create an appropriate system of discounts, presenting them to customers. Be sure to determine the degree of impact of discounts on sales policies.
After that, the state’s price control measures are taken into account. It is necessary to determine how such actions will affect the level of cost of production. Legislation may be limited by the level of profitability. Subsidies are issued for some goods, and tax sanctions are applied. In some cases, a seasonal price reduction is carried out.
An assessment of the patent purity of products is also carried out, especially when delivering it 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:
- The full cost method. It is also called Cost Plus. The advantage of this approach is the full coverage of variable and fixed costs. This allows you to get the planned level of profit. The disadvantage of this technique is the inability to take into account the elasticity of demand. There is also no sufficient incentive to reduce costs in the enterprise.
- Costing method based on reduced costs. Allows you to review the structure of the range, choosing the optimal inventory list. A special formula is used for the costly pricing method. An additional list of costs is being formed. The disadvantage of this technique is the complexity of the distribution of costs for fixed and variable according to the range of goods.
- 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 with a high level of inflation.
- 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 provides the required level of return on assets of the enterprise. The disadvantage of this technique is the difficulty in determining the employment of certain types of property of the organization when using the nomenclature.
- Marketing Assessment Method. Allows you to take into account market conditions, as well as determine the characteristics of the reaction of customers to certain changes. The disadvantage of this method is some convention of quantitative estimates.
Full cost method
Among the pricing formulas in production, the most common is the calculation using the full cost methodology. To identify all the features of the presented approach, it must be considered by example. For example, a company produces 10,000 units. products for the reporting period. The costs of production and sale are as follows:
- Variable production costs (Rper) - 255 thousand rubles. (25.5 rubles per unit).
- Permanent overhead costs (General) - 190 thousand rubles. (19 rubles per unit).
- Administrative, commercial costs (RCA) - 175 thousand rubles. (17.5 rubles per unit).
Total costs (Rpoln) is determined by 620 thousand rubles. (62 rubles per unit). At the same time, the desired profit (PZ) is 124 thousand rubles.
In the course of calculating the price by the presented method, it is necessary to add the required profitability indicator to the sum of total costs (variable and constant). It covers the entire level of costs for the manufacture of products and their implementation. The organization also receives the desired profit. This technique is widely used in factories with a large inventory.
The method involves calculating the rate of return:
P = Pzh / Rpoln * 100% = 124/620 * 100% = 20%.
This is the required level of profitability, on the basis of which the price of products is calculated. At the same time, the pricing formula according to the “Cost plus” principle is calculated by the formula:
C = Rpoln + Rpoln * R / 100.
In the calculation you need to take these units of production:
C = 62 + 62 * 20/100 = 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 = P full / 1 - R.
Using the presented pricing formula, the retail price will be the same (74.4 rubles).
Therefore, profitability includes the price that is acceptable to the organization. If for some reason it is impossible to present marketable products on the market at a given cost, you need to look for ways to reduce costs or provide for other profits.
Reduced cost method
You should continue to consider examples of pricing calculations. One common method is reduced cost. In this case, the level of required profitability is added to variable costs. This indicator should cover all fixed costs. By laying such a profitability in the price of a product, a 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 variables and fixed. The second category includes, for example, depreciation, rent, interest on loans, etc.
Variable costs vary in accordance with the volume of production proportionally. They are calculated per unit of output. They represent the cost of raw materials, remuneration of employees employed in production, etc.
To determine the cost of production, you need to calculate the level of profitability:
P = ((Pzh + Pchot + Pka) / Pper) * 100%.
P = ((124 + 190 + 175) / 255) * 100% = 191.8%.
Next, the cost is determined by the following formula of the costly pricing method:
C = Rpoln. + Rpoln * R / 100.
C = (25.5 + 25.5 * 191.8 / 100) = 74.4 rubles.
Price calculation is per unit of output. This method allows you to get the same result as when using the full cost technique. This is due to the fact that the same source data is used. If the information is different, then per unit of production this difference is compensated by a different level of profitability.
ROI method
Considering the formula for calculating pricing, it is worth noting the method of return on investment. Cost is determined by profitability. It should 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 for the loan. This allows you to take into account the price of paid financial resources.
This approach is used by organizations that produce a large list of products. The costs of their production are different. This approach allows you to calculate the price and new products. The method for determining the return on investment is well suited for this. On its basis, the volume of production of such products is calculated.
For example, a company wants to calculate the price of a new product. It is planned to produce 40 thousand units of products annually. 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. The fixed costs for one product are determined:
700/40 = 17.5 rub.
Total consumption is calculated as follows:
17.5 + 35 = 52.5 rubles.
The desired revenue should not be lower than the cost of the loan:
(1 million rubles * 0.17) / 40 thousand rubles. = 4.25 rubles / unit
The minimum unit price is:
52.5 + 4.25 = 56.75 rubles.
The method of return on assets involves adding to the total cost of manufacturing a percentage that equals the return on assets. It is established by the enterprise itself. The following formula is used for this:
C = Rpoln. + (R + act) / Opozh, where act - the value of the property of the enterprise, Opozh - the volume of sales expected in the future (in physical units).
Marketing Assessment Method
Other pricing formulas apply. One approach that is suitable in different circumstances is the marketing assessment method. He intends to apply information about past tenders and competitions. The manufacturer whose value of the offer can guarantee acceptable deadlines for the upcoming work, as well as the quality of the finished product, wins. Reasonable price in this case provides profit.
This technique is used, if necessary, to conduct the selection of performers of the state order or in the process of socially significant work. Another approach may be taken, for example, profitability of sales. The price in this case is determined by making an estimate of the total costs. Profitability is calculated on the formula:
P = Pzh / Rpoln * 100%.
You can also set the price using gross profit information. In this case, the full cost methodology is applied. Profitability inherent in the cost of production is calculated as follows:
P = (Pzh + Pka) / Rolln * 100%.
Relay Method
Studying pricing formulas, it is worth paying attention to the relanga technique. 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 unit price is also formed.
It is necessary to apply this method, if you want to observe, constantly monitor the location of marketable products. For this, the ratio of price and demand is taken into account and even sometimes changed. Application of the presented methodology provides a number of possibilities:
- Change in the physical characteristics of marketable products.
- Changes in performance.
- Making minor performance changes.
- Supplement the product with some special services, for example, consultations, expansion of service and maintenance, etc.
- Product Updates.
In this case, it is necessary to take into account the fact that in the manufacture of long-acting products, the period of their use is reduced artificially. For this, the design is simply changing. At the same time, the range of finished products is expanding, the filling of the distribution network with the products of the organization is expanding.
Consumer effect method
This approach involves taking as a basis for calculating the price the effect of the use of new products. It arises in the field of consumer demand. The pricing formula in this case will be as follows:
C = CBI + E * Kt, where:
- CBI - the cost of the base product that was produced earlier;
- E - consumer effect when replacing a previous product with a new one;
- CT is the coefficient of inhibition and moral aging of the product.