In contrast, GPMT helps you decide if this approach can scale up. Cost-plus pricing is how to calculate selling price per unit. The best strategy you can apply is a flexible one.įor example, WTMWB (What the Market Will Bear) is better during short periods when you need to recoup costs quickly, such as releasing a new SKU after a period of R&D. For example, a company could raise its prices by 1% and see overall profits increase by far more than that, even if demand remained the same. Another thing - the results of price changes are not always linear. Like it or not, customers infer a lot of information about your business from your prices. If your pricing strategy and your competitor’s pricing strategy are the same, then it’s like missing out on utilizing a helpful tool. Would $59.95 be the more enticing price that leads to higher profits? How to find the best pricing strategy This is why a retailer is more likely to price a product at $19.99 rather than $20.00.Ĭustomers are more likely to make a purchase when it is $19.99 because our brains tell us - “This is less than $20.00? it’s a bargain.” Other industries tend to use this technique, such as those in real estate. You can use this metric to analyze progress to your ideal gross profit margin and adjust your pricing strategy accordingly. Many manufacturing businesses aim for a GPMT of at least 20%, but this depends on your industry and costs. Dividing this with the original $10,000 leaves you with a gross profit margin of 0.4. Say a company has $10,000 in revenue, and the COGS is $6,000. Gross profit margin target (GPMT)Īfter you know how to calculate the selling price, you can work out the GPMT of your business. In short, it leaves you vulnerable to your competitors’ pricing strategy. But beware - this is not a sustainable strategy - charging at the upper limits of what the market can bear leaves the field open for a wily competitor to undercut your prices easily. This is a pricing strategy that can lead to the highest profit margins. If an item costs $100 to manufacture, and the most a customer will pay for it is $500 - this is the market limit. This pricing charges the maximum (or very close to the maximum) for what the market allows. The flexibility makes it suitable for manufacturing businesses. If not, you can increase prices or increase output. You can use it to work out if your business will be profitable at your current pricing strategy. Planned profit pricing combines your cost per unit with projected output for your business.
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