When selling a product, food or services, you have to ensure sufficient income to cover your expenses. Any income made the production cost is considered your profit. Below is the pricing methods on how to price your products.
Cost-plus pricing – this method allows you to cover all direct costs and then generate a profit. For example, you want a 20% profit from 100 units of a product that cost you P1,000. you should sell the product for P12 each.
Cost-based pricing – this method uses unit costs of direct and indirect costs to determine the price. The cost-based pricing formula is [(VC x unit sold) + FC = price per unit x units sold] x (100 + profit margin, expressed in percentage).
For example, your variable cost is P30; fixed cost, P500; units sold, 100; and target profit, 20%. Using the formula, your selling price must then be P42 per unit, to cover your costs and make a 20% profit.
Note that the price per unit, before adding the profit margin, is also the breakeven point. The selling price must be P42 to cover costs and make a 20% profit.
Percent food cost pricing – this is a method based on a theory that food cost makes up about 40% of the product price. Using this method, simply multiply the food cost by 2.5 (40% x 2.5 = 100%).
Contribution pricing – this method always allow you to cover all direct costs (per product), and also allows a contribution toward indirect costs and profit. For example, your indirect costs amount to P1,000; desired profit, 30% (P300); and a contribution of P20.
The formula to follow is (IC + profit)/contribution = units to sell. Using this formula, you need to sell 65 units of the product to cover the indirect costs and make a profit of P300.
Working-back method (expected return) – this method is most useful for small businesses, as it computes for the total costs and desired profits first. Use this formula: (total costs + profit)/units sold = price per unit.
For example, your total cost is P1,000; units sold, 100; and desired profit is 50% (P500). Your price per unit would be P15. If this turns out to be higher than the price offered by your competitor, offer something more to the consumer, to compensate for the higher price (for instance, free delivery).
Reference: Pricing Your Food Product, North Dakota State University Extension Service
