is there an actual formula companies use to calculate what the perfect price of an object should be?
In: Economics
Is there an actual formula? Not a standard one, no.
But the market is able to send all sorts of signals, and marketers and managers and sales people are able to gauge a price. They’ll look at similar examples and similar markets and similar launches in the past and do all the research, but at the end of the day it’s just going to be what the market dictates.
Many companies, no doubt, have their *own* versions of formulas–if nothing else, they’ll see what they can do before a project is even started to make sure it’s worth it. But it’s nothing standard or official or even all that accurate.
This is don through market research. You look at similar things that is already in the market. You can interview people asking if they are interested in the product. You can ask experts in the field such as shop owners. You can release some information about the product and see how much interest there is in it. Or maybe the most accurate way today is to accept pre-orders, this is often what kickstarter is used for.
There are some models which attempts to gauge how the demand changes with price. And it would be lovely to know that for example increasing the price by 10% decreases sales by 50%. But these models are highly dependent on the type of product and the market.
Noone knows “the perfect price” its a concept or ideal not something that realy exists. Both supply and demand depend on local factors too.
The whole supply and demand thing is used to get an average price under many different sellers.
You as an individual vendor just set a price that you can make money with(aka dont sell at a loss). If its lower than that of others you will get more customers untill others lower their prices. By adjusting these prices over and over again you get closer to this ideal price.
If it isn’t moving, lower the price. If it’s selling out, raise the price.
If you have a free marketplace with enough sellers all doing this, prices will auto-adjust across the whole market relatively efficiently, without needing any fancy formulas.
With the sweet spot between trial and error, past experience, educated guesses, market research and a pinch of sheer luck.
Also, since nothing comes for free, every seller has their own *minimum acceptable margin* (might be negative in some cases, but still it has a value).
So you know what is the minimum sell price you are willing to accept, now you just have to guess-stimate the maximum purchase price your customers are willing to pay (and hope it is higher than your value)
Typical retail mark-up is 100%, so a t-shirt that costs a store $10 gets marked $20. That additional $10 covers the store’s rent, utilities, employees, marketing, and allows for discounts/sales.
For many businesses, a 10% margin is target, so in the above example the store would hope to hold all those other expenses to $9.
Same 10% profits holds for other businesses, too, so say you’re a plumber you’d hope to have at least 10% profits after paying your employees, paying for parts and materials, paying for your company’s tools and trucks, marketing, etc. If there’s more demand than you can meet, you could raise prices to make same amount of money with less work, if you didn’t have enough work for a time you might offer discounts.
There is no “perfect price” because there are a lot of factors that go into pricing, and many of those factors are constantly fluctuating.
As a starting point, obviously, the “perfect price” for a retailer is “as much as I can charge without scaring too many customers away.” But as soon as you start to break that down, you see how many factors there are at play. For instance:
1.) How much do consumers actually want this product and what are they willing to pay for it? You can find this out using things like consumer surveys.
2.) Can consumers get a similar thing from somewhere else, and if so, for how much? This is a market research question.
3.) If I restrict sales by pricing too highly, am I going to start suffering from high inventory costs? This is an internal cost analysis issue. If I have a warehouse full of Christmas toys and it’s December 27th, I have to weigh whether it’s worth selling them at a discount now versus paying to store them for a whole year and trying to sell them again next year.
4.) If I’m selling a premium brand (like Ferraris), do I need to protect the brand by charging a high price even if I could sell more at a lower price?
At the end of the day, the simple answer to your question is that companies do their best to balance these factors, and then adjust their prices upwards or downwards over time if they realize that their first guess might have been wrong.
The most basic analysis would look something like this:
If you have a warehouse full of widgets because they’re selling much slower than you produce them, then you should probably lower the price of a widget.
If you’re constantly sold out of widgets and have a bunch of customers on a waiting list for them to come available, then you could probably raise your prices.
Simple. Price the item high and then sell on sale for 30% off. If it sells, reduce the discount slowly and find the inflection point. If it doesn’t sell, increase the discount until it does.
you do research. Most goods have a market already, so you just see the pricing of similar things in the market. Then, you can adjust from there if your price doesn’t produce the revenue you want.
if it’s a unique product, then you essentially just determine your profit goal based on the cost to make it and go from there. But……even “unique” stuff has something similar usually that can give you an idea of the market.
Then there is stuff like art which is often literally unique and there really is no market. A piece of art might sell for millions and a similar piece sells for $200.
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