How do we determine the selling price of one of our products? Which factors influence it?

The establishment of a proper pricing policy is a critical factor in every company’s strategy, as it directly affects the level of sales, revenue, and profitability.

Pricing Factors

Pricing factors are divided into internal and external factors. Internal factors are related to the decisions of the company’s management regarding internal operations, such as determining the selling price, which must be higher than the product’s cost. In a few cases, the company prices the product at cost or below cost (e.g., introducing a new product to the market, selling a profitable product together with a loss-making one). The uniqueness of the product, which attracts more customers, is also taken into account. There are many cases where an alternative production method (manual or automated) may be chosen depending on consumer demand for the products. It is essential for a business to know the exact cost of each product—something that is not always obvious, especially for small businesses that manage a large number of products.

External pricing factors are related to competitors, customer profiles, and the broader environment. Competitor prices are a key benchmark from which a business cannot deviate, except to the extent that product differentiation justifies it. The economic condition of the target customers also plays an important role. The key question is identifying the price the buyer is willing to pay for the specific product. This is shaped by the target audience’s financial situation and the perceived relationship between price, image, and quality. The company may decide to offer lower prices in cases involving special products or services (e.g., birthdays, events for associations, homeless support). Additionally, regulatory conditions (e.g., regulated pricing for bread) are another factor influencing the product’s price.

All the above factors are important and must be considered in combination. More specifically, cost determines the minimum price level, competition usually sets the upper limit, while the final consumer’s perception and the company’s objectives define the intermediate levels, along with the general environment, which acts as an “uncontrollable” factor in determining price levels in the overall market.

Purpose of Pricing

The purpose of pricing is to determine prices overall per product or per piece/kilo. This is taken into account by the company when deciding how to manage the final pricing. Additionally, product pricing aims to increase the company’s market share. Another purpose is achieving returns on the invested capital that the entrepreneur has provided. Furthermore, the company may demonstrate corporate social responsibility (e.g., reduced prices for the unemployed or large families).

Price Determination

The selling price of a product can be determined in various ways. One method is adding a profit margin (%) on top of the product’s cost.

• Determining the Selling Price Based on Percentage (%) of Gross Profit per Cost Item. Often, the company’s management wishes to achieve a certain percentage of gross profit per cost item and, based on this, determines the final selling price.
• Determining Gross Profit / Net Profit. Frequently, the company’s management wants to know the gross profit (i.e., how much it earns from selling the product). Gross profit is calculated as follows:
• Gross Profit = Sales – Product Cost. Additionally, it is important to determine gross profit in terms of: total value (€), gross profit percentage (%) per product, and overall percentage (%) for all products. For example, a 50% gross profit from selling bread, 70% gross profit from selling pastry items, and so on. Meanwhile, the total gross profit percentage from all products might be, for instance, 45%.
• Another important factor is determining the net result (profit), which is calculated as follows: Gross Profit – Administrative/Sales/Financial Expenses = Net Result before Taxes. The net result is calculated in both value (€) and percentage (%) based on the level of sales.
• Calculating Selling Price Based on Mark-Up and Margin
  The selling price can be calculated in two ways: 

1. Mark-Up (% on the product cost)
2. Margin (% on the selling price)

In conclusion, it is worth noting the basic pricing strategies that concern the “launch” of a new product in a store. This stage is characterized by low sales (the product is still unknown), high costs (production, communication, and promotion), and consequently negative financial results (losses). Under these conditions, the company has two main pricing policy options.

The first involves setting a low price (compared to competitors and cost) with the goal of rapid market penetration, i.e., attracting customers, quickly increasing sales, and expanding the company’s market share. Implementing this policy requires high price elasticity of demand, the existence of economies of scale, and relatively standardized products. Profits come from high sales volume.

In contrast, the second option involves setting a high price with a high unit profit margin. Success here relies on strong product differentiation (image, quality, specialization—such as gluten-free baked goods or a unique country-style bread) and targeting a sufficient number of customers who recognize and are willing to pay for this differentiated product.

The first option is aggressive and is suitable for businesses that can financially “withstand” price competition (or even a price war), while the second is a strategy of avoiding direct competition, focusing on specialization and niche targeting.

The typical evolution of a product’s price over its life cycle is as follows: if market conditions allow, at the launch stage, management sets a price that covers costs while ensuring a profit margin, thus “capitalizing” on the product’s innovation. During the growth stage, the price tends to decrease to accelerate market penetration and expansion. In the maturity stage, the price should remain competitive compared to similar businesses, and in the decline stage, the price tends to decrease due to lower costs and declining demand.

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