|Need a good pricing formula|
y=mx+b is not enough
I'm trying to come up with a formula that will input cost and output price. I can't seem to come up with anything that works well over a cost range (x) of about $1 - $25. Can any math guys or gals show me how it's done and how to tweak it?
[edited by: buckworks at 4:58 am (utc) on Dec. 11, 2009]
[edit reason] No URLs please; see TOS [/edit]
We used to use Excel, basically setup so that if the cost was xx.xx to yy.yy, the percentage markup was zz%. Works OK for basic starting numbers but gets to be a pain with a lot of products that change price a lot.
I use a lot of excel functions such as:
=A1*1.5+if(A1<100, 10, 5)
That way for low dollar items you will be adding extra profit to cover processing and handling costs that I don't mind absorbing in higher dollar sales.
Can you elaborate on the question? If I understand correctly, you just need Price = markup * cost
But, it seems too basic of a question. Are you trying to understand how to calculate your COGS? Adding in time value of money, inventory carrying, fixed costs such as warehousing, etc?
A proper pricing function will take into account several factors:
(a) the shipping cost you paid to acquire the product,
(b) the packaging and void-fill costs you paid to ship the product,
(c) the product life-cycle costs, including losses, damage, and non-resellable returns.
A (simplifed) formula that I've used is:
Markup = 2.475 * Cost ^ -0.16
if Markup < 1.2 then Markup = 1.2
Price = (Cost * Markup) + (0.25 * Weight)
Round to higher nickel if < 10.00, or
round to higher 95-cents if > 10.00.
I also take into account payment processing fees which applies to the sales price and shipping. For example, if the customer uses PayPal to buy your widget for $25 plus $5 shipping, that adds about $1 to your expenses ($0.35 + %1.9 to 2.9% I believe)
Thank you very much, your formula is exactly what I was looking for.