In business, “margin” is the profit you hope to make on the sale of a product. Your profit can be expressed in two ways. Margin is one of them; the other method is called “markup.” Although the term is sometimes used this way, you don't add margin to cost to determine your selling price. Margin is the percentage of the selling price that is your profit. You add markup to your costs to get the selling price -- margin is deducted. If you are lucky enough to name your price in a market place where you have no competition, then you can just add on any mark up you please. However, if your product has rivals you need to study their prices, find out what price the market will bear and detect whether your product has a higher or lower perceived value than its rivals. With this information, you can set your margin.
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Research similar products. Find every product that does the same as yours and could possibly be placed on a shelf next to it. Note down the range of prices of these items. Your selling price should not be too much lower or too much higher than these. If similar products are priced £50, £55 and £59, you will have a price range into which your product’s selling price should fit.
Commission a consumer survey of your product. This should tell you whether the public thinks your product is better, worse, or about the same as the rival products. If you are introducing a new product into a tightly fought market, you would be advised to try an introductory offer, pitching your price below rivals without signaling to the public that this is a low-value item.
Calculate all the costs that go into to making each unit of your product. The price will vary depending on the quantity you are able to produce. The more products you sell per week, the more units will bear a share of fixed costs and the lower those costs will be per unit. Deciding your costs, therefore, requires you to estimate expected sales and production volumes.
Pick your selling price depending on where the market researchers tell you you product sits in the price range of its rivals. Deduct your unit cost from this. This will give you your margin.
Tips and warnings
- The margin is the percentage of the sales price that you can take as profit. If this percentage does not fit your expectations, try adding your expected profit margin to your cost per unit. This will give you a markup. Run this price past your marketing team. If they think this is an unworkable price, take their advice and stick to the recommended margin.
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