Calculating Product Price Based on Profit Amount

[JamesSco]

For some years now I have struggled to come up with formula to calculate the price of our products based on several inputs. I'll use one specific product as an example.

Product Cost: £0.222395833333
Delivery Cost: £0.80
Required Profit: £0.40

So far seems simple, but now I need to get a final product cost based on the above figures so at the end we receive 0.40p per order. However, the final figure must also include an additional amount for VAT at 20% plus card processing fees of 2.4% + 0.20p.

For the above example I know the final price should be £2.04 which will give me a breakdown as follows:

Our Cost: £0.222395833333
Shipping Cost: £0.80000
VAT: £0.34
Fees: £0.26936
Total Cost: £1.63175583333
Customer Paid: £2.04

Profit: £0.40824

Any budding mathematicians know how this can be calculated. As it stands, I have programmed our system to add the Product Cost + Delivery Cost + Required Profit to get a total. I then have the system add 1p onto this value and then calculate what the profit would be. If it matches my required profit it stops. Otherwise it will keep adding on 1p until it reaches the required level.

Although this works, its now having to do this 6000+ times and its taking a very very long time. Any ideas of a simple way to do it? Hope this is clear, if not please let me know.

 

[titanium]

So you want 40p profit regardless of the item? Wouldn't it make more sense to be aimed for a % profit rather than a concrete amount? Surely if you sell a more expensive item you would want more than 40p?

 

[Ninja Commerce]

Price = p
Shipping = s
Cost = c
Bankfee = b = 0.024p + 0.20
Vat = v = 0.2p

profit = p - s - c - b - v
profit = p - s - c - 0.024p - 0.20 - 0.2p
profit = 0.776p - s - c - 0.2

profit = 0.4

therefore

0.4 = 0.776p - s - c - 0.2

p = (s + c + 0.6)/0.776

so in your example:

s = 0.8
c = 0.22

p = (0.8 + 0.22 + 0.6)/0.776 = £2.09

I've done this very quickly, so I could have made a mistake. Does this number sound about right?
Sound about right?

 

[JamesSco]

The actual price I am looking for is 2.04 but this could be down to rounding. However, I am not following your figures.

Can you please confirm how you calculated 0.776p? I note that you have profit '= p - s - c - b - v'. However, I already know what I need the profit to be. What I am trying to determine is the price which is used in the above calculation.

 

[Ninja Commerce]

Yes I realize you know what you want the profit to be. The equation is calculating the profit on the basis of the variables, then we substitute "profit" for 0.4 since that's the profit you are after. That is this bit:

---
profit = 0.776p - s - c - 0.2
profit = 0.4

therefore

0.4 = 0.776p - s - c - 0.2
---

0.776p comes from collecting together: p - 0.2p - 0.024p
p is the sales price
0.2p is the vat amount (since vat is dependent on the price)
0.024p is the processing fee of 2.4% of the price

so you could say: vat + bank charge = 0.2p + 0.024p + 0.2
where the final 0.2 is the extra 20 pence you are charged per transaction

---

your figure of £2.04 is wrong, that would produce a profit of 36 pence, so yes that is probably rounding error. My formula appears to be correct.

 

[JamesSco]

I am afraid I am still not following, I think calculating 0.776 is what I am missing.:

0.776p comes from collecting together: p - 0.2p - 0.024p

if p is price, what figure are you using for this and how are you calculating this?

 

[Ninja Commerce]

1 - 0.2 - 0.024 = 0.776

I can't really explain it any simpler than that, it's just how algebra works.

And in the formula I am not using a value for p, the final formula is:

p = (s + c + 0.6)/0.776

so you just plug in your values for shipping and product cost and the formula gives you the price you need to charge.

Anyway, you don't need to understand how it works, the formula is correct. If you want to understand it you will need to do a bit of research on algebraic substitution.

I'm afraid I need to get back to work now though. Feel free to use the formula if you want to.

Regards, Mark.

 

[Anna Chandley]

Price = p
Shipping = s
Cost = c
Bankfee = b = 0.024p + 0.20
Vat = v = 0.2p

profit = p - s - c - b - v
profit = p - s - c - 0.024p - 0.20 - 0.2p
profit = 0.776p - s - c - 0.2

profit = 0.4

therefore

0.4 = 0.776p - s - c - 0.2

p = (s + c + 0.6)/0.776

so in your example:

s = 0.8
c = 0.22

p = (0.8 + 0.22 + 0.6)/0.776 = £2.09

I've done this very quickly, so I could have made a mistake. Does this number sound about right?
Sound about right?

There is one error in this formula re the VAT. If P is the VAT inclusive price then VAT is P/6 or 0.1667P.

If the profit required is 40p then the formula would be

p = (s+c+0.6)/0.809

This gives a price of £2 using your example so there are some rounding errors

 

[Ninja Commerce]

Why is vat p/6? vat is still 20% right?

p/6 would imply a vat rate of 16.7%

 

[Ninja Commerce]

Oh wait, I just got what you mean. Sorry I'm not entirely clear on how vat is calculated, but I take you're point, so yes, you're probably right.

 

[Anna Chandley]

Why is vat p/6? vat is still 20% right?

p/6 would imply a vat rate of 16.7%

VAT = 0.2 X net price

Sales price = net price +0.2 net price =1.2 net price so net price = Sales price/1.2

VAT = 0.2 X (sales price/1.2) =0.2/1.2 sales price

 

[JamesSco]

Thanks guys, using the above formula with 0.809 I was able to work out a final price of the example above and I've worked it back and it gives 40p profit as requested. Have very little knowledge on how it works but it does!

I do have another issue with the profit figure though, this is not a static figure. Although I know what each products margin should be, they are all different and not always 0.40p. For example, some require a profit of £2.50.

I went onto another example to see if the above formula worked for it, using the following formula but it outputted an incorrect figure as this specific product required a profit margin of 60p. I attempted to change the 0.6 in the below formula to 0.4 but still no joy.

SalePrice = (DeliveryCost + ProductCost + 0.6)/0.809

I assumed that i would change the 0.6 in the above formula but off course i now know this is incorrect. What am I missing

 

[Kempres]

Hi Guys,

When pricing a product the industry standard is normally 2-2.5 isn't it?

Buy for £10.00 sell for £19.99-£24.99...

Kempres

 

[JamesSco]

Hi Guys,

When pricing a product the industry standard is normally 2-2.5 isn't it?

Buy for £10.00 sell for £19.99-£24.99...

Kempres

There is no real standard. It all depends on what you are selling and what your competitors are selling at. You could set a profit margin of £2 on one product and sell 5 of them to make £10. But you could also half your margin to £1 to become really competitive and sell 20 products to make £20.

There are many variables involved such as the time it takes to process an order.

 

[Kempres]

Hi JamesSco,

Oh yes, there is no defined rule and like you say it depends on many things, if you get a real good deal on something then you can price accordingly.

Quite often you sell not by what it cost but by what it's worth.

The 2-2.5 is generally accepted within 'lifestyle gift stores' which is what my background was, but again yes, there is no set rule.

 

[Anna Chandley]

If you want to be able to change the profit then the following formula would work.

Sales price = (profit +delivery cost + product cost + 0.2)/0.809

The 0.60 in the original formula was 0.40 profit + 0.20 fixed card charge

 

[JamesSco]

Well I believe I have come up with a formula that works. Well at least I hope it does! Any comments?

D = My Delivery Cost
P = My Product Code
M = Required Profit Margin

C = (M-0.4)+0.6

Sale Price = (D+P+C)/0.809

 

[JamesSco]

If you want to be able to change the profit then the following formula would work.

Sales price = (profit +delivery cost + product cost + 0.2)/0.809

The 0.60 in the original formula was 0.40 profit + 0.20 fixed card charge

Ahhh - It all makes sense now. I could not figure out where the 0.20p had gone and I now understand why my figures are not matching up. My calculation above is basically a long winded way of removing the 20p!

 

[Anna Chandley]

If you wanted a formula where you could change every variable except for the VAT rate then you would use

Sales price = (Profit + Delivery + Cost + Fixed charge)/(1 - variable charge - 0.1667)
Fixed charge is the fixed credit card charge - currently 0.20
Variable charge is the % credit card charge as a decimal - currently 0.024 (2.4%)

 

[elsaid_m]

Hi All,

I wanted to ask a question in relation to pricing.

Basically we have various distributors that we deal with and we have developed an integration with there website where they send us our trade price and RRP. Now the products are in the range of 1000s, and they have many different categories which means its variable difference between each product between trade price and its RRP, thus we cant really set a fixed profit margin..

I get a feeling that many of you must have passed by this before and have an advise on how to set the margins on our ecommerce new site that we are launching.

The product updates happen daily to reflect any changes, price drops from the distributors etc.. so I think it isn't the best idea to do that manually?

Appreciate your input on the matter.

N.B. before we used to do things manually when we get a quotation request so we used to look at the prices of every item, but now since we are doing the ecommerce site and automating the whole process, there must be a better way to do it rather than manually or even a system that you subscribe with?

Cheers guys..

 

[GraemeL]

Hi All,

I wanted to ask a question in relation to pricing.

Basically we have various distributors that we deal with and we have developed an integration with there website where they send us our trade price and RRP. Now the products are in the range of 1000s, and they have many different categories which means its variable difference between each product between trade price and its RRP, thus we cant really set a fixed profit margin..

I get a feeling that many of you must have passed by this before and have an advise on how to set the margins on our ecommerce new site that we are launching.

The product updates happen daily to reflect any changes, price drops from the distributors etc.. so I think it isn't the best idea to do that manually?

Appreciate your input on the matter.

N.B. before we used to do things manually when we get a quotation request so we used to look at the prices of every item, but now since we are doing the ecommerce site and automating the whole process, there must be a better way to do it rather than manually or even a system that you subscribe with?
.

start your own thread then, rather than hijack this one!

G

 

[elsaid_m]

start your own thread then, rather than hijack this one!

G

Yeah you are probably right, at first thought it may be useful to be in the same post for others to benefit from it since its all about pricing, but after posting it, it kinda looks like it should be a post on its own. didn't mean to hijack a post though.