Translation from Russian into English
Перевод с русского языка на английский язык
How to calculate the base price of product
Nina Danilova, financial controller of Stora Enso company
Firstly, we need to define what the base price is. This is the minimum acceptable selling price for the company.
You can define it in different ways:
- cost (direct variable expenses) plus all costs;
- prime cost plus variable overhead expenses (for example, sales). At the same time, fixed costs will be covered by the marginal profit of other goods. This method of forming the base price is possible in companies with a wide range of assortment;
- full cost (for manufacturing companies);
- full cost plus the desired rate of profit (covers all operating expenses of the company and brings the company the planned profit).
The base price for a product can be either higher or lower than the minimum market price.
Situation
How to calculate the base price of a retail product.
In retail, the base price is usually formed by multiplying the purchase price of the product by the markup percentage.
The markup is set separately for product categories based on comparable market prices for indicator products and an assessment of demand elasticity.
In case of significant fluctuations in the exchange rate, the mark-up for imported goods can be adjusted during the year, for goods purchased in Russia for the purpose of resale – once a year.
This approach to the formation of the base price justifies itself as much as possible in the presence of a large assortment, when individual pricing is technically difficult.
Example
An example of justifying the base price of product in a large chain of outlet stores
Natalia Kholodnaya, Deputy financial director of “Familia” company, ACCA
The main task of our department stores is to sell a wide range of goods at a price lower than in other department and specialty stores.
The base selling price is calculated as follows: cost plus markup.
The cost price for an imported product is equal to the purchase price plus customs, shipping, brokerage and certification costs.
The markup is regularly reviewed by the management and depends on the product group, brand, conditions of work with the supplier.
If it’s possible to return the unsold product to the supplier, then the company sets the price for it higher than for the product for which the return is not possible.
For goods with a purchase price of less than 100 rubles mark-up can exceed 100 percent, as we have a high overhead for product display and installation of anti-theft sensors.
Example
An example of determining the base price of product
Marina Semenenko, financial director of the “Miratorg” division
In the company, the base price (the minimum selling price of the goods) is the price that was included in the sales budget.
The base price covers the costs associated with production, brings the necessary rate of profit and provides the standard return on invested capital for owners.
The sale of goods at a price below the base price entails a decrease in the rate of profit, and in some cases losses.
The company practices several ways to form the minimum allowable price for different groups of goods:
- direct costs plus contribution margin ratio;
- production costs plus operating profit margin;
- total cost plus pre-tax profit margin.
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Date of copying: March 21, 2023