How to Calculate Price Based on Gross Profit Percentage
As a business owner, you'll want to set goals and determine prices for your product when you're looking at your overall budget. One way to do this is to use your company's gross profit percentage or profit margin percentage as a basis for pricing. This allows your business to set a price based upon desired goals, as opposed to merely using market pricing as a basis for decision-making. This simple process can be used as a guide for planning, budgeting and pricing decisions.
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Instructions
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1
Determine your gross sales. This is the total sales of your company, either projected or current.
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2
Determine your cost of goods sold. Add up all expenses associated with your company, from labor to advertising.
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3
Subtract your cost of goods sold from your profit to determine your gross profit.
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4
Divide the total in Step 3 by your sales (determined in Step 1). This is your gross profit margin. To convert it to a gross profit percentage, multiply this number by 100.
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5
Find your target price by dividing your cost of goods sold (found in Step 2) by 1 minus your gross profit margin (found in Step 4). For example, if your cost of goods sold is $8 and your gross profit margin is 0.20, divide 8 by 0.80 (1 minus 0.20) to get a result of $10.
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Tips & Warnings
Use this method as a basis for your pricing range. Certain markets may not be able to support your suggested pricing, but this will give you and your company the basis for your decision-making process.
If your gross profit margin is a negative number, something needs to be changed within your company. Either your sales revenue needs to go up or your expenses need to go down.
