They say that in business, price is a major leg-breaker. Hence, the pricing method you select provides direction on how you want to set your product price in the market. The way you set prices in your business will eventually change for many reasons. And as you learn more about your customers and competition, you may decide to change your pricing method. Usually changes in the industry or the development stage of your product are the most significant indicator on whether it is time to review your pricing strategy.

Simply, pricing methods are a way to determine how a product will be priced. The following are the most common methods adopted to simplify the process of setting the price of products and services:

1. Cost-plus pricing
   
   This method allows you to cover all direct cost and then generate a profit. For example, you want a 20 percent profit from 100 units of a product that cost you PhP 1,000.00. You should sell the product for PhP 12.00.


2. Cost-based pricing
   
   This method uses unit costs of direct and indirect costs to determine the price. The cost-based pricing formula is [(VC x units sold) + FC = price per unit x units sold] x (100 + profit margin, expressed in percentage).
   
   Let us say your variable cost is PhP 30.00; fixed cost, PhP 500.00; units sold, 100; and target profit, 20 percent. Using the formula, your selling price must then be PhP 42.00 per unit, to cover your cost and make a 20 percent profit.
   
   Note that the price per unit, before adding the profit margin, is also the break-even point. The selling price must be PhP 42.00 to cover costs and make a 20-percent profit.


3. Percent food cost pricing
   
   This is a method based on the theory that food cost makes up about 40 percent of the product price. Using this method, simply multiply the food cost by 2.5 (40 percent x 2.5 = 100 percent).


4. Contribution pricing
   
   This method allows you to cover all direct cost (per product), and also allows a contribution toward indirect cost and profit. Let us say your indirect cost amount to PhP 1,000.00; desired profit, 30 percent (PhP 300.00); and contribution of PhP 20.00.
   The formula to follows is (IC + profit) / contribution = units to sell. Using this formula, you need to sell 65 units of the product to cover indirect costs and make a PhP 300.00 profit.


5. Working-back method
   
   This method is most useful for small businesses as it computes for the total costs and desired profits first. Use this formula: (total costs + profit) / units sold = price per unit.
   
   Let's say your total cost is PhP 1,000.00; units sold, 100; and desired profit is 50 percent (PHP 500.00). Your price per unit would be PhP 15.00. If this turns out to be higher than the price offered by your competitor, offer something more to the consumer to compensate for the higher price (i.e. free pick-up or delivery).