It is very important for founders and companies like you to be well prepared for entering the market. All preparations have been made and you are firmly convinced of the success of your product or service. Then all that’s missing is to find the right price for it. Price calculation is extremely important for every company and backward calculation also plays an important role in pricing.
What is a backward calculation?
The backward calculation also belongs to the group of the trade calculation. It is always used when the list sales price of a product is already specified. Now you need to use the backward calculation to determine the maximum list purchase price. In the case of backward calculation, which is usually found in retail, the goal is to achieve the best possible profit through well-thought-out purchasing and selling of goods. The backward calculation does not aim to determine a sales price .
Procedure for the backward calculation
It happens very often that you as a retailer buy a product or goods at a very specific price. When making the calculation, it is then your task to take into account all relevant items, including the so-called trading margin. That way you can then find out your selling price. Sounds easy, but it is not. You will not always be able to determine the selling price in this way. There are certain situations in the market that require you to do the math the other way around. And then you have to use the backward calculation.
Prices play a big role
The online trade is on the increase and that makes it to you as a trader increasingly difficult to sell your products or services free of all external factors and influences. There is a reason for that. Trading on the Internet gives customers more and more opportunities to compare prices. A very good offer can be found quickly. It is not the case with all customers that the price is the most important argument for a purchase decision. But basically the price plays a very important role. It is therefore important for you to trade successfully in the market that you always keep an eye on your competitors and their prices. This is exactly what you use the backward calculation for.
The selling price is usually fixed
As already mentioned, the backward calculation does not track the determination of the sales price. In very many cases this is already fixed and is dictated by the market. As a retailer, you have to use this sales price as a basis. From this price, you then have to deduct all the items that you incur. It starts with taxes, goes on to discounts and your profit. This calculation then gives you the so-called maximum list purchase price. If you want to continue to do a good deal with your trade, then this price must not be higher when purchasing this product.
List sales price Basis for the backward calculation
In the case of backward calculation, the list sales price is the basis and also the starting point for your calculation. With the backward calculation you now start to determine what your list purchase price should look like. You may have heard of the backward calculation formula before too. But you can forget that. Not everyone can work according to this formula. Depending on the dealer, there are different discounts or surcharges and the applicable tax rates are not the same for everyone. It is important that you list all items that you have to consider. As already mentioned, the list price is right at the top. The next step is then the sales tax deducted. You have to consider all costs incurred. This also includes, for example, discounts, cash discounts . So you go step by step.
Backward calculation scheme
The scheme of a backward calculation is as follows.
– less customer discount
= target sales price
– less agent commission
– less customer account
= cash sale price
– less profit surcharge
= prime costs
– Surcharge for trading costs
= subscription price
– less purchase costs
= cash purchase price
+ plus delivery account
= target purchase price
+ plus delivery discount
= list purchase price
Definition of the individual relevant items
- List sales price : Consists of target sales price and customer discount
- Customer discount: This is the discount you give to your customer
- Target sales price: This price is made up of the items agency commission, discount and cash sale price
- Agent commission: This means the commission that is due for the conclusion of a contract. It ensures a percentage reduction in the cash sale price.
- Customer account: You grant this to a customer (usually 2-3%) if he pays in cash or within a period granted to him.
- Cash sale price: This price is made up of the items cost price and profit.
- Profit: You have to add the profit to the prime costs. Together with the prime costs, this results in the cash sale price.
- Costs: This means all costs that you incur for production, materials, sales and administration. The prime costs are composed of the purchase price or purchase price and the handling costs.
- Action costs : These costs relate to the purchase price and in percentage form. This includes costs for, for example, employees who are not directly involved in manufacturing or offering the product. In addition, there are costs such as rent. Electricity costs, depreciation, etc. are added.
- Subscription price: The subscription price is the price that you incur until the goods are available in your company, i.e. at the moment when they are delivered.
- Purchase costs: This includes all costs that are incurred for purchasing, for example freight costs and shipping costs.
- Cash purchase price: This price is made up of the purchase costs minus the purchase price.
- Delivery account: A delivery account is a discount granted to you by the supplier. Here, too, it can be granted in the case of cash payment or payment within a certain period of time.
- Target purchase price : This price is made up of the cash purchase price and the delivery discount.
- Delivery discount: The delivery discount is a price reduction that you get from the supplier, for example, when purchasing large quantities. You have to deduct this from the list purchase price.
- List purchase price: With this price you get the maximum price to be paid so that you can keep to the specified list sale price.
What is a trade estimate?
The trade calculation is the basis for any price calculation. All costs and surcharges can be determined using a simple scheme. The aim of the trade calculation is to calculate the list price for you as the end seller in order to make a profit. In order for you to be able to make a profit, your sales price must be higher than all costs incurred. A distinction is made between forward and backward calculation in the trade calculation.
Difference between backward calculation and forward calculation
The forward calculation represents a counterweight to the backward calculation. The aim here is to determine the sales price for an existing list purchase price. The forward costing is characterized by three major intermediate steps.
- Intermediate step 1 – reference calculation: This is about your purchase. In this intermediate step, you determine the cost price or the purchase price.
- Intermediate step 2 – cost calculation : In this step you have to add all overhead costs to the cost price.
- Intermediate step 3 – sales calculation : Once you have calculated the cash sales price, you can now determine the list sales price.
The market situation today is not easy for many traders. In order to be able to survive successfully on the market and to make a profit, a very precise calculation of prices is required. Even a small increase in the purchase price can have a very negative effect on your profit. Using the backward calculation, however, you are always on the safe side.