setting the right price

Setting the Right Price

Lesson Goals:• Learn how to:

– Calculate total costs– Calculate a profit margin– Use break-even analysis

• Identify the difference between wholesale and retail pricing

• Discuss psychological factors that impact pricing


“Under pricing is one of the most common mistakes home-based businesses make.”


Realistic Prices

• Cover Costs• Earn a Profit• Attract Customers


Educated Guess

or

Orderly Analysis



OverheadOverhead

Direct Costs

The costs of the materials and supplies related to the actual production of a product or service.


Labor

Cost of services provided by workers for wages


Overhead

All the costs of running a business that are not directly related to the actual production

of a product or service


Overhead Expenses

• Advertising• Business Permits• Business-Related Travel• Office Supplies • Office Equipment• Insurance• Demonstration Materials

• Rent• Utilities• Taxes• Other Business-

Related Costs• Equipment / Supplies• Maintenance

Equipment / Repairs


Overhead Percent Example

Direct Costs = $4,000 Labor = $6,000Overhead = $2,000

Overhead Expenses_________________________________________________________

Direct Costs + Labor

$2,000_________________________________________________________

$10,000= = .20 or 20%


Total Cost Example

Direct Costs = $5.00

Labor [2hrs @ $10 per hour] = $20.00

Overhead [@ 20% of $5.00 +20.00] = $5.00

Direct Costs + Labor + Overhead = $5 + $20 + $5 = $30


Profit

Income after all expenses have been paid


Factors to Consider When Setting Price

• Direct Costs• Labor• Overhead (20% - 25% of Direct Costs + Labor)• Profit (10% - 20% of Total Costs)


Price



Overhead [@ 20% of $5.00 +20.00] = $5.00

Profit [@10% of $5.00 + $20 $5] = $3.00

Direct Costs + Labor + Overhead + Profit = $5 + $20 + $5 + $3 = $33


Retail Price



Overhead [@ 20% of $5.00 +20.00] = $5.00

Profit [@10% of ($5.00 + $20 + $5)] = $3.00

Wholesale Price = $33Retail Price [wholesale price x 2] = $66


Break-Even Point

The point at which sales (revenues) are exactly equal to costs (expenses).

Sales = Variable Expenses + Fixed Expenses


Break-Even Point Example


1.00x = .45x + 275

1.00x - .45x = 275

.55x = 275

x = 500


Break-Even Point Example


1.00x = .45x + .20(1.00x)

1.00x - .45x = 275 + .20x

1.00x - .45x - .20x = 275

.35x = 275

x = 786


Psychological Aspects of Pricing

• Competition• Discounts• Estimates• Exclusivity

• Location• Odd Number• Prestige• Professionalism


Psychological Aspects of Pricing

• What the market will bear

• Expertise• Inflation• Itemizing

• Quality• Seasonality• Volume


setting the right price

Documents