Setting the Right Price Setting the Right Price

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

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

Setting the Right Price Realistic Prices • Cover Costs • Earn a Profit • Attract Customers

Setting the Right Price Educated Guess or Orderly Analysis

Setting the Right Price Direc t Costs Labor Costs Overhead TOTAL Costs

Setting the Right Price Direct Costs The costs of the materials and supplies related to the actual production of a product or service.

Setting the Right Price Labor Cost of services provided by workers for wages

Setting the Right Price Overhead All the costs of running a business that are not directly related to the actual production of a product or service

Setting the Right Price 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

Setting the Right Price Overhead Expenses Direct Costs + Labor Overhead Percent

Setting the Right Price Overhead Percent Example Direct Costs = $4, 000 Labor = $6, 000 Overhead = $2, 000 Overhead Expenses _____________________________ Direct Costs + Labor = $2, 000 _____________________________ $10, 000 = . 20 or 20%

Setting the Right Price Labor Direct Costs Overhead Total Costs

Setting the Right Price Total Cost Example Direct Costs = $5. 00 Labor [2 hrs @ $10 per hour] = $20. 00 Overhead [@ 20% of $5. 00 +20. 00] = $5. 00 Direct Costs + Labor + Overhead = $5 + $20 + $5 = $30

Setting the Right Price Profit Income after all expenses have been paid

Setting the Right Price Direct Costs + Labor + Overhead Profit Price

Setting the Right Price Factors to Consider When Setting Price • • Direct Costs Labor Overhead (20% - 25% of Direct Costs + Labor) Profit (10% - 20% of Total Costs)

Setting the Right Price Direct Costs = $5. 00 Labor [2 hrs @ $10 per hour] = $20. 00 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

Setting the Right Price Retail Price Direct Costs = $5. 00 Labor [2 hrs @ $10 per hour] = $20. 00 Overhead [@ 20% of $5. 00 +20. 00] = $5. 00 Profit [@10% of ($5. 00 + $20 + $5)] = $3. 00 Wholesale Price = $33 Retail Price [wholesale price x 2] = $66

Setting the Right Price Break-Even Point The point at which sales (revenues) are exactly equal to costs (expenses). Sales = Variable Expenses + Fixed Expenses

Setting the Right Price Break-Even Point Example Sales = Variable Expenses + Fixed Expenses 1. 00 x =. 45 x + 275 1. 00 x -. 45 x = 275. 55 x = 275 x = 500

Setting the Right Price Break-Even Point Example Sales = Variable Expenses + Fixed Expenses 1. 00 x =. 45 x +. 20(1. 00 x) 1. 00 x -. 45 x = 275 +. 20 x 1. 00 x -. 45 x -. 20 x = 275. 35 x = 275 x = 786

Setting the Right Price Psychological Aspects of Pricing • • Competition Discounts Estimates Exclusivity • • Location Odd Number Prestige Professionalism

Setting the Right Price Psychological Aspects of Pricing • Expertise • Inflation • Itemizing • Quality • Seasonality • Volume • What the market will bear