Many small business owners are frazzled by the whole pricing issue. What is a fair price? What will customers pay? Can I make a decent profit? When can I raise prices? And so on. Here are a few tips that will help you in setting prices for your goods and services.
Materials Cost: You should determine exactly what your materials cost. Do the math if you buy in bulk to determine exactly what each finished piece costs you in materials. Here’s how: Look at your product and list what materials are included, and how much. If you have been making your product for some time, you will know you can paint 10 per quart of paint, so each one requires 1/10 of a quart of paint. It is important to be specific because the next step is determining how much the raw materials cost so you can assign a cost to each project. If a quart of paint costs $5, then each product you make has fifty cents worth of paint. Do the same thing for each material involved. To illustrate, let’s use a per unit materials cost of $15.
Labor Costs:: Always determine a fair labor cost for your product. I always advise clients to ask themselves how much they would require if they were doing the same labor in a job, or how much they would pay someone else to do this job, and add 30% to that for benefits. For example, if you can make 2 of your products per hour and you would work making them for $20 per hour, then the labor cost of each is $10 plus $3 for benefits for a total labor cost per unit of $13.
Overhead Costs:: This will vary depending on each situation, but add enough to cover things like administrative and marketing costs, space costs (rent, electricity, etc.) and office expenses (phone, paper, internet). Once you have been in business for awhile, you can look at your accounting books and determine a more accurate overhead cost. A good rule of thumb is to keep overhead as low as possible, particularly during the first year or two while you are establishing your business. Take the sum total of your monthly projected overhead costs, divide them by a realistic number of units sold and that is your overhead cost per unit. For example, if your overhead cost total is $2,000 per month and you can sell 50 units, your overhead cost is $40 per unit.
So, now we have $68 per unit in costs. ($15 in materials, $13 in labor and $40 in overhead. Technically, selling for $69 per unit is selling at a profit. However, that is not a very big profit margin. Different industries have different “rules of thumb” for setting prices based on raw costs plus overhead. One way to find out what they might be is to do a price analysis, which will be detailed in a future article.
Service Professionals Pricing
If you sell services, the process is the same. Your materials cost is probably very low. You might have cleaning supplies if you run a cleaning service, but that will be a much smaller percentage of your pricing than one who sells products. Service pricing is usually quoted per hour or per job. You will determine your materials, labor and overhead costs per hour and/or per job before quoting or stating prices. Labor will likely be your highest cost. However, it is even more important that you do a market analysis.
Market analysis is a quick and easy way to find out what the going prices/rates are for your goods and services. We will discuss How to Collect and Analyze Competitive Pricing Information in the next SOHO article.