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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. - PowerPoint PPT Presentation

### Transcript of Setting the Right Price

• Setting the Right Price

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• Lesson Goals:Learn how to:Calculate total costsCalculate a profit marginUse break-even analysisIdentify the difference between wholesale and retail pricingDiscuss psychological factors that impact pricingSetting the Right Price

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

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• Realistic Prices

Cover CostsEarn a ProfitAttract CustomersSetting the Right Price

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• Educated GuessorOrderly AnalysisSetting the Right Price

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• Direct Costs

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

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• Labor

Cost of services provided by workers for wagesSetting the Right Price

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

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• Setting the Right Price

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• Overhead Percent Example Direct Costs = \$4,000 Labor = \$6,000 Overhead = \$2,000

\$2,000_________________________________________________________\$10,000==.20 or 20%Setting the Right Price

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• Setting the Right Price

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• 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 = \$30Setting the Right Price

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• Profit

Income after all expenses have been paidSetting the Right Price

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• Setting the Right Price

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• Factors to Consider When Setting Price

Direct CostsLaborOverhead (20% - 25% of Direct Costs + Labor)Profit (10% - 20% of Total Costs)Setting the Right Price

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• Price Direct Costs = \$5.00 Labor [2hrs @ \$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 = \$33Setting the Right Price

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• Retail Price Direct Costs = \$5.00 Labor [2hrs @ \$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] = \$66Setting the Right Price

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• Break-Even Point

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

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• Break-Even Point ExampleSales = Variable Expenses + Fixed Expenses 1.00x = .45x + 2751.00x - .45x = 275.55x = 275x = 500Setting the Right Price

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• Break-Even Point ExampleSales = Variable Expenses + Fixed Expenses 1.00x = .45x + .20(1.00x)1.00x - .45x = 275 + .20x1.00x - .45x - .20x = 275.35x = 275x = 786Setting the Right Price

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• Psychological Aspects of Pricing

CompetitionDiscountsEstimatesExclusivity

LocationOdd NumberPrestigeProfessionalismSetting the Right Price

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• Psychological Aspects of Pricing

What the market will bearExpertiseInflationItemizingQualitySeasonalityVolumeSetting the Right Price

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