Setting the Right Price
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Setting the Right Price
description
Setting the Right Price. Setting the Right Price. “Underpricing 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. - PowerPoint PPT Presentation
Transcript of Setting the Right Price
Setting the Right Price
“Underpricing is one of the most common mistakes home-based businesses make.”
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Setting the Right Price
Realistic Prices
• Cover Costs• Earn a Profit• Attract Customers
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Setting the Right Price
Educated Guess
or
Orderly Analysis
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Setting the Right Price
Total Costs
Direct Costs + Labor + Overhead
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Setting the Right Price
Direct Costs
The costs of the materials and supplies related to the actual production of a product or service.
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Setting the Right Price
Labor
Cost of services provided by workers for wages
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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
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Setting the Right Price
Overhead Expenses
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• 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 Percent
Overhead Expenses_________________________________________________________
Direct Costs + Labor
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Setting the Right Price
Overhead Percent Example
Direct Costs = $4,000 Labor = $6,000Overhead = $2,000
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Overhead Expenses_________________________________________________________
Direct Costs + Labor
$2,000_________________________________________________________
$10,000= = .20 or 20%
Setting the Right Price
Total Costs
Direct Costs + Labor + Overhead
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Setting the Right Price
Total Cost Example
Direct Costs = $5.00
Labor [2hrs @ $10 per hour] = $20.00
Overhead [@ 20% of $5.00 +20.00] = $5.00
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Direct Costs + Labor + Overhead = $5 + $20 + $5 = $30
Setting the Right Price
Profit
Income after all expenses have been paid
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Setting the Right Price
Price
(Direct Costs + Labor + Overhead) + Profit
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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)
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Setting the Right Price
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
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Direct Costs + Labor + Overhead + Profit = $5 + $20 + $5 + $3 = $33
Setting the Right Price
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
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Wholesale Price = $33Retail 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
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Setting the Right Price
Break-Even Point Example
Sales = Variable Expenses + Fixed Expenses
1.00x = .45x + 275
1.00x - .45x = 275
.55x = 275
x = 500
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Setting the Right Price
Break-Even Point Example
Sales = Variable Expenses + Fixed Expenses
1.00x = .45x + .20(1.00x)
1.00x - .45x = 275 + .20x
1.00x - .45x - .20x = 275
.35x = 275
x = 786
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Setting the Right Price
Psychological Aspects of Pricing
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• Competition• Discounts• Estimates• Exclusivity
• Location• Odd Number• Prestige• Professionalism
Setting the Right Price
Psychological Aspects of Pricing
• What the market will bear
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• Expertise• Inflation• Itemizing
• Quality• Seasonality• Volume
Setting the Right Price
