Setting the Right Price

“Underpricing is one of the most common mistakes home-based businesses make.” SLIDE 1 Setting the Right Price

Realistic Prices Cover Costs Earn a Profit Attract Customers SLIDE 2 Setting the Right Price

Educated Guess or Orderly Analysis SLIDE 3 Setting the Right Price

Total Costs Direct Costs + Labor + Overhead SLIDE 4 Setting the Right Price

Direct Costs The costs of the materials and supplies related to the actual production of a product or service. SLIDE 5 Setting the Right Price

Labor Cost of services provided by workers for wages SLIDE 6 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 SLIDE 7 Setting the Right Price

Overhead Expenses SLIDE 8 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 SLIDE 9 Setting the Right Price

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

Total Costs Direct Costs + Labor + Overhead SLIDE 11 Setting the Right Price

Total Cost Example Direct Costs = $5.00 Labor $10 per hour] = $20.00 Overhead 20% of $ ] = $5.00 SLIDE 12 Direct Costs + Labor + Overhead = $5 + $20 + $5 = $30 Setting the Right Price

Profit Income after all expenses have been paid SLIDE 13 Setting the Right Price

Price (Direct Costs + Labor + Overhead) + Profit SLIDE 14 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) SLIDE 15 Setting the Right Price

Price Direct Costs = $5.00 Labor $10 per hour] = $20.00 Overhead 20% of $ ] = $5.00 Profit of $ $20 $5] = $3.00 SLIDE 16 Direct Costs + Labor + Overhead + Profit = $5 + $20 + $5 + $3 = $33 Setting the Right Price

Retail Price Direct Costs = $5.00 Labor $10 per hour] = $20.00 Overhead 20% of $ ] = $5.00 Profit of ($ $20 + $5)] = $3.00 SLIDE 17 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 SLIDE 18 Setting the Right Price

Break-Even Point Example Sales = Variable Expenses + Fixed Expenses 1.00x =.45x x -.45x = x = 275 x = 500 SLIDE 19 Setting the Right Price

Break-Even Point Example Sales = Variable Expenses + Fixed Expenses 1.00x =.45x +.20(1.00x) 1.00x -.45x = x 1.00x -.45x -.20x = x = 275 x = 786 SLIDE 20 Setting the Right Price

Psychological Aspects of Pricing SLIDE 21 Competition Discounts Estimates Exclusivity Location Odd Number Prestige Professionalism Setting the Right Price

Psychological Aspects of Pricing What the market will bear SLIDE 22 Expertise Inflation Itemizing Quality Seasonality Volume Setting the Right Price