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

TOTAL Costs Direct Costs Labor Costs Overhead

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

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

Total Costs Direct Costs Labor Overhead

Total Cost Example Direct Costs = $5.00 Labor $10 per hour] = $20.00 Overhead 20% of $ ] = $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 ProfitPrice

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

Price Direct Costs = $5.00 Labor $10 per hour] = $20.00 Overhead 20% of $ ] = $5.00 Profit of $ $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 $10 per hour] = $20.00 Overhead 20% of $ ] = $5.00 Profit of ($ $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 1.00x =.45x x -.45x = x = 275 x = 500 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 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 What the market will bear Expertise Inflation Itemizing Quality Seasonality Volume Setting the Right Price