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

“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

Setting the Right Price

OverheadOverhead

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

Setting the Right Price

Overhead Percent Example

Direct Costs = $4,000 Labor = $6,000Overhead = $2,000

Overhead Expenses_________________________________________________________

Direct Costs + Labor

$2,000_________________________________________________________

$10,000= = .20 or 20%

Setting the Right Price

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

Direct Costs + Labor + Overhead = $5 + $20 + $5 = $30

Setting the Right Price

Profit

Income after all expenses have been paid

Setting the Right Price

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)

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

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

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

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

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

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