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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

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  • 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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  • Setting the Right PriceOverhead

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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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  • Overhead Expenses

    AdvertisingBusiness PermitsBusiness-Related TravelOffice Supplies Office EquipmentInsuranceDemonstration Materials

    RentUtilitiesTaxesOther Business-Related CostsEquipment / SuppliesMaintenance Equipment / RepairsSetting 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

    Overhead Expenses_________________________________________________________Direct Costs + Labor

    $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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