Setting the Right Price
Setting the Right Price
Setting the Right Price
“Underpricing is one of the most common mistakes homebased 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
• Advertising
• Business Permits
• Business-Related Travel
• Office Supplies
• Office Equipment
• Insurance
• Demonstration Materials
SLIDE 8
• 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
Overhead Expenses
_________________________________________________________
Direct Costs + Labor
=
$2,000
_________________________________________________________
$10,000
= .20 or 20%
SLIDE 10
Setting the Right Price
Total Costs
Direct Costs + Labor + Overhead
SLIDE 11
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
SLIDE 12
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
[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
SLIDE 16
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 = $33
Retail Price
[wholesale price x 2]
= $66
SLIDE 17
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 + 275
1.00x - .45x = 275
.55x = 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 = 275 + .20x
1.00x - .45x - .20x = 275
.35x = 275 x = 786
SLIDE 20
Setting the Right Price
Psychological Aspects of Pricing
• Competition
• Discounts
• Estimates
• Exclusivity
• Location
• Odd Number
• Prestige
• Professionalism
SLIDE 21
Setting the Right Price
Psychological Aspects of Pricing
• Expertise
• Inflation
• Itemizing
• Quality
• Seasonality
• Volume
• What the market will bear
SLIDE 22
