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
Direct
Costs
Labor
Costs
Overhead
TOTAL Costs
Setting the Right Price
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 BusinessRelated Costs
• Equipment / Supplies
• Maintenance
Equipment / Repairs
Setting the Right Price
Overhead
Expenses
Direct
Costs
+ Labor
Overhead
Percent
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%
Setting the Right Price
Labor
Direct
Costs
Overhead
Total
Costs
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
Direct Costs +
Labor +
Overhead
Profit
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 = $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 + 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
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•
•
•
Competition
Discounts
Estimates
Exclusivity
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Location
Odd Number
Prestige
Professionalism
Setting the Right Price
Psychological Aspects of Pricing
• Expertise
• Inflation
• Itemizing
• Quality
• Seasonality
• Volume
• What the market will bear