Setting the Right Price

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Setting the Right Price
Setting the Right Price
“Underpricing is one of the most common
mistakes home-based 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
•
•
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Advertising
Business Permits
Business-Related Travel
Office Supplies
Office Equipment
Insurance
Demonstration Materials
SLIDE 8
•
•
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Rent
Utilities
Taxes
Other BusinessRelated 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
SLIDE 10
=
.20 or 20%
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
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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
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Competition
Discounts
Estimates
Exclusivity
SLIDE 21
Location
Odd Number
Prestige
Professionalism
Setting the Right Price
Psychological Aspects of Pricing
• Expertise
• Inflation
• Itemizing
• Quality
• Seasonality
• Volume
• What the market will bear
SLIDE 22
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