How Do I Figure Out Pricing for Goods and Services
The range of pricing strategies is fairly staggering. If you cannot honestly say that you have a good strategy see the very simple model below to explain ensure that your prices cover your costs.
Lets begin by assuming that you have accurate records of your expenses, both direct (costs directly related to creating and selling the goods) indirect (overhead). We’ll look at two kinds of businesses below:
You buy widgets at $1.50 each and have additional direct costs of $1500 per month. Your overhead is $3000/month. Last year you sold 10,000 widgets.
Your costs to sell the widgets (direct and overhead) is $4500 per month plus the cost of the widget ($1500 + $3000). Assuming level sales, you are selling 833 widgets per month (10,000/12). Adding the $1249 per month (833 X $1.50) cost of the widgets to the calculation. Those 833 widgets must support $5749 of expense ($4500 +$1249). Therefore, you must sell the widgets for $6.90 just to break even (cover your costs).
Cost of Widgets (one month, 833 widgets) $1249.50
Overhead (indirect Costs) – one month $3000.00
Additional Direct Cost – one month $1500.00
TOTAL Cost $5749.00
Breakeven selling price for one widget ($5749/833) $ 6.90
Service Businesses are Different
A repair business will have direct costs (labor, parts, delivery, etc.) plus overhead. A business with overhead of $3500 per month, direct costs of $3000 per month, and a history of 23 jobs per month at an average of six hours per job or 138 hours (23 X 6) of paid work per month. The business will need to charge $47.10 per hour just to break even ($3500+$3000/138).
For businesses which work on a bid basis, such as contractors, I understand you are inclined to underbid your rivals to get the contract on the theory that you will make it up “somehow”. Some of the time you won’t make it up. You will lose money, often the customer will be unhappy (costing you future customers). I’ve worked with a number of contractors and a major error is failure to bid the work correctly. You may lose the job to a lower bidder, but getting underbid contracts may lose you the business.
We’ve talked above about breakeven and there is a section on calculating overall breakeven because it’s an important concept to understand. But breaking even is not the object of owning a business. Profit is the object.
Below is a very simple pricing spread sheet for a retail gift shop.
Sample Spreadsheet For Calculating Prices for Goods and Services
|SIMPLE PRICING WORKSHEET -WHITE COMPANY GIFTWARE|
|ITEM||Unit Cost||Shipping*||Cost per Unit||Unit Sales Price||Gross Profit % Per Unit||Less Fixed & Labor**||Profit %||$ Profit If All Units Sold|
|6″ Candle Holder||5.00||1.79||$6.79||$12.00||43.42%||41.60%||1.82%||$1.31|
|8″ Candle Holder||6.00||1.79||$7.79||$14.00||44.36%||41.60%||2.76%||$2.32|
|10″ Candle Holder||7.00||1.79||$8.79||$16.00||45.06%||41.60%||3.46%||$3.32|
|TOTAL PROFIT IF ALL UNITS SOLD||$62.75|
|* The expense for shipping and display is divided by the number of units. Shipping: ($25 divided by 42 units results in a charge of $.60 per unit). Display: (One half the cost of the display is $50, divided by 42 units is a charge of $1.19 per unit).|
|**Cost of labor plus tax on labor is 11.2%. Anticipated Fixed Expense is 30.4%. Total Is 41.6%.|