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Setting the Right Price

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  1. Setting the Right Price

  2. Setting the Right Price “Underpricing is one of the most common mistakes home-based businesses make.” SLIDE 1

  3. Setting the Right Price Realistic Prices • Cover Costs • Earn a Profit • Attract Customers SLIDE 2

  4. Setting the Right Price Educated Guess or Orderly Analysis SLIDE 3

  5. Setting the Right Price Total Costs Direct Costs + Labor + Overhead SLIDE 4

  6. 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

  7. Setting the Right Price Labor Cost of services provided by workers for wages SLIDE 6

  8. Setting the Right Price OverheadAll the costs of running a business that are not directly related to the actual production of a product or service SLIDE 7

  9. Setting the Right Price Overhead Expenses • Advertising • Business Permits • Business-Related Travel • Office Supplies • Office Equipment • Insurance • Demonstration Materials • Rent • Utilities • Taxes • Other Business-Related Costs • Equipment / Supplies • Maintenance Equipment / Repairs SLIDE 8

  10. Setting the Right Price Overhead Percent Overhead Expenses _________________________________________________________ Direct Costs + Labor SLIDE 9

  11. Setting the Right Price Overhead Percent Example Direct Costs = $4,000 Labor = $6,000Overhead = $2,000 Overhead Expenses _________________________________________________________ Direct Costs + Labor $2,000 _________________________________________________________ $10,000 .20 or 20% = = SLIDE 10

  12. Setting the Right Price Total Costs Direct Costs + Labor + Overhead SLIDE 11

  13. 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

  14. Setting the Right Price Profit Income after allexpenses have been paid SLIDE 13

  15. Setting the Right Price Price (Direct Costs + Labor + Overhead) + Profit SLIDE 14

  16. 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

  17. 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

  18. 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 = $33Retail Price [wholesale price x 2] = $66 SLIDE 17

  19. 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

  20. 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

  21. 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

  22. Setting the Right Price Psychological Aspects of Pricing • Competition • Discounts • Estimates • Exclusivity • Location • Odd Number • Prestige • Professionalism SLIDE 21

  23. Setting the Right Price Psychological Aspects of Pricing • What the market will bear • Expertise • Inflation • Itemizing • Quality • Seasonality • Volume SLIDE 22