Setting the Right Price

1. Setting the Right Price

2. 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

3. Setting the Right Price “Under pricing is one of the most common mistakes home-based businesses make.”

4. Setting the Right Price Realistic Prices • Cover Costs • Earn a Profit • Attract Customers

5. Setting the Right Price Educated Guess or Orderly Analysis

6. Setting the Right Price Overhead

7. Setting the Right Price Direct Costs The costs of the materials and supplies related to the actual production of a product or service.

8. Setting the Right Price Labor Cost of services provided by workers for wages

9. 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

10. 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

11. Setting the Right Price

12. 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% = =

13. Setting the Right Price

14. 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

15. Setting the Right Price Profit Income after allexpenses have been paid

16. Setting the Right Price

17. 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)

18. 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

19. 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

20. Setting the Right Price Break-Even Point The point at which sales (revenues) are exactly equal to costs (expenses).Sales = Variable Expenses + Fixed Expenses

21. 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

22. 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

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

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