Setting Prices
Jan. 31st, 2008 08:58 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
ellyssianThought this might prove useful to some folks...
Setting prices that are fair - which implies the customer is not getting rooked and the business is sustainable - is not an easy matter, and it's not something that is often done well.
Lots of people look to a competitor's price and then try to beat this. Some say they'll make up the difference in volume. However, the competitor might have lower operating costs than you do. They might be making a profit and doing great even with you swiping sales from them. As you beat their prices, you wonder why your business is failing and you can't pay bills even though your sales are through the roof.
The example here is specific to my business, but it's easily adaptable to any business.
First number you need are the hourly wages for each employee that provides the service or even handles the merchandise:
Hourly Wages = employee((hourly rate+ hourly benefits + hourly taxes) * percent of time on job)
Next, you want to calculate your overhead cost. I like to take it down to an hourly figure, and I am conservative on the number of the hours in a week and number of weeks in a month. It's important not to leave any indirect business expense out: telephone, fax service, hosting cost of websites, and so on. For the first year, you're estimating these numbers. For the second year, you have accurate numbers to work with of your profit & loss statement. You can be even more accurate if you look at these numbers on a monthly basis, altering your estimate to better reflect reality.
Overhead Cost = hourly figure = # hrs in work week (4 week month(monthly(property rent + equipment loan + utilities + equipment maintenance + license costs + truck fuel cost + benefits + taxes)))
To get the final price for a service I offer, I need to include some other factors as well. Material cost for me is often based on area, in other cases it's just added right in to the number. Because many of my jobs involve fuel and oil consumption by equipment, I calculate out hourly costs for them. I then work out a total hourly cost of wages, overhead, fuel, & oil multiplied by the amount of time it takes to perform the service. Add that to the materials cost, multiply by a profit margin, and there's your pricing:
Service Pricing = (area * material cost for area) + (time estimate * (sum(hourly wages) + overhead cost + fuel cost + oil cost)) * profit margin
It may not beat the competitor's price, but if I don't get it, I can't continue to pay employees, feed myself, keep my equipment running, or keep that website up and running.
Cross-posted from![[livejournal.com profile]](https://www.dreamwidth.org/img/external/lj-community.gif)
buildyourwings. I'll add an example for merchandise pricing in the comments over there.
Setting prices that are fair - which implies the customer is not getting rooked and the business is sustainable - is not an easy matter, and it's not something that is often done well.
Lots of people look to a competitor's price and then try to beat this. Some say they'll make up the difference in volume. However, the competitor might have lower operating costs than you do. They might be making a profit and doing great even with you swiping sales from them. As you beat their prices, you wonder why your business is failing and you can't pay bills even though your sales are through the roof.
The example here is specific to my business, but it's easily adaptable to any business.
First number you need are the hourly wages for each employee that provides the service or even handles the merchandise:
Hourly Wages = employee((hourly rate+ hourly benefits + hourly taxes) * percent of time on job)
Next, you want to calculate your overhead cost. I like to take it down to an hourly figure, and I am conservative on the number of the hours in a week and number of weeks in a month. It's important not to leave any indirect business expense out: telephone, fax service, hosting cost of websites, and so on. For the first year, you're estimating these numbers. For the second year, you have accurate numbers to work with of your profit & loss statement. You can be even more accurate if you look at these numbers on a monthly basis, altering your estimate to better reflect reality.
Overhead Cost = hourly figure = # hrs in work week (4 week month(monthly(property rent + equipment loan + utilities + equipment maintenance + license costs + truck fuel cost + benefits + taxes)))
To get the final price for a service I offer, I need to include some other factors as well. Material cost for me is often based on area, in other cases it's just added right in to the number. Because many of my jobs involve fuel and oil consumption by equipment, I calculate out hourly costs for them. I then work out a total hourly cost of wages, overhead, fuel, & oil multiplied by the amount of time it takes to perform the service. Add that to the materials cost, multiply by a profit margin, and there's your pricing:
Service Pricing = (area * material cost for area) + (time estimate * (sum(hourly wages) + overhead cost + fuel cost + oil cost)) * profit margin
It may not beat the competitor's price, but if I don't get it, I can't continue to pay employees, feed myself, keep my equipment running, or keep that website up and running.
Cross-posted from
buildyourwings. I'll add an example for merchandise pricing in the comments over there.