How to set your prices

Determining what price should be charged for your products or services is one of the biggest challenges business owners face.

There are many reasons why this is so challenging.

  • You do not want to set a price that is too high.
  • You do not want to set a price that is too low.
  • You want to be competitive while remaining profitable.

When figuring out a fair price you will have to consider these basic areas:

  • The price must be sufficient to cover your costs while making a profit,
  • If you lower your prices you must also reduce your costs
  • Compare other prices in the market and determine what price is fair.

The prices are generally established in many ways and not all formulas apply to all businesses. Do your homework and research your industry. Here is a general example that could apply to a product or a service:

Step 1: Determine your operating costs of your business.
Step 2: Determine your profit margin on your product and service.
Step 3: Compare the new prices with its competitors.

The simple formula for pricing:
Materials cost $10
+ Labor Cost $20
+ Overhead $40
Total cost = $70
+ Desired profit margin (Apprx. 43% of sales) $30
= Price of product required $100

Now that you have identified your price it will be important to develop sales goals. These sales goals will help you predict the amount of product you will need to figure out how much money will be generated.

Forecasting sales is simple, for example:

  • If I sell 1,000 products per month at $100 each I will generate $10,000 per month.
  • If that becomes my goal every month, then I will generate $120,000 in a year ($10,000 x 12 months).

Setting goals is the key to growing your business. Good luck and keep up your dreams!

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