
HOW MUCH DO I CHARGE?

Four main factors will help you decide what to charge for your
product or service:

1) your direct and indirect costs;
2) the profit you want to make;
3) your market research data on competitors' prices; and
4) the urgency of the market demand.  There is rarely an exact
   "right" price but rather an acceptable price range within which
   you will want to fall.  Avoid the common mistakes made by many
   new business owners-- charging too much or too little.  Use
   several approaches to arrive at a cost and "test" the price.  If
   your ego is too involved, your price may be too high.  On the
   other hand, if you have the attitude that "this is just a little
   something I do in my spare time" or "anybody could do this," then
   your price may be too low.

Here is a formula for setting a fair price.  Calculate your price
using other approaches, too, before you make a final decision on
price:

Typical Pricing Formula

1.  Direct Material Costs--Figure the total cost of the raw
materials you have to use to make up your item.  Figure the cost of
a group of items and then divide by the number of items to find the
cost per item.  If you can easily and immediately determine the
material cost of a single item, fine.  Some items are produced in
batches, however, and it is easier to get an item cost by dividing
the cost of a batch by the number of items eventually produced.

2.  Direct Labor Costs--Figure what you pay to employees to produce
the item (whether or not you have employees now).  You must assign a
wage figure, even if you are the only one producing the item.  Take
the weekly salary you pay someone to produce the necessary number of
items and divide it by the number of items.  Add this figure to the
Direct Material Costs total.

                 Materials + Labor = $__________.

3.  Overhead Expenses--These expenses include rent, gas and
electricity, business telephone calls, packing and shipping
supplies, delivery and freight charges, cleaning, insurance, office
supplies, postage, payroll taxes, repairs, and maintenance.  The
accuracy of your costing depends on estimating logical amounts for
all categories of expenses.  If you are working at home, figure a
portion of your total rent or mortgage payment (in proportion to
your work space and storage areas), or assign a reasonable,
competitive rent figure for the same amount and type of space.  List
all overhead expense items and total them.  Divide the total
overhead figure by the number of items per month (or time period you
used above).  The answer is your overhead per item.

           Overhead + Materials + Labor = Total Cost/Item

4.  Profit--Include an amount added to the cost of each item so you
won't end up just breaking even or making the employees' wages.
Check your competition and see what they are charging.  (Retailers
generally double the wholesale price.) If your product is a little
better than the competition, charge a little more.  If your product
is comparable, price it similarly.  Remember, you will get the
profit from each sale, in addition to the salary figure.  Add the
profit figure you have chosen to the total cost per item to get your
total price per item.

          Profit + Total Cost/Item = Total Price/Item

Remember, the main purpose in operating a business is to make a
profit.  Don't undersell your product or service just because "I'd
be baking cakes anyway" or "I'm just starting out" or"I work out of
my home." If you have a new, rare, handmade product or personalized
service, the demand may be so high that customers are willing to pay
a little more.


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