Calculating costs
Before you set a price for your goods or services, you should calculate the total cost of what you are providing. According to the U.S. Small Business Administration, a pricing model should consist of the costs for materials, labor, and overhead. The materials cost includes the components of the product you are providing, such as the materials you would need to make a custom T-shirt or supplies for a cleaning business. Next, you will want to determine the labor costs of generating your service. This typically includes the hourly wages of employees or your own expected income if you are the sole employee. The final cost to calculate is overhead. This refers to indirect things that affect your business, such as rent, taxes, advertising, supplies, utilities, and insurance.
Choosing a pricing method
Another consideration for selling your goods or services is figuring out your pricing method, whether it is an hourly rate, a flat fee, or variable. Many self-employed individuals, such as freelance writers or designers, charge hourly rates because they understand how long it takes them to complete a task and the value of their time. This is the preferred method of pricing for many businesses, because it is low risk and guarantees that the time it takes to complete a project will be worthwhile.
On the other side of this is charging a flat fee, which is more beneficial to the customer. If using this method, make sure you have an airtight agreement for pricing. Some customers may ask for adjustments or changes to a good or service, thus requiring more time from the business without extra pay. One way to account for this is variable pricing, which gives you the ability to negotiate based on the level of effort a good or service requires. On the flip side, you can gain loyalty from customers by offering a variable price cut if they buy in bulk.
Determine a profit margin
Once you have all of your costs calculated, the next step is deciding on a fair profit margin for your business to succeed. While you may want to immediately go high and try to make as much money as possible, you want to avoid acquiring a reputation for overcharging, advises Inc.com writer Elizabeth Wasserman. The best way to get an understanding of how much to charge, according to Wasserman, is to “look for resources in your industry, such as the annual statement studies on small and mid-sized business financial benchmarks from Risk Management Associates.”
Monitoring profitability
With a new pricing method in place, monitor the results for the first few months to assess whether anything needs to change. Wasserman suggests making cuts in various overhead areas if you are struggling to make a profit. Determine whether employee costs are too high or if there are other areas where you can cut costs. As you are monitoring profitability, be sure to check the market for changes in your industry. If you notice competitor prices rising, you may be able to do so as well. Just be careful you do not become known for overpricing, as that may be a detractor for potential customers.
With these tips in mind, you should have a good starting point for pricing the goods and services of your business.