How do I go about determing a price to sell my products and services?
Pricing Goods and Services
How much “do you want to/can you/do you have to” charge for your goods and services?
Quality, price, service, availability, and speed of delivery are primary determinants for setting prices.Your ability to differentiate yourself from the competition on one or more of these criteria is critical to setting and maintaining your price.It is, however, a given that the market may try to dictate a price range, and, sometimes a very low price range, that, despite your superior quality, competitive price, and/or quick production turn may “force” you to alter you pricing.
How do you come up with a pricing strategy?
How do you know how low you can go without jeopardizing your business?
How much product or service do you need to sell to break even?
How much do you need to sell to make a profit?
Most importantly: How much do you need to sell at a specific price with a given cost structure to generate a targeted profit.
Understanding and coming to terms with some basic accounting measures is the key to running a successful business.
We have the basic accounting equations:
Sales – Cost of Goods Sold = Gross Profit Gross Profit – Marketing, Operating, Administrative Expenses = Net Profit
What are Sales?
Sales are what you sell in the normal everyday course of your business.Sales are not one-time sales of business assets or income from investments or other extraordinary events.
What is Cost of Goods Sold?
These are the costs of direct labor and direct materials that go into the production of and delivery of your goods and services.These costs are not discretionary and are the costs that must necessarily be incurred to produce or deliver a product or service.These costs will vary directly with the amount of product or volume of service your company delivers.
What is Gross Profit?
Gross Profit is how much money you have to operate your business.Mathematically you subtract Cost of Goods Sold from Sales and that equals Gross Profit.Sales are not profits.Costs of Goods Sold are not expenses.Gross Profit is how much money you have left over after you have sold your product and services and have paid for all the direct labor and materials (for the moment we will assume a cash basis business – discussions of sales with accounts receivable and purchases with accounts payable is important and ultimately un-escapable – but for now the object is to understand and address the relationships of sales, costs, expenses, and profit).Gross Profit will increase if you raise prices and your cost of goods sold remains constant.Gross Profit will decrease if your prices remain constant and your cost of goods sold increases.Gross Profit then is a dependent result given a range of sales and cost of goods variations.You can choose to office in moderate or expensive surroundings.You can choose to pay adequate compensation or above market compensation.You can choose to be prudent with expenses or you can choose to be extravagant.The point is that “expense” choices are largely discretionary were as the “costs” of your cost of goods sold are not discretionary.
Gross Profit then, is the amount of money you actually have left to cover marketing, operations, and administrative expenses, and interest, taxes, etc., and presumably a profit.You have probably heard the old adage “I may be losing money on each sale but I will make it up in volume”.A fitting statement on failing to recognize that increasing sales alone or cutting costs alone may not be the answer but that recognition of the relationship of all your numbers is the key.To avoid this conundrum you must closely monitor pricing and costs in determining a gross profit percentage that is needed to “float the boat” and then react accordingly.
What is Net Profit?
Net Profit is “the bottom line”.Net Profit is calculated as being what is left over after the above mentioned COGS, and after marketing, operating, and administrative expenses, and, interest (debt burden), depreciation, amortization, and taxes have been deducted.In determining your sales pricing you must factor in all these expenses.It will not do you any good to have a positive gross profit if your “net” is a loss.So in working through your pricing, costs, and expenses, you must consider the entity in its entirety.
The Pricing Program
The accompanying spreadsheet program is designed to assist in all these determinations.
You will find example entries and results discussed at the end of the “Introduction Worksheet” in the spreadsheet program,
