PRODUCT COSTING & PRICING
Knowing how to price a product or service is one of the most important financial issues that any business must understand. If a small business owner does not know the meaning of Full Cost Pricing, they more than likely are not going to achieve profitability and sustainability.
Full Cost Pricing is a melding of direct and indirect costs in creating the single unit (product/service) and then adding a profit margin. The following are the components that comprise a Full Cost Pricing scenario:
Direct Costs: this includes everything that is used to exclusively to create a product or service for sale.
- Direct Labor (much too often a small business owner does not take his/her time into consideration when pricing a product or service.) As an example, if the product you sell costs $100 and you sell it for $120 you did not really make a $20 profit; the time you spent handling that product has to be factored in.
- Direct Expenses
Share of indirect costs:
- Production and service overheads
- Administrative and management overheads
- Sales and distribution overheads
- Product/service must be able to generate profit for the company
- Must be pitched realistically so that customers will buy
- Must be in line with how the product has been marketed.
The result = The Selling Price
- Selling price must be such as to gain market share.
While this is nothing more than a brief overview of product costing and pricing, a worthwhile expense is to work with a CPA or knowledgeable mentor and determine what your pricing has to be in order to be profitable. The future of your business is directly tied into this process.
Don’t watch the clock; do what it does. Keep Going! Sam Levenson
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