Review pricing structure of products/services
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 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 to this process.
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