Pricing your Products and services
This can be really difficult for start-up companies - how to price up your products and services - just exactly how much are people prepared to pay?
Does it matter what people are prepared to pay?
Okay let's start out with an example. Suppose you sell fabric online, you have a website, hosting and it's just a matter of typing in the information to create a new product page to display your new fabrics.
Lets suppose you are buying 20 rolls of fabric each with 100 metres on and you intend to sell them wholesale in 10 metres batches. For simplicity sake lets assume the fabric costs are all the same - 5 units / metre each and the shipping was 200 units. The tax was 20% on the overall amount. So your outlay to buy all the fabric and get it delivered to your premises was ((20x100x5)+200)x1.2=12240 units.
Lets assume you will be able to sell all the fabric within 1 year and this fabric is effectively all you have to live off.
You have expenses and you want to pay yourself 200 units per week - that's 200x52=10400.
So now your costs are 12240+10400=22640 units for the year.
So in order to get back that money and pay yourself a wage you need to charge 22640 for your products just to break even.
You have 2000 metres of fabric and you are going to sell them 10 metres at a time. Therefore you have 200 units to sell.
Therefore 22640 / 200 = 113.2 units you will need to charge to get your money back.
Of course this is over simplified as in reality you don't know how long it's going to take you to shift all the units - you may shift them in a day - i.e. you might have already found a buyer for them - you may be drop shipping the goods effectively and never see the goods in your own hands.
If you are stocking the goods - where are you going to store them - space costs money usually and the longer you are using that space to house your products the more it is going to cost you.
Also in reality you will likely be purchasing more goods as the money comes in through sales - you will be building your stock back up to give your customers more choice, or keeping enough stock so you don't go out of stock - customers are less likely to purchase from you in future if they had to wait a long time for goods or services.
What if you have loaned the money - you will also have to factor in the interest repayments on your loan.
If you haven't loaned the money you have to factor how much money you will have made from leaving it in the bank and sitting on your hands, as your stock doesn't earn interest.
You will need to consider VAT - this can obviously be a benefit if you are getting money back from the VAT man. See the reverse VAT calculator.
If you have shareholders in your company you will also want to build in an actual profit - that is when all the costs are taken out is there anything left over - ideally every business should be making a profit - not just paying off all the bills.
Pricing up the services you provide is done in exactly the same way although this time you are charging people for your time and expertise. You have to work out how long the job is going to take and then work out how much you want to be paid per hour.
Let's say you are a graphic designer and it's going to take you 3 hours to do a job and you want to earn 20 units per hour - it's a straight forward calculation - 60 units you need to charge for the job.
Again you need to think about your start up and running costs - usually in a service business - these are lower than if you are selling products. Of course start up costs can be huge if for example you are professional photographer and started off with no equipment - you may have needed a loan in order to buy your equipment and you'll need to add this into your calculation to work out your costs as well as your time.