When it comes to setting prices one thing we all seem to understand is that we need to add a markup to our cost. While this may seem easy, many small business owners take it at face value. e.g. I bought this for $5 so if I sell it at $10 I'm making 100% profit.
While that's a good start, it is not the end. They are making one critical mistake:
ignoring their fixed costs
- and as a result, they undercharge.
That's because most small business owners will tell you they don't take a salary or they understate their fixed costs.
I work from home so I don't pay rent
but at the end of the day, you still need to live, don't you?
Examples of costs that small business owners ignore
How much do you deduct from your business for:
• lunch
• airtime
• the electricity you use to bake
• water
• transport
• the money you gave your helpers to 'buy a drink'
and so on.
These amounts may seem inconsequential but over time they become significant... and they need to be factored into your product price.
So going back to our example- that extra 5 bucks you added as markup is your gross profit(or margin) and not your net profit.
Are we together? #YourMathsTeachersVoice
A failure to understand this will result in you doing a perpetual balancing act to stay afloat, while you wonder how your business continues to struggle yet it seems 'profitable'. That's because you'll be losing money but you're oblivious to it.
The product cost calculator
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| A screenshot of the product cost form |
There's a simple method you can use to calculate your break even cost and this will tell you whether your business or a product is profitable.
The logic is that every item should contribute a certain amount to your fixed costs i.e. your rent, salary, licences and so on.
We've created a free online tool which you can use to help you calculate your fixed cost charge(i.e. the percentage that each product should contribute to your fixed costs). This simple tool will also show you your break even price for a specific product. You don't need to download anything, (unless you want to).
Please check it out by clicking the link below:
Open the product cost calculator
and remember... If you like it then you should put a share on it.
As always, I wish you all the best,
Love, Likhwa
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