Prices for Products and Services
price of a product can make the difference between success and failure.
Good prices make customers think they are getting their money's worth
and make you think you are getting a fair return on your investment of
time and money.
How much can you charge?
Consider comparable commercial
products, prices charged by others in your community for similar
products, and "what the traffic will bear." Consult business people in
the community. Prices should reflect all fixed and variable expenses in
the business and provide what you consider a reasonable profit. Keep
prices competitive and in a range that customers are willing to pay.
The following pricing methods are guides that you can adjust to your
Through experience, you will learn to set up your own
pricing formula. Don't worry if the prices you set are a little higher
than your competitors if you are sure your product is better in some
way. Be prepared to explain your price, if asked: "I use real butter
and fresh eggs--not powdered--in my pound cake." Be careful not to
criticize your competition!
This method uses unit costs of ingredients, expenses, and labor to
determine the price (Direct Costs + Labor + Overhead Expenses = Total
Costs). Here's an example. As a maker of homemade bread, you have fixed
expenses of $50 per month; you plan to work one day each week, or 32
hours per month; your ingredient cost is $0.50 per loaf; and you can
make five loaves in an hour. How much should you charge for each loaf?
Figure the productive working
hours (total hours spent in actually making the product). Seven hours
of the 32 are spent in marketing, bookkeeping, shopping, and delivery,
so they are not productive hours. Therefore, your total productive
hours per month are 25 (32 - 7 = 25).
Figure expenses per hour. Divide
the monthly fixed expenses by the productive working hours in one month
($50 ÷ 25 hours = $2 fixed expenses per hour).
Figure ingredient cost per hour.
Multiply the ingredient cost of one loaf ($0.50) by the number of
loaves you can make in an hour ($0.50 x 5 = $2.50).
Set labor cost. In this example,
you decide you are willing to work for $6 per hour.
Add your totals:
Fixed Expenses $2.00
Total per hour
Divide the total per hour cost by
the number of loaves you can make per hour ($10.50 ÷ 5 =
Profit is the income left after all direct costs, labor, and overhead
expenses have been paid. To have money left over, a profit factor or
profit margin must be calculated in initial pricing. After the total
costs are calculated, the profit factor is added to get the final price.
Total Costs + Profit = Price
(Direct Costs + Labor + Overhead Expenses)
+ Profit = Price
The amount to add for profit is based on the standard for the type of
business. Generally, this amount ranges from 10 to 25 percent. An
initial mistake that many businesses make is not adding in a profit
margin to their pricing strategy. If this is not done, there will be no
money for growth or expansion of the business.
While the principles for pricing a product or service are essentially
the same, there are some differences that need to be considered when
wholesaling a product to a retailer. The price figured above is the
wholesale price. To arrive at the retail price for a product or
service, a retail margin is added. This is usually two to three times
the wholesale price and is called the markup.
Wholesale Price x Retail Margin = Retail Price
(Direct Costs + Labor + Overhead Expenses + Profit) x Retail Margin =
After determining the price, compare this price with similar products.
Will customers pay $4.20 to $6.30 retail for a loaf of your bread? If
the price is considerably higher than a similar item made by the
competition, consider these options:
* Reduce ingredient cost
* Reduce labor cost
* Increase per hour production
* Decrease expenses
* Improve work methods, which may
accomplish all four of the above
* Reconsider the business venture
A wholesaler may crossover and be a retailer at times. When this
happens, the wholesaler must be careful not to compete with or undercut
wholesale customers. For example, bread may be sold to a retailer for
$2.10 knowing that the retailer is going to markup the price to cover
costs. In this case, the wholesaler who also sells directly to the
retail customer needs to sell at retail prices. If the foods business
wholesaler sells directly to the retail customer at a lower price than
the retailer, the business will lose wholesale accounts.
If wholesaling to retailers or selling to retailers through a
distributor or "sales rep," the retailer may ask for discounts when
buying in bulk and distributors may ask for a percentage of what they
sell. Both of these are overhead "costs" that must be incorporated into
the original pricing formula.
Have a price sheet that is available to customers. On this sheet, list
your basic policies. Post both prices and policies in your office as
well. Some basic policies could include:
* Minimum order size
* Time needed to fill order
* Delivery schedule
* Advance payment and billing procedures
* Price changes
* Other rules you will follow
Remember, pricing is as much an art as it is a science. Your customer
has to be willing to pay your price or your business will not be a
a Food Processing Business in Virginia