What Will it Cost?

Establishing the price of your product or service remains one of the toughest—and most important—elements of business success. Let’s learn from Carla’s experience.

Carla’s Story

Carla started a handicraft business. She borrowed on their home to start the business. The equity line of credit gave her more than enough to start the business and keep it going for five years. She produced a better product than most of her competition. She also marketed her business exceptionally well. As a result she tripled here sales each year over the previous year for three straight years.

Unfortunately, she did not conduct a good cost analysis for her handicrafts. She set her price point based on prices for similar handicrafts. She failed to account for why she provided a better quality product. Her materials cost more. She spent more time on her crafts. Her cost analysis failed to account for marketing costs, product placement costs, legal costs, administrative overhead, or taxes. She just based her analysis on cost of materials to produce the crafts.

She did not realize that she lost $1.35 for every $5.00 she sold. She increased the debt of her company by $78,000 in three years. She lost her business. They lost their home.

Three Key Elements to Set Your Price

I suggest analyzing three key elements when establishing the price for a product or service. These suggestions apply very general principles. Establishing the exact price requires spreadsheets and other calculators. You need to consider each of the following elements in establishing the price for your product or service.

1. Overhead Costs: Establish what it costs to produce, market, support, and distribute your product or service. The SBA can help you understand all the overhead costs.
• Begin with production costs. Make a list of all materials you need to use establish how much it costs to purchase the materials. Try to find the cheapest materials, yet maintain quality. Include costs for waste materials, broken products, maintenance costs, and replacement costs for equipment.
• Include administrative costs. Remember that your business also needs to pay for accounting, financing, legal, taxes, electricity, gas, water, waste management, computers and other office equipment. Costs will also include insurances, supplies, and more. You need to include these in the overhead costs.
• Human resource or personnel costs. Include the salaries you will pay for both exempt and non-exempt personnel (include your salary). Do not forget to calculate employment taxes, worker compensation funding, insurances, withholding taxes, FICA, and the other costs per employee. It may be easier to contract with a staffing or payroll service. They will cover all of that and give a simple estimate.
• Add in sales and marketing costs. Remember Internet ISP, web development, market research, advertising, printed materials, mailers, contact management software, and more. Each of these costs adds to the overhead costs.
• Contingency costs for emergencies and unanticipated costs. You should also include reinvestment costs. Determine how much you need to put back into the company. Business startups require higher reinvestment as a percentage of revenues than later.
2. Profit margins: You need to determine the profit margin for your business. The profit margin describes the percent of the price that goes directly to profits.
• Research the typical margins for your industry. Sam Walton changed the face of retail by establishing the lowest margins in retail. Some industries have margins as high as 75%. Others can be as low as .05%. You can find typical profit margins by industry at MarketResearch.com.
• Calculate what margin you want on each product or service. You may use the calculators at BankRate.com.
3. What your clients will pay: The ultimate element determining your price point will always be what your clients will pay. The Lean Business Development  using the Customer Development teams and pivoting (that we discussed in my July 22nd blog)enhance your ability to determine what you client will pay.

Get Help

You will need help to establish the price of your product or service. You may use the free resources of the SBA, SBDC, or SCORE (Service Corps of Retired Executives). I want to begin by suggesting that you access a cost accounting professional to help you analyze your costs. provide free counseling to get you started.

Do not allow your business to fail or incur unneeded debt because you failed to establish a price for your product or service that both made you money AND that your clients will pay. Analyze all three elements to establish your prince point. Get the help needed to ensure it’s accuracy.

Next week will discuss Planning Your Operation

Please leave a comment or share an experience about setting your price point. The more people who share their ideas, the better all of our experience will be.