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HOMEWORK BEFORE SETTING PRICE - Part I

© Barbara Massie

Today would be a great day to go to the horse races. We go when my better half succumbs to my hints - about once a year. We're not really gamblers, but there is something about that moment when the horse you bet on wins and you've made a profit. A foolhardy way to make a "profit."

How do I pick a winner? I might like a jockey's name or just feel that the high-spirited horse prancing around with the 20-1 odds will win as a long-shot. What does this have to do with business? Many of us are gamblers at heart and hope to win big in the race with our competitors for sales. We'll pick a price to put on our products and Lady Luck will do the rest. Sorry, but the color of your product won't help, nor will a name make the profit expected if your pricing method lacks all the elements needed for profit.

DOUBLING COSTS

Mae, a marketing student, was more concerned about asking about pricing than in listening to my "Marketing Your Crafts" information. Since I couldn't be swayed from the marketing topics, she stayed after class to ask more about pricing.

She makes stick horses with stuffed, bright fabric heads. The horses appeal to the young jockeys of the world. Mae is satisfied with the volume of sales, but is troubled that the profit she hoped for isn't there. She said, "I buy material, make the horses and double the cost of materials to find the price to charge."

Whoaaa! That's part of the problem! You can't expect to gallop to the bank to deposit winnings (profits) by doubling costs to set the price.

Read this two-part article overview of the many factors to consider when calculating a profitable price for items. To calculate a profitable price for items weigh each factor carefully during the price-setting process. Start charting the factors as they pertain to your business. Next month I'll tell how to use this to set prices.

BASIC FACTORS

1. OVERHEAD - Utilities used, rent paid, insurance premiums - all are expenses paid that need to be considered in the cost of making your product. Calculate in a percentage of overhead when figuring price of a product.

1A. One expense few consider is the INTEREST ON MONEY borrowed to buy machinery, inventory or another business reason. If a loan is in your future, calculate the interest on the principal amount before borrowing. This will help you determine the cost of borrowing. Learn how to Calculate Simple Interest.

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