Calculating Your Price Points: Considering Costs

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When it comes to determining the price for your product or service, cost is the obvious starting point. It’s only after you have your costs completely nailed down that you can really start to make serious plans for pricing. With a clear understanding of your costs, you can quickly react to changes that impact your bottom line, such increased costs for raw materials or bringing on new employees.

On a basic level, costs are easy to identify. For instance, let’s say your company is a bakery that makes organic cookies and snacks. Ingredients will be one of your most obvious costs. It’s fairly easy to work out your per-unit needs for each ingredient, and to scale that up to the bulk price your supplier will charge.

Finding the total per-unit cost for each snack you make is a simple matter of creating a spreadsheet. Spreadsheets are a great tool for pricing, as they allow you to make adjustments on the fly, and to see the results instantly. This is particularly important when you’re adjusting your prices later on, such as when the costs rise of your high-end organic flour, or when you can finally order enough baking powder to get a volume discount.

Another element of cost is production time. Each batch of cookies your organic bakery makes takes a certain amount of time. If you’re on top of your game, you know exactly how long each batch of cookies takes. You’ve timed the whole process, from the moment the ingredients are opened to when the finished cookies are packaged and ready to be shipped. Combined with some basic math and well-informed labor pricing data, you know exactly how much it should cost to hire a skilled baker to make your cookies and snacks. Divide the cost of labor by the number of units, and you now have the per-snack cost of labor.

There are other per-unit costs in play as well, such as the cost of packaging. You might find that it simply doesn’t make sense for your cookies to be individually wrapped, or that you get a better cost per unit by scaling up from a 6 oz package size to a 12 oz one.

The other thing to keep in mind are your fixed costs. This includes things like your rent, your payroll and administrative costs, and your utilities. There are other costs as well, like your marketing budget, your insurance premiums, and the up-front costs of hiring a salesperson or two to start getting your glorious, delicious cookies into stores.

By adding all those costs together, you can get a clear picture of just how many batches of batch of organic cookies you will need to sell to keep the lights on. With that number locked in, it becomes that much easier to come up with a final price.

Of course, that isn’t the end of the story for pricing your product. Where your cookies will be sold, and at what volume, also plays a major role. That’s a huge topic that we’ll explore that topic in another post.