If you have followed me for any length of time, you know that my number one rule for business is “Don’t Lose Money.” Now, this doesn’t mean we never make money mistakes, this means that we are deliberate in our pricing and costing, so we are moving into profit with everything we sell. So, how do we calculate selling price, so we don’t lose money?
First, I want to acknowledge that there are many different ways to price goods and services. There are Value Pricing, Cost-Plus Pricing, and Market Pricing to name a few. There are great free pricing calculators on the web, if you like excel spreadsheets there are some calculators with pricing formulas available as well.
I am honestly just a “Keep it Simple” kind of girl, and unless you are manufacturing or have a multi-tiered pricing structure, you can calculate the selling cost of your product and service fairly simply, and come up with pricing that won’t allow you to lose money. Here’s my quick step-by-step method.
Step 1: List ALL of your costs.
I mean ALL. Do you print labels for your handmade goods or buy tags for pricing? It counts. Gas to get to the flea market? It counts. Pay for an online platform or storage for all of your digital products? It counts. In your pricing I want you to recover ALL of your costs. I have worked with too many entrepreneurs who were leaking profits 10 cents at a time because they forgot to add in some actual cost and break it down for each product or service sold.
Step 2: Add a Profit Margin.
Go ahead, add 10%. I’m not saying your costs plus 10% is your price for everything, but I want you right now to start thinking about profit margin. So, add a profit margin.
Step 3: Calculate Your Business Operations Cost.
I want to know how much it costs you every day and every hour to be in business. Add up your Breakthrough Number, other costs, and get a total monthly amount. Include your paycheck. I also see many creative entrepreneurs lose money on their time and labor when they are creating goods for sale. Take the monthly total and divide by the number of days you are open each month, then number of hours. To see this calculation, visit my blog on this topic.
Once you know your costs, your profit margin, and your hourly cost of business operations, we can calculate what you should sell your goods and services for. Let’s say your costs to produce your jewelry is $35.00. You want a 10% profit margin ($3.50) and it costs you $23.00/ hour in operations costs, and it took you an hour to produce. The price for that piece of jewelry should START at $61.50. So, if you are selling for $40.00 (costs plus a little bit) you are probably losing money. And we need to fix that. There are several ways to do it, through pricing, cutting expenses, etc. But you need to address this if it is you. Because you are probably losing money if you don’t. And rule number one is, “Don’t Lose Money.”
Ready to take your First Steps to Profit? It’s not about what you make, it is about what you keep!