Price Counts: Determining How Much to Charge

A new business owner has to keep an eye on employees,
operations and inventory, but sales are the true key to
financial success. Sales are what will keep you in
business next month. Nothing is more important. Sales
are the very lifeblood of your business. Your company
will grow quickly as long as you are selling your
product or service and being paid for it. If you don’t pay close attention to sales, your company will fail.

by Jim R. Sapp

During your first year of business, you will need to
track your sales (or revenues) every day.
This number should be the first thing you review every
morning and the last thing you look at before you
close. How many widgets did you sell today? How many
service hours did you invoice? How much money will
those sales bring in? When is that money due?

Do not think for a moment that sales will come easily
or that customers will come knocking at your door. You
must plan your sales strategy. Remember, nothing
happens until a sale is completed and paid in full.

How much should you charge customers for your product
or service? This, of course, depends on the nature of
your business. There are no specific formulas. You must
do some research to find an appropriate price for your
specific product.

Research Your Industry
A place to begin is to research your specific industry.
Make a list of similar products or services and how
much other companies charge for them. This information
will tell you what the market is accustomed to paying.

Review Your Costs
Once you know what the market will bear, review your
costs for producing the product or service — the cost
of goods or raw materials, the amount of staff time
(including your time) it will take to produce the
product, as well as the amount of administrative time
to invoice your customers and collect payments. You
also need to include general operating expenses and administrative costs
(or G&A) when calculating the cost of your product or service.
G&A expenses include rent, leases, marketing, sales
expenses, administrative costs, insurance and inventory
costs, which vary by industry.

Mark up for Profit
When you know what your costs will be to produce the
product or service, you then increase the price by a
certain percentage for profit. Do not be ashamed to
mark up your product or service. Your small business
must make a profit to grow next year, pay off debt and
continue to be a viable enterprise. The amount of the
markup varies by industry, service, potential liability and
general overhead. Generally, you should at least double your
fixed costs to get a selling price. In retail, this is known as "keystone"
pricing. When retailers apply a discount of 10-40 percent for a
sale on their products, they still make a profit
because they used keystone pricing.

Be careful not to overprice or underprice. Increase
your prices with inflation and as the company grows. If
appropriate, vary your price depending on customer
demand, the season or the timing of your service.

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Jim R. Sapp is an international business consultant and
speaker with more than 25 years experience as a
business owner and entrepreneur. He is founder and
director of the American Small Business Institute, and
recipient of both the "Entrepreneur of the Year" award
and "Blue Chip Enterprise Award" for inspirational
achievement in business. His book, Starting Your First
Business, is available from http://www.sappbiz.com or by
calling (800) 570-5436.

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