So, you just started your new business and you are wondering how you should correctly calculate the price of your goods and service. This is very important as it will determine if you will be making a profit or a loss.
The very first step would be to know your costs;
There are two types of costs; the direct costs and the indirect costs.
Direct Costs
Direct costs are costs that you incur in the process of producing the goods or service. Examples are: raw materials, labour fees, importation costs, packaging etc.
Indirect Costs
Indirect costs are general cost associated with running the business such as rent, electricity, salaries, utilities, maintenances etc. A portion of this cost should be added to the price of each product as a contribution towards covering for these costs.
These two costs should be factored into the price of the product.
There are two main methods of pricing: the Cost-plus method and the value-based method.
The Cost-Plus pricing:
This method of pricing focuses on adding a profit margin that is satisfactory to the seller. This is calculated by adding the below figures
The total Direct cost of producing the product
+
A portion of the Indirect cost
+
Profit margin of 20% of the total of direct and indirect cost
=Price of product.
Here is an example
Aduke makes ankara dresses for sale, the cost of fabric to make one dress is N2000, other trimmings cost N300, the tailor who makes the dresses charges N1,000 per dress. The monthly rent for her shop costs N20,000 and the utilities bill is N2000 per month. She produces 50 dresses every month. She would like to earning a 20% profit on each dress. How much should she price her product?
| Cost of fabric | 2000 |
| Cost of trimmings | 300 |
| Labour cost | 1000 |
| Total direct cost | 3,300 |
| Rent charge (20,000 /50 dresses) | 400 |
| Utilities charge (2,000 / 50 dresses) | 40 |
| Total cost | 3,740 |
| Profit margin (20% x 3,740) | 748 |
| Ideal Price | 4,488 |
Aduke can choose to round it up to N4,500, if she so chooses but with this calculation, she has ensured that all her costs are covered and she is making a reasonable profit.
Value based pricing
This method of pricing considers how much the customer is willing to pay. The value of the product is placed by considering several factors that would determine the value.
Some factors that would affect these decisions are:
- The price the competition charges
- The quality of the product compared to other alternatives
Using this method, you consider these factor and decide what price point would be most favourable to you.
Do you want to offer the same price as your competitors or lower than them? Do you believe that your target market is able to pay for a higher priced item and would value your product more if the prices are higher or lower?
You evaluate and decide!
So, there you have it! Choose a method of pricing that works best for your product.
