<%BANNER%>
UFIR IFAS
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/IR00002526/00001
 Material Information
Title: Pricing
Physical Description: Fact Sheet
Creator: Israel, Glenn D.
Publisher: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Publication Date: 1991
 Notes
Acquisition: Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status: Published
General Note: "Publication date: November 1991."
General Note: "HE 7112"
 Record Information
Source Institution: University of Florida Institutional Repository
Holding Location: University of Florida
Rights Management: All rights reserved by the submitter.
System ID: IR00002526:00001


This item is only available as the following downloads:

HE03700 ( PDF )


Full Text

PAGE 1

FactSheetHE7112 TheInstituteofFoodandAgriculturalSciencesisanequalopportunity/affirmativeactionemployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,age,handicap,ornational origin.Forinformationonobtainingotherextensionpublications,contactyourcountyCooperativeExtensionServiceoffice. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/JohnT.Woeste,DeanPricing1 AdaptedbyGlennD.IsraelandNaydaI.Torres2Determiningpricesfortheproductsorservices soldisoneofthemostchallengingtasksfacinganew entrepreneur.Toooften,homebusinessownersdo notcarefullyconsiderhowtosetapricefortheir productorservicebeforeopeningshop.Mostof themtendtochargelessthantheycouldratherthan more;however,the``best''priceforaproductor serviceisnotnecessarilythepricethatwillcreatethe mostbusiness.The``best''priceisonethatwill maximizeyourprofits. Customers,competition,thetradearea,materials, overhead,laborandprofitareimportant considerationsinsettingaprice. Whatisthehighestpricecustomersarewillingto payforyourproductorservice?Sometimeshigh pricesareassociatedwithprestigeandquality;you maybeconsideredmore``professional''ifyoucharge highprices.Ifyourproductorservicedoesnotmeet theseexpectations,however,youwilllosecustomers. Anewanduniqueproductorservicewillallow youtosethigherprices.Butifyouareoffering productsandservicessimilartoyourcompetitors', thenpricecompetitively. Lowpricesareawaytoattractcustomersifyou arejustenteringamarketwithseveralcompetitors. Althoughitisalsoawaytogeneratehighsales volume,beawarethatvolumedoesnotalways compensateforpricesthataretoolowtomakea profit.Settingapricethatistoolowismoneyoutof yourpocket. Regardlessofdemand,costisanover-riding factor.Youmustdeterminewhattheproductor servicecost,whatyourlaborisworth,what percentageofprofityoumustreceive.Togetherthese factorsshoulddeterminethepriceyouset: Materials+Overhead+Labor+Profit=PriceCOSTThetotalcostofproducinganyserviceorproduct iscomposedofthematerialcost,thelaborcostand theoverheadcost.Theformulabelowshowsthe partsforfiguringyourtotalcost: Materialcost+laborcost+overhead=total cost Materialcosts aremadeupofthecosttoyoufor partsandsuppliesandmaterials.Fora service,make alistoftheneededitemsandthequantitiesthatwill beused.Determinetheircosttoyou.Besureto includeshipping,handlingandstoragecosts.Fora product,figurethecostofallmaterialsused,even thosethatcostonlyapennyperitem. 1.ThisdocumentisFactSheetHE7112,aseriesoftheHomeEconomicsDepartment,FloridaCooperativeExtensionService,InstituteofFood andAgriculturalSciences,UniversityofFlorida.Publicationdate:November1991. 2.GlennD.Israel,AssociateProfessorandProgramandEvaluationSpecialist,andNaydaI.Torres,AssociateProfessorandFamilyand ConsumerEconomicsSpecialist,CooperativeExtensionService,InstituteofFoodandAgriculturalSciences,UniversityofFlorida,Gainesville FL32611. Theuseoftradenamesinthispublicationissolelyforthepurposeofprovidingspecificinformation.Itisnotaguaranteeorwarrantyofthe productsnamed,anddoesnotsignifythattheyareapprovedtotheexclusionofothersofsuitablecomposition.

PAGE 2

Pricing Page2Findingreliableandaffordablesuppliersisa majorchallenge.Itmaytakeacoupleofyearsbefore youfinallyhavesolvedmostofyoursupplier problems.Onewaytofindthespecialsuppliersyou needistoobtaincopiesofthe YellowPages from largecities.Onceyouknowfromwhomyouwantto order,bepreparedtomeettheirminimumquantity requirements.Anotherwaytofindthespecial suppliersyouneedistonetworkwithothersinyour industry,throughmembershipinprofessional organizations,aswellasthroughsubscriptionsto newslettersandtradeperiodicals. Laborcosts aredeterminedbymultiplyingthe numberofhoursrequiredtodoajobbythecostper laborhour.Itisveryimportanttodetermine accuratelytheamountofhoursneededtocompletea service,souseatimeclock,aworksheetoradaily timecardtodeterminetheexactamountoftime spentoneachjob. Remembertoincludetimeyouspendon bookkeeping,travelingtoclients,andotheractivities necessarytorunyourbusinesswhenyoufigureyour laborcosts.Yourlaborcostsalsoincludeselfemploymenttaxes(FICA).Onemethodforincluding thesecostinthehourlywageistomultiplythewage byasomefactor.Forexample,ifyouplantopay yourself$10perhourtomakeaproduct,thenyou mightactuallycharge$20or$25perhour(afactorof 2or21/2times)tocoverthecostsofFICAtaxesand timespentonbusinessmanagement. Whenemployeesareinvolved,besurefringe benefitsareincludedinthehourlywageorallocated tooverhead. Overheadcosts includealljob-relatedcostsother thanmaterialsandlabor.Determiningthesecostsis perhapsoneofthemostdifficultaspectsofpricing forthehome-basedbusinessperson.Forthepurpose ofdeterminingoverhead,apersonworkinginthe homeshouldatleastplaceavalueonthespaceused, andapproximatetheportionofthe indirectcosts whichmightbeattributedtothebusiness.Besureto includeutilities,ordinaryservices,mortgageinterest, insurancepremiums,realestatetaxes,ordinaryrepairs anddepreciationorrent.Onewaymightbetouse thepercentageallocationallowedbyIRSforahome officededuction. Directcosts suchasattorneyoraccountingfees, advertising,travelcosts,duesandsubscriptions, equipmentcosts,supplies,taxes,etc.aremoreeasily accountedforintheoverheadcalculation.PROFITOnceyouhavedeterminedthetotalcostfora job,calculatetheprofitandaddittothetotalcostof thejobtogetthepricetochargefortheservice: TotalCostofJoborProduct+Profit=Price Profitandwagesarenotthesamething,although mosthome-basedworkerstendtoforgetthisfact. Afteryouhavepaidalltheexpensesrelatedtoyour business(includingyourownsalaryandanywages paidtoothers),theideaisthattherestillshouldbe somethingleftoverasprofitfortheowneror company.Theprofitisusedforbusinessexpansion, inflationandinvestment.Buttherewon'tbeaprofit ifyouforgettoincludeoneinyourpricingformula. Profitisinfluencedbythepriceschargedbyyour competitors,inflation,theamountofbusinessyou have,theefficiencyandqualityofyourserviceand otherconsumerpressures.SettingAProfitForServicesForaservice,thecommonbusinesspracticeisto expressprofitasapercentageofthebaseusedfor pricing.Forexample,onceyouhavedeterminedthe totalcostofajob,tryaddinga10to20percentprofit margin.Theseexamplesshowhowtheprofit calculationaffectsthetotalprice: 10percentprofit: $46.60totalcostofjobx10percent =$4.64+$46.40 =$51.04priceofservice 20percentprofit: $46.40totalcostofjobx20percent =$9.28+$46.40 =$55.68priceofservice Whilethissmallhikeinthepricemaymeanlittle ornothingtothebuyer,itcanmeanawholelotto you.Forexampleifyouhave50jobsinayear,look whathappens: 10percentprofit:

PAGE 3

Pricing Page3$4.64x50jobs =$232.00profitforyou 20percentprofit: $9.28x50jobs =$464.00profitforyouSettingAProfitForProductsForaproduct,considerlabor,materialsand overhead,thendecidehowmuchtoincludeforprofit. Usuallyitis20to30percentofthesellingprice. Laborcosts$8.78perbowl Materialscost$2.00perbowl Theoverheadcosts$40.00perweek Youneedaprofitof$40.00aweekforbusiness expansion,inflationandinvestment(about32 percent). Youcanproduce20woodensaladbowlsina40hourweek. Labor+Materials+Overhead+Profit=Price $8.78+$2.00+$2.00(perbowl)+$2.00= $14.78perbowl Yourweeklysalesgoalis$295.60selling wholesaletoashoporstore.Thiswillgiveyouthe wholesalepricethepriceyouwouldchargeifyou weresellingtodistributorsorretailstores.Doubling thewholesalepricewillgiveyouaretailpricewhich wouldapplyifyouweresellingdirectlytocustomers. Wholesalepricex2=retailsellingpriceperunit $14.78x2= $29.56perbowl Thisisthemostadvancedapproachforthe experiencedproductmaker.Itassumesefficiencyin productionandsteadydemand.Workthroughthe formulasthatfollowwithyourownproduct, substitutingyourownfacts,figuresandgoals. Rememberthatnooneformulawillworkforall productsnorassuremaximumprofitsinallsituations. Atbest,youshouldbeabletomakesomeprediction ofpotentialandlookatyourenterpriseinarealistic, practicalway.FIVEPRICINGFORMULASListedbelowarefivemethodsofpricingproducts alongwithcomments.Nooneformulawillworkfor allproductsnorassuremaximumprofitsinall situations.Everyproductmakermustapproachthe problemindividuallyandcreatively. Thebasicinformationis: Youwanttowork40hoursperweek. Youcanproduce20woodensaladbowlsin40 hours. Thematerialscost$40.00for20bowls. Theoverheadcosts$40.00perweek. Youwanttomake$7.50perhouroratleast$300 perweekinwages(labor). Youneeda$40.00profitperweekforbusiness expansion,inflation,andinvestment.Formula1Materials+labor/numberofunits=selling priceperunit. $40.00+$300/20=$17.00perbowl Yourweeklysalesgoalis$340.00 Thisapproachisoftenusedbecauseitseemsto provideareasonablewage.Thereisnoallowancefor overheadcosts,inflation,orprofits.Formula2Materialsx3/numberofunits=sellingprice perunit $40.00x3/20 bowls=$6.00perbowl Yourweeklysalesgoalis$120.00 Thisformula(materialsx3)isanapproachoften usedbybeginningproductmakersbecauseitisvery easytocalculate.Theprofitmarginisslimunless productiontimeisveryefficientandmaterials relativelyinexpensiveandreadilyavailable.

PAGE 4

Pricing Page4Notethattheformula,asappliedinthiscase, resultsinanhourlywageof$1($40/40hourstomake 20bowls)afterpayingformaterial($40)and overhead($40)costs.Therealsoisnomoneyleftas aprofit.Ontheotherhand,thisformulacanbe usefulifyouhavelittleinformationtousetosetyour price.Formula3Materials+overhead+(productiontimex hourlywage)/numberofunits=sellingprice perunit $40.00+$40.00+(40hoursx$7.50)/20bowls =$19.00perbowl Yourweeklysalesgoalshouldbe$380.00 Thisisaprofessionalapproachwhichcompares wagesinotheroccupationsthatrequirethesamelevel ofability,skill,andtraining.Formula4Materials+overhead+desiredweeklywage+ profit/numberofunitsyoucanproduceper week=sellingpriceperunit $40.00+$40.00+$300.00+$40.00/20bowls= $21.00perbowl Yourweeklysalesgoalshouldbe$420.00 Thisisthemostindividualizedapproachbecause youaredecidingonasatisfactorywageandthe amountoftimeyouspendearningthatwage.This formulaalsousesallfourpartsfordeterminingprice thatweredescribedearlierinthisfactsheet.Formula5Materials+labor+(50percentxmaterials+ labor)/numberofunits=sellingpriceperunit $40.00+$300.00+(50percentx$40.00+ $300.00)/20bowls=$25.50perbowl Yourweeklysalesgoalshouldbe$510.00 Thisdirectcostapproachdependsupon establishingacontributionpercentagethatwillcover allyouroverheadexpensesplusyourprofit.This sampleisfiguredonthecostsofmaterialsandlabor, butitcanalsobefiguredperlaborhour,perpound ofrawmaterials,ormachinehour. Inworkingthroughtheseformulasorapproaches, youmayfindthatyoucanuseoneorseveralatthe sametime.Thecriticalfactoriswhattheconsumer willpayfortheproductyouproduce.Keepinmind thatretailpricesreflectatleasta100percentmarkup (wholesalepriceperunitx2=retailsellingpriceper unit).Theproductmakerreceivesaboutone-half thatamount. Ifyourwholesalepriceistoohightobe competitive,improveyourproductionprocessor reduceyouroverhead.Ifyou,themaker,cannot realizeaprofitinadditiontoyourwages,perhapsthe productshouldbedropped.OTHERPRICINGCONSIDERATIONSOtherfactorswillaffectyourpricingstrategyalso. Someofthesearemoreapplicabletobusinesses sellingaproduct,somearemoreapplicabletoa customproduct/servicebusiness,butallthesefactors areimportantinyourpricingdecisions. Competition Docomparisonshoppingbefore yousetaprice.findoutwhatyourcompetitionis charging.Insteadofundercuttingyourcompetitors, offeraproductorservicethatissomewhatdifferent. Ifyourproductorservicehasmoretooffer,suchas freedelivery,fasterserviceorbetterquality,itmaybe worthmoretoyourcustomersthanwhatthe competitionoffers. Volume Youmaybeabletoofferlowerprices ifyouanticipateagreatersalesvolumeorlarge numberofservicejobs.Sometimes,however,the expenseofsellingmoreitems(storage,extrasales help,returns)ordoingmorejobs(extravehicles, moreemployees)outweighstheprojectedprofit. Value Seasonalitems,faditems,unusualand importeditemsbearhigherpricesbecauseofthe perceiveddesirabilitybycustomers.Ifyouhaveever purchasedafaditem(NinjaTurtleT-ShirtsorPet Rocks,forexample)whatdoyouthinkthecosttothe producerwas?Howmuchwastheprofitmargin? Thispracticeiscalled``skimmingthemarket.''The oppositeofskimmingthemarketiscalled ``penetrationpricing,''settingone'spricesabnormally lowtobecomeestablishedinamarket.

PAGE 5

Pricing Page5SupplyandDemand Customersarewillingto paymoreforitemsorservicesthatarelimitedin availability,andlessforitemsandservicesthatare easilyavailable. Image Arestaurantthatfeaturesa``gourmet diningexperience,''couldchargemorethanafamilystylebuffetoperation.Sometimespeoplethinkthat anythingthatisexpensivemustbegood. ProfitGoal Youshouldmakeenoughofa profittocovertheriskofdoingbusinessandmakea returnonthemoneyandequipmentyouhave investedinthebusiness. InflationandIncreasedOverhead Thecostof doingbusinessrisesperiodicallyandpredictably. Becausecustomersresentfrequentpricechanges,set pricesthatcoverthesechanges. ``PassingThrough'' or ``Absorbing''RisingCosts Estimatingthecostofreplacing inventory/materialsinthefuturemustbeapartof everypricingdecision.Whencostssuddenlyrise, whatwillbetheeffectonvolumeofsalesand customerloyaltyof``passingthrough''highercoststo theconsumer?Woulditbebetterpolicyinthelong runtogiveupsomeoralltheprofitsonanitemor serviceby``absorbing''thehighercostswhilekeeping pricesstable?Canyouaffordtodothis? FutureMarkdowns Occasionallyyoumayhave toofferspecialsordiscountstomovemerchandiseor increasebusiness.Haveyousetpriceshighenough soyoudonotincuralosswhenyoudiscountitemsor services. LegalConstraints Federal,stateandlocal lawsregulatepricingonsomegoods.Federallaws preventdeceptivepricingandpricingthatlimits competitionwithinagivenmarket.Statelaws,called fair-tradelawsorunfairsalespracticelaws,specify pricesbelowwhicharetailermaynotsellaproduct. Locallaws,whentheyexist,reinforceorstrengthen stateorfederallaws. Estimates Inmanyservicebusinesses,an estimateofthefinalpricefortheworktobedone canbeofferedtothecustomer.Thebusinessperson mayguaranteethattheservicewillcostnomore,or thattheestimateiscorrectwithinacertain percentage.Whateveryourpolicyisforgiving estimates,sticktoit.Thiswillpreserveyourbusiness reputationandintegrity.Youmayalsowantto chargeforfiguringanestimateifitis time-consuming. Location Whereyousellaffectsthepricesyou cancharge.Ifyouareproducingaproduct,youwill usuallygethigherpricesinurban,suburbanandhigh incomeareas.Pricesinruralandeconomicallypoor areasaregenerallylower. Skills Ifyourproductionskillsareabove average,youcanoftengetahigherprice.Thisis especiallytrueifcustomersappreciateandvalueyour skills.Trytodevelopaproductorservicethatisa specialty.Manycustomersarewillingtopaymorefor yourexpertise. Time Timeismoney.Ifyoucanproduce moreitemsorprovidetheserviceinlesstimewithout compromisingquality,you'llhaveanedgeoveryour competition. Customers Peoplehavevariousinterests,likes anddislikes.Thinkofalltheindividualsandgroups whomightbeinterestedinyourproductorservice. Materials Moreexpensivematerialsandthose requiringaspecialknowledgeortechniquewill requirehigherprices.Oneproductmakersays,``It takesjustasmanyhourstomakeanitemoutof cheapmaterialsasoutofqualitymaterial.'' Timeliness Someproducts/servicessellbetter atcertaintimesoftheyear.Isyourbusiness seasonal?Forexample,giftsandHolidaydecorations OctoberthroughDecember,candynearValentine's DayandEasterholidaysandhomeimprovement servicesinthespringandsummer. Quality Peopleareusuallywillingtopaya littlemoreforawell-madeproduct.Qualityisnever anaccident.Itisalwaystheresultofthewillto producesomethingspecial.SOURCESRedeker,NormaJ.1989. SettingAProfitablePrice Publication8838-E.CooperativeExtension Service,UniversityofArizona. Rowe,BarbaraR.andMarionT.Bentley.1986. A Home-BasedBusinessWorkshop:SettingAPrice CooperativeExtensionService,UtahState University.