No matter what size the business is, you need to calculate accurate prices that cover your overheads and costs, meet your rate expectations, and align with market conditions. This is an important aspect of your business, so make sure you give it the attention that it deserves.
Calculate Costs
Although they are often conflated as the same thing, the cost of sale and overheads are different. The cost of sale is the money you spend to deliver a service, while overhead is the cost of running your business. For example, a photographer might need to hire an assistant for an event, this would be a cost of sale, but the photographer’s editing software is an overhead.
If your expense can be traced to an event and is not a general business cost, then it falls into the category of cost of sale. This can be a determining factor in your pricing structure, so make sure you understand the full cost of your service. In most cases, a business service price will include the cost of sale as well as a percentage cost of overheads to operate the business.
Determine Overheads
If a business doesn’t get its pricing strategy correct, it will not be profitable and fail. One of the main areas you need to cover is your overheads; this includes anything your need to deliver your services, such as software, infrastructure, and devices. Each sale you make will include a percentage of your overhead costs, and this may change based on your success.
The prices of your products and services need to cover your costs and expenses to ensure you are sustainable and profitable. An overhead percentage needs to be applied to every service. To calculate this percentage, you will need two figures, one of them is the annual gross revenue, and the other is the annual operating expenses. A calculation will give you a percentage figure.
Determine Rates
The next step in creating sustainable prices for your business is to determine the rates you will change. A rate is different from the price. The price of a product or service contains the cost of sale and the overhead percentage; the rate is how much the provider wants to be paid. The rate you charge will be influenced by the marketplace and the industry where you apply your trade.
Several factors influence the Average Pay for your services. The rate is determined by your level of experience in a role; it is also determined by the market conditions and your competitors. When you are creating your pricing structure, make sure you separate your rate from the overheads and the cost of sale to ensure that you are paid the amount you expect.
Calculate Price
To calculate an accurate price for a product or service in your business, a few calculations are required. The first step is to add together your costs and rate to find your baseline fixed price. Next, you will multiply your baseline fixed price with the overhead percentage rate; let’s say that’s 30%. Find a final fixed price by adding the baseline fixed price and overhead contribution.
Once you have carried out this calculation, you should have a price for your product or service that is sustainable and meets your expectations. Another advantage of having a planned calculation is the breakdown in pricing that you can offer to your customers on their invoice – this gives them a better impression of your business and helps to support customer retention.
Adjust Price
After you have determined an accurate price for your services, it’s time to adjust the price to reflect market conditions and competitors’ valuations. Of course, you can’t sell a service at $3000 per month, or your customers can find a similar business offering the same services for $2500; you need to lower your prices. Unfortunately, this can eat into your rate expectations.
Although you will be operating at a lower rate, you will still have a strong and sustainable pricing structure that will maintain your business finances and create a strong foundation for the future. If you want to increase your rate in the market, you could look into alternative services your competitors don’t offer or upskill yourself and your staff to make your business more valuable.
Final Thoughts
Pricing the products and services in your business can be tricky, which is why you need to think carefully about your pricing structure and perform calculations. Having a well-thought-out pricing structure ensures your business has integrity and you have transparency with your customers.