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Pricing - Focus on Expenses

When calculating your price you must secure to cover all expenses.

A startup business must decide the pricing strategy for it´s product or service. To many this is unexplored territory. However, it does not have to cause too much trouble.

Supply and demand

You need to be aware of relatively few conditions when deciding your pricing strategy. Condtitons which apply for all products and services:.

• Market mechanisms allow you to put a high price on your product/service if there is a great demand and a poor supply
  
• Oppositely, if there is a poor demand and a surplus of similar products/services in the market you may be forced to apply a low price.

Pricing - focus on expenses

Before your product/service reaches the customer, a number of cost accumulating activities have taken place – activities such as:

• Purchase, cost of sales and maybe also raw material processing
• Wages
• Freight, import duty
• Administration, etc.

Break-even

Once you have determined your expenses, you can easily apply a "breakeven price" on your product/service. Breakeven price is when all costs to the production/purchase is covered.

Add your required profit to your cost price and you have a sales price. Do not forget to add VAT or other expenses demanded by the state if it is obligatory in your country.

The calculation could look like this:

Cost price /raw material
+ Cost of production
+ Profit
= Your sales price
+ VAT or sales tax
= Customer price

Something else than price

Price is only one of many competitive parameters. You should also pay attention to a number of other conditions: service, quality, close to market, prestige, ‘the good story’ etc.

See also: Pricing - focus on the market

Go to next business issue: Contribution Margin

It is not how great you start it, is how great you end up.
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