[Biz] Costing & Pricing

At its simplest, the price you charge for an item = (The amount you want to earn in a year DIVIDED by the number of hours you will work in a year) TIMES the number of hours it takes to produce one product / deliver one service.

That’s at its simplest.

The amount you want to earn in a year has several components. The two main ones are the cost of your labour (which is calculated on the personal expenses you want the business to pay for) and the cost of your overheads to run the business.

For example, if I want the business to pay me $30,000 peryhear and I’ll be working 1,314 hours in a year (due to holidays, weekends, downtime) then I need to charge $22.80 per hour for my labour (30K/1,314). One bit of advice: take that figure you want to earn and add 20% to it, to allow for tax.

Overheads work in the same way. If it costs me $5,000 a year to run my business then I need to charge $3.80 per hour to cover those (5K/1,314). And remember, overheads are the expenses that tick over each month regardless of whether you make a sale or not. IOW, they are going to cost you even before you make your first sale.

The cost of materials needs to get passed directly onto the consumer. Let’s say that’s $5.

The total cost of the product = Labour + Overheads + Materials. In the case above, that’s $31.60 an hour.

If you have extra revenue streams (part time jobs, other businesses) then you can reduce the amount you need to draw from the business (which changes the Break-Even Point). Accounting for those is the next step.