## Thursday, April 17, 2008

### How much should I charge for my items? by Ediebeedieboutique

This is how I determine the cost of my clothing as well, although you need to account for profit as well. This is different from labor. Pricing your clothing this way, you will always be able to account for using more expensive fabrics or if you make a difficult design that takes more time to complete. See below:

Cost Plus Pricing

The best way to determine the prices you will charge for your products or services is to use a cost plus pricing formula and combine this with your overall pricing strategy. To accomplish this, you have to figure out your fixed operating costs, your variable costs associated with the delivery of services, the manufacturing of products, or the wholesale costs of products, and add a profit. The formula therefore is:

Variable costs + Fixed costs + Profit = Selling price.

Assume you sell services. Just remember that the following information can also be used to determine cost plus pricing for products. As a rule of thumb, labor costs generally represent the largest share of expenses for service providers. So the first step is to figure out how much you want to earn per hour. You should base our decision on three factors: How much money you need to earn to pay your personal expenses? What is the industry average for the job? Do you have a premium if the service you provide is highly specialized or risky?

Once you have determined how much per hour you want to earn, the next step is to calculate your fixed costs, which are business expenses that do not fluctuate regardless of the number of sales you make, such as the telephone, rent, and insurance. Use the attached worksheet to determine your fixed operating costs.

The next step is to determine the costs incurred in the delivery of the service, which is referred to as variable costs. For instance, if you operated a dog grooming service, the costs to purchase shampoo and grooming supplies for each dog groomed would be the variable costs. The next step is to calculate and add a profit. Every business needs to generate a profit in order to stay in business and stay competitive in the market place. Most small business owners use a percentage to calculate a profit on each job, such as total costs plus 20 percent. The final step is to tie it all together. The formula used to arrive at a selling price is to:

1. Multiple your labor rate by the number of hours to complete the job.
2. Add fixed expenses.
3. Add variable expenses.
4. Multiple the total of the three by your desired profit margin.
5. The total is your selling price.

For the example below, we will assume that fixed business expenses are \$1,000 per month, and there are 160 billable work hours each month; \$1,000 divided by 160 hours equals \$6.25 per hour fixed expenses, and that the total job required 25 hours to complete

Labor rate, \$20 per hour x 25 hours = \$500.00

Fixed expenses, \$6.25 per hour x 25 hours = \$156.25

Variable expenses for the job = \$150.00

Total = \$806.25

Profit 20% = \$161.25

Selling price = \$967.50