Determining what price to charge for their products and services is one of the biggest challenges Westchester County small business owners face. It’s a very complex process. The Small Business Administration has identified three key components that should go into determining every price:
1. Direct Materials: If you’re a manufacturer, this is the cost of the goods used to make your product. A restaurant owner would consider the cost of the ingredients that go into a particular dish. If you’re in retail, this number should reflect the price you pay for your inventory.
2. Labor: This number should reflect the value of your time or the time of your employees used to produce and sell your products or services.
This number can be more difficult to determine than the direct materials cost. It helps to keep careful track of how you, and your employees, are spending your time. For example, if you run a nail salon and you determine that a manicurist can see 6 clients in an hour, to determine the cost of labor per manicure, you’ll want to take that employee’s hourly rate and divide that number by six. The resulting amount needs to be included in the price of a manicure.
If you’re not sure what type of value to assign to your own labor, or you’re having difficulty determining the right rate to pay your employees, talk to your SCORE Westchester small business mentor. Their experience and insight will help you find the answers you’re looking for.
3. Overhead: Overhead is a broad term used to describe the costs of doing business that aren’t direct materials or labor. For example, the website used to promote your day care business is considered part of your overhead: you don’t use the website to provide care for the children, but you need it to promote your business. Other examples of overhead cost include the cost of renting your shop or building, electricity or heating expense, and benefits that you pay to your employees. Every sale you make needs to pay for some portion of your overhead expense.
These three components are a great starting point when it comes to determining a price for your products and services, but they’re not all the information you’re going to need. You also need to know what your customer is willing to pay for your offerings, and what your competition is charging. Putting all of the pieces together can be challenging, which is why the Small Business Administration recommends that new business owners get advice from an experienced advisor or mentor on this issue.
One great place to get guidance on setting the perfect price for your products or services is at “The Price is Right! But Is It?” small business workshop on Wednesday, March 26th. Hosted by SCORE Westchester, this workshop features John Chester, a financial expert. His considerable expertise and ability to make complex issues like pricing easier to understand make this workshop a don’t miss experience for Westchester County small business owners. The workshop is free, but space is limited. Avoid disappointment and register now!