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Wayne Schwitzer: "Pricing Products" Part 4

Now, don't forget about your profit. Now, there's three key ways that entrepreneurs tend to add profit to their product. First of all, they'll apply at flat rate; in this case, say, $5 per unit. Based on a percentage of cost is another way, and some people will take costs at 10 per cent or 15 per cent. We're going to use 10 per cent in this example.

Other people will take the amount they've got invested in the business. In this case she has $25,000 in a knitting machine, $5,000 worth of raw materials, so she has $30,000 worth of invested in this business. So she says, "Well, I want at least a 15 per cent return on this because I've got risk." So that would work out to about $4,500 per year. Doesn't seem like a lot of profit, but remember that profit is to cover the repayment of the loans and to cover replacement of equipment.

So in all these calculations we've assumed 21 days of production per month, 15 sweaters a day, or 315 a month, or 3,780 sweaters per year. Now, for each of the items above, the selling prices is using method A: By just adding a $5 surcharge on each sweater as your profit, will work out to $68.49. That's just an indicated minimum price.

63.49 plus 10 per cent, if you're using a 10 per cent mark up method, $69.84 is what those sweaters would cost you, or be available to your customers at. And if you used the return on investment method, or the 15 per cent of the investment of 30,000, the sweaters would be valued at $64.48.

This is where you need to look at your competitors. Now, what are they selling their products for? Remember, if you're selling the product or selling your customers one unit at a time, remember that your sales costs are considerably higher than if you're selling to retailers who are buying from you maybe a dozen units at a time. Above all be honest with your costs. No one benefits from you going out of business or having underestimated your expenses. So overestimate your expenses; underestimate your production ability, if anything.

I'd suggest trying this exercise again using 10 units a day. I'll tell you what you end up with is system A: $85.32 a unit; system B: $88.35 a unit; system C: $82.11.

Now, how do you compare to your competitors?

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