Meanings of Right Price Part II
For Karl’s target group, this means: Assuming 20 percent of male Germans buy a new shelf once a year, of which only 15 percent are willing to spend more on a new shelf. Another 22 percent of them order their furniture online. That is the equivalent of 1,230,000 inhabitants. One percent of them would be Karl’s customers, i.e. 2,706. These order once a year. That means, that could be 225 potential customers for Karl’s shelf per month.
From this number it can be derived which price has to be calculated for the shelf and which income can be expected. This is of course only very roughly calculated. But is going in the right direction.
2. What are the real costs?
According to GRADPHYSICS.COM, the next step in the price calculation is to determine the actual costs. Because these should of course be covered by the sales price.
To do this, all costs that arise from the manufacture and marketing of the product or service must be determined.
These costs result in the company’s prime costs. These usually consist of the following cost items:
- Material costs
Raw and auxiliary materials, operating materials
- Manufacturing costs
Machines, production (manufacturing wages and energy costs), production facility (space costs), construction and
- Development costs
R&D costs (research and development)
personnel, property, plant and equipment, resources for research, product development and experimental development
- Service costs
Consulting costs, costs for transport or lease, maintenance and service costs
- Administration and distribution costs
Salaries for sales, marketing, customer service, accounting, human resources, rent or lease, depreciation, travel costs, postage costs
The costs that you take into account in the price calculation are usually divided into variable and fixed costs. While variable costs depend on the quantity or service produced, fixed costs also arise without something being produced. For example salaries, insurance or rent.
And how are the prime costs determined?
The prime costs are calculated per piece and result from:
Direct material costs
+ material costs
= material costs
+ direct labor
+ manufacturing overhead
+ development costs
= manufacturing costs (materials and manufacturing costs)
+ administrative expenses
+ selling expenses
The individual costs can be added directly to the product – material costs for the shelf of 230 euros. While the overhead costs are allocated proportionally (as a percentage) of the quantity produced – the office rent of 500 euros per month.
How do I calculate the cost of services?
If you are a freelancer and do not sell products, but rather your working hours – for example as a coach or consultant – you have to use a different price calculation. Because in this case the available working hours are the basis of your price calculation.
First, all costs are determined: from personnel costs to insurance to office rent. Do not forget to include the amounts for social security that would otherwise be borne by the employer.
Then determine the available working hours. Take into account the number of working days per year. But also possible vacation and sick days. Because on these days you cannot work and therefore do not earn any money.
You should also take into account the time required for office organization, accounting, customer acquisition and sales in the price calculation. Because you cannot bill anyone for these times either. And you have to balance these times with a reasonable hourly rate. Therefore, you cannot expect a workload of 100 percent. Rather, 60 percent is realistic – and good.
Also include a profit in your hourly rate. This provides you with a cushion in the event that times come with fewer orders or you want to make investments.
Note: Partnerships, a GbR or OHG, and sole proprietorships only consider their salary in the profit calculation. Because their work performance and their remuneration are compensated by the profit. In this case, the payout is not viewed as an expense, but as a private withdrawal.
In order to still take the salary into account in the price calculation, you can include the imputed entrepreneur’s wages as additional costs. This indicates the difference that results from the actual income and the fictitious shareholder salary customary in the market.
As the founder of a corporation, however, your salary counts directly towards costs. Because you are considered an employee of the company who regularly receives a salary. The salary is part of the personnel costs and is therefore profit-reducing. And is therefore calculated at cost.
3. Determine the profit margin
The price should of course not only cover the costs, but ideally also a profit. For this, the profit margin must be taken into account in the price calculation. This should also cover any fluctuations in demand or idle times. Or also to enable investments for the company.
The profit margin – or the profit surcharge – is also the difference between the list price and the cost price. The range can vary greatly depending on the industry. Profit margins of 100 percent or more are quite common in the manufacture of furniture and clothing. In the case of books, on the other hand, it is 35 to 55 percent.