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Module3-Pricing Products (part1)

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Uploaded on Jul 20, 2011

"Pricing Products" Part I

This section is on pricing products for retailers, for service businesses, or for manufacturers. Those are the three main business categories that businesses encounter, but what we're going to deal with today will be the manufacturing side. It seems to be the most complicated part, and the lessons lender in this section will certainly be applicable to a service business or a retail business.

Starting a business has its own challenges when calculating your minimum selling price. Arguably, the manufacturing has more variables when calculating selling price. So that what we're going to look at here, a manufacture company needs to deal with the following key areas in order to develop the pricing strategy.

First of all, they need to deal with raw materials. They're going to have to deal with labour costs, overhead costs, and profit. "Profit's" also referred to as "return on investment."

With all these areas are pretty self explanatory. There should be some cautions that are needed to be dealt with in each category, though. Raw materials, be sure to include all costs, such as freight, insurance, those things that expenses that to get your product to your manufacturing facility. Don't forget to count the non useful waste; for example, the things that you've cut off and throw away. You've paid for it, but it's still a cost to you even though it doesn't go into the finished product.

Under "labour," one of the key areas that entrepreneurs tend to forget are such things as WCB costs, employer's EI and CPP costs, Employment Insurance and Canada Pension Plan, vacation pay, the cost of statutory holidays, and any other benefits that you provide to your employees. These combined, can easily total 15 to 20 per cent of your labour costs, and they need to be added into your production costs.

For yourself, make sure you count all of your time. Include the evening phone calls, the time you spent setting up your facility so your employees can work efficiently, the time you spend marketing. And if you're going to work for 10 hours a day, you should at least be compensated for that. You'd pay an employee, so why not pay yourself?

How do you decide how much to pay yourself? Well, ideally, start with a personal budget. Figure out all of your personal expenses as what you need out of this business, and then go and add 20 to 25 per cent on top of that to cover the monthly costs that unexpected surprises. Allow for the usual rent, utilities, auto expense, medical and such, but don't forget important things like birthday and Christmas gifts, and those annual insurance bills that tend to sneak up on you.

You have more risk than anyone else in this business, so you should be paid more than even your more most skilled employee. Take a rate that your employees would earn and add 25 to 30 per cent for yourself. If you don't require it, you can always reinvest the surplus. If you don't plan for it, though, this could be one of the major reasons that your business will get in trouble.

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