In a new business, it’s easy to get caught up in what we call “busyness”. This is where you spend your days doing everything that looks like it’s business, but doesn’t translate into sales or income. Busyness includes spending days setting up your workspace, organizing your records, massaging your phone message and surfing the Internet. You can easily get so caught up in busyness that you never do any real business.

Nearly everything you do should relate to getting sales. One of the most important things to do is know what your actual costs are. There are two types of costs: tangible and intangible. Tangible costs are those things you can measure. This includes the cost of inventory, workspace, tools, equipment, utilities, advertising, supplies and staff time. Intangible costs include research, networking, sales calls, ordering, marketing and other activities that can’t readily be measured in dollars and cents. All of this adds up to the cost of your service or product. Anything beyond this cost is your profit. 

There are many ways to calculate pricing. If you are selling a product, then the Cost of Goods is a good way to determine the price. This factors in all of the tangible and intangible costs noted above. Some of these items are amortized. For example, the raw goods may cost you X dollars to make X items. You divide the cost of these goods by the number of items you can make with them. Your overhead is the cost of the items used to make these products over a period of time. The cost of workspace, tools, equipment, and utilities is amortized over the course of a year or the life of the product. If a button maker can make 10,000 buttons before it needs to be replaced, then the cost of the button maker would be divided by 10,000. That’s is factored into the cost of each button made.

The same can be said for a service. Instead of costs of goods, you factor in the value of your services. If the market for writing web content is $40 per hour, for example, this rate factors in your time plus your overhead. Depending on your overhead and how you manage your costs, you could pocket anywhere from $15 to $35 an hour. That is your profit.

Here’s a simple chart to understand your profit margins.

If you want a gross profit margin of:  Your markup is:

50%       100%
45%       82%
40%       67%
35%       54%
33%       50%
30%       43%
25%       34%
15%       18%
10%       11%

In other words, if you want to make a 50% gross profit on an item that cost you $10 to make, you need to charge $20 for the item. $10 of the $20 is cost of sales and the other $10 is your profit. $10 is 50% of $20.

Of course, there is no hard and fast rule about setting prices. A lot depends upon your competition’s pricing, the perceived value of your product or service and the price the market will bear. Again, test the market. Experiment with different pricing tiers and see which one sells the best. That’s your ideal price point.