How to Correctly Price Your Product/Service?

Product/Service Pricing is one of the most critical part of your business plan, a bad pricing strategy can literally bring down your business.

When I just start up my logistic business, I make a mistake in pricing my service too low. I though I could make it if I just cover my variable cost and survive just by breaking even. Little did I know that although I am seeing growth in sales, I didn't see and growth in cashflow and it almost cause my business to fail due to insufficient cashflow.

Many entrepreneur fail to realise the hidden cost that must be factor in when it comes to their pricing strategy. And I am here to share a method that I use personally to price my services in hope that people who are starting a business will not fall into the same trap.

The key to good pricing is to know the following formula:

(Img Src:http://image.slidesharecdn.com/breakevenanalysis-121110062807-phpapp02/95/break-even-analysis-3-638.jpg?cb=1352528928)

The breakeven formula allow you to consider all the cost that must be factor in and the amount of units that need to be sold at a certain price to achieve your sales target. Click here to find out more about breakeven formula.

I am not here to teach economics so I will skip the actual calculation using the formula. However, I want to highlight the important cost that must be factor in during the calculation so you can minimize risk of insufficient cashflow.

Important Cost To Take Note

1) Depreciation

If you plan to own machinery or vehicles, depreciation is major cost you must factor in so you will have enough cash reserve to replace them.

2) Your expected earnings

There is no point if your business survive but you can't feed yourself. You need to keep yourself alive to lead the business to greater heights, so factoring in your expected salary will make sure your pricing can allow your company to grow and allow you to survive.

3) 10% - 20% of cost increase

Factoring in 10% to 20% of cost increase can allow you to have pricing that need no adjustment should there be a sudden change in the economy.

Having all this cost in mind plus all the cost involve in your business, you can apply them in the formula and come out with a comfortable pricing. This method of course is not the end all and be all, you will have to adjust according to your business needs and how the market is doing.