So you figured out which business entity you will choose and now it's time to start making money right? Well not quite there is a major MAJOR task you have to handle before you do that. It will require a lot of number crunching and thinking but it's necessary!
Before you set a price for your product/service and start promoting your business you FIRST must determine what your overhead will be. Overhead are all of your expenses combined that is required to run your business. Here are two of the most common expenses you will have as an entrepreneur:
Fixed expenses: are the same amounts every month regardless of sales, production, or any other activity. Examples are: salary wages, rent, car note, insurance, Internet hosting, lawyer, accountant, etc.
Variable expenses: change month-to-month depending on production & needs. Examples are: hourly wages, freelance wages, gas, shipping costs, production materials, etc.
It’s very important that you sit down and go over every single thing you need to efficiently start doing business. Be honest and unfiltered DO NOT CUT COSTS and discard certain things with the intentions on keeping the number low. It’s crucial you have a realistic view of what you need to cover going forward. Figure out the monthly total for your overhead, which will then give you your yearly total. Now you have something to shoot for, whatever that number is, lets say $42,000/year, which is $3,500/month, that’s how much your business needs to make in order to break even. Now you have to price your product/service accordingly so that you can make a profit.
Do not make the mistake of pricing your work low so that it appeals to customers. The customers/clients aren’t the ones running your business you are! If your business goes bankrupt your customers/clients will sleep well at night while you are sinking. Price your products/services properly so that YOU can prosper! Don’t worry about scaring people off; those that do business with you are the ones that truly value you!
To price properly you need to know your sales margin & sales goals. I will provide an example of how to figure this out. The formula is universal and works for both products based & service based businesses
Let’s say you decide to sell a product/service priced at $20. It costs you $11.60 to make the product/provide the service. This includes all expenses whether it is materials, shipping costs, or labor.
1. You will now subtract $11.60 (your total expense) from $20 (the sales price) that will give you a net profit of $8.40. You will make that amount for every single product you sell or service you provide.
2. Now divide $8.40 (your net profit) by $20 (the sales price) that will give you 0.42. Multiply this figure by 100 and you will get your sales margin. In this case it is 42%.
1. To break even each month you will divide $3,500 (monthly expenses) by $8.40 (your net profit per sale) that gives you your monthly sales goal of 417. You must sell 417 products or service 417 people a month to break even or 5,004 people a year. Anything above 417 monthly or 5,004 yearly will give you a profit under this example.
I know this post is jammed pack with a lot of information and a lot of math (I hate math btw) but I believe it’s very important you master this FIRST before you do anything else. I made the mistake of diving in head first with selling my services and pricing things randomly. I was 23 years old and eager to become rich! I didn't think any of this through. As a result my business was in disarray and it was stagnant for the first couple years.
Once I discovered this formula and process I settled in, charged what I was worth and what I needed to make money then my business began to progress. So please go over the numbers thoroughly, figure out your overhead expenses, then determine what you think a good sales price will be, and find out your margins. If the numbers don’t meet and exceed your expenses then you MUST change your sales price and start over. This is why it’s best to know this upfront before you promote anything! I hope this helps if you have any questions please don’t hesitate to email me! Until next time!