Small Business Owners and Setting Prices

"$75/hour! Are they crazy?" All of us have had this reaction to price at some point. Although some products/services are overpriced, most freelancers/small business owners determine price by what the time and/or materials it takes to produce an item. A number of factors go into this process.

Let's say you make pillows. All of your friends rave about your talent and suggest that you sell them. "What a great idea," you think. But, for how much? You have no idea. There are many factors to be considered to determine price, but the essential four are:

1) Manufacturing costs: Includes cost of raw materials, labor, overhead (electricity, machinery, gas, etc.).

2) Markup: The profit from each item (unit) sold. For example, if it costs $5.00 to produce a product, and you sell it for $10, your markup is 100%.

Note: To research pricing a product, consult the trade association for that industry. In our example, you would contact The National Home Furnishings Association (NHFA.org).

Many associations have membership fees. A free, excellent source is the SCORE chapter of the SBA. Score is the Service Core of Retired Executives. These executives volunteer to help small business owners with small business issues - business plans, marketing, pricing, etc. [FYI, www.the-efa.org is a great organization for editorial freelancers.]

Call your local SBA and set up an appointment. Many of these executives have 20, 30, 40+ years experience in business and are just waiting for you to pick their brains.

3) Gross margin: The amount of money somebody pays for a product, minus what it costs to produce.

If your average investment in inventory is $100 and your gross margins are $300 (Sales of $300 and cost of goods $100), then your Gross Margin Return on Inventory Investments (GMROII) ratio would be: 3 (300 / 100).

This means you are getting 3 dollars for every 1 dollar you invest in inventory, or a 300% GMROII.

4) Market bearance: What the customer is willing to pay. No matter how cute, delicious, helpful or necessary you think your product/service is, it is only as valuable as what the customer is willing to pay for it.