For those with no experience in the business world, pricing seems like an easy task. As long as you make a little on everything you sell, you earn a profit. That way of thinking leads to bankruptcy and stores closing their doors for good. Pricing involves much more than just the cost of the item. When you price your items too low, you do not cover your overhead costs and you lose money. If you run a small business and find yourself losing money, then you need to know how to save money and raising the prices of your products increases profits.
Overhead cost is a term that refers to anything you need to keep your business going. Even if you run a fairly small business, you still have overhead costs. Your costs include any marketing, co-op marketing, your utility bills, the cost of rent on your property, office supplies, and the salary of you and your employees. The only way you can make money is by selling products at a cost that covers all of your overhead costs and still have money left over. As long as you sell products too cheaply, you will keep losing money because you cannot cover overhead costs.
A good example to look at is the restaurant industry. In the restaurant industry, chefs must make dishes that cost 30 percent or less of what the item sells for. If a dish sells for $20, then the restaurant should only pay around $6 for the food in that dish. The rest of the price goes towards the bus boy, manager, chef, and dishwasher salaries, as well as the cost of running the restaurant. Many restaurants fail because the manager cannot keep food costs down.
Before determining the price for your products, consider your overall costs. You typically have higher costs if you work out of an office or store, than you would have when selling items from home. You should also take into account the salaries of any employees, the cost of your building, gas costs, and any other costs. The costs of the items you purchase are only a part of the pricing structure. When you pay $1 for an item wholesale and sell that item for $2, you must sell thousands of products simply to stay afloat. If you want to make a profit, then you need to increase your profits or sell even more products.
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