Costing Your Offerings For Profit

Costing Your Offerings For Profit

Business is a means of exchange of value. As long as you have value to offer, people will come to you and you will get money in exchange for your product or service. Businesses are not liquid because they do not have any value to exchange.

Profit is expressed in two forms – Margin and Mark Up.

Margin
This is when profit is expressed as a percentage of sales/turnover. Here, you take into consideration all the costs (overhead, salaries, transportation and electricity costs, time, creativity, etc) incurred in producing that product or service then you add a margin to determine the price at which you will sell.

For instance, we want the selling price to give us a 50% margin.
Material – ₦100.00
Labour – ₦50.00
Overhead – ₦30.00
Total cost is – ₦180.00

Selling price – cost of product = desired margin
1(SP) – ₦180= .50(SP)
1 – 50=180
1.50=180
SP= 180/0.50 = ₦360.00
Profit = ₦360 – ₦180 = ₦180

Mark Up
This is normally expressed as a percentage of the cost. You determine ahead of time how much percentage of profit you want to make and then you add that percentage to the cost of the product to arrive at a selling price.

For instance, you have incurred the following costs:
Material – ₦100.00
Labor – ₦50.00
Overhead – ₦30.00
Total cost is – ₦180.00

With a 50% Mark Up, 1.50 * ₦180.00=₦270.00. The ₦270.00 will be your selling price. Our profit is, therefore, ₦270.00–₦180.00=₦90.00.

The above are the 2 simplest methods of arriving at a selling price for your products. Other factors that can also impact your selling price and therefore your profit are environmental factors, competitors’ prices, having an understanding of customer needs, knowing where your industry/business is headed, etc.

Any good business must consciously reduce its overheads and increase turnover. Never increase or reduce your price abruptly. Even when the occasion demands an increase in price, look for flexible ways to still give value to your customers. You can try reducing the quantity and still selling at the same price or creating an alternative packaging. For all of that, ensure that the quality of your product remains the same.

As a business person, don’t be content to do just one thing, learn to diversify or better still, add some spice/variety to that product or service that you are offering. Feel free to let us know how you make your profit or how you arrive at the selling price of your goods and services in the comments section.

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