How much should I sell my products?
One of the dilemmas often faced by entrepreneurs is how much they will sell their products to the market. Sometimes, they just price in the amount similar products are sold in the market, or how much their basic costs plus a little profit.
I always give the example of Aling Nene selling banana cue. If Aling Nene’s competitor sells it at Php10, will the price cover Aling Nene’s costs? Can this price cover the cost of banana and the stick costs?
Direct / Indirect Costs
In pricing, it is important to know the costs that go into the product. Thus, including the cost of the banana and the stick is one step to progress of unlocking the mystery of pricing for entrepreneurs. In addition to the cost of bananas and sticks, the owner should also consider what else goes into the making of the banana cue, because the product doesn’t transform to itself when Aling Nene bought the bananas and the stick. It is important to know the process, time and other materials used in making it. These include sugar, oil to fry it, the pan, the stove and utensils used. And then find a particular way of allocating the costs. Like, how much oil was used in a day and how many banana cues were made from that oil. We can allocate the cost of oil used to the number of banana cues made using that oil.
The stove and the utensils, would need a lot more thinking than the oil, because you don’t use the stove today and buy a new one after using it. To allocate the cost of the stove and utensils, imagine how many years you are going to use it. Since, we have an estimate of how many banana cues we can make in a day, then we convert that into number of banana cues in the years the stove will be used. Then we can add that to our cost.
How Much Is Your Time?
Most MSME owners are the producer, seller and administrative persons of their business. Thus, they would not pitch in the cost of their time into their product. Since the profit of the company goes to them, these are no longer considered. However, when they find that they can be more productive in hiring a person to help them produce than personally do it, they suddenly find out that their selling price does not cover all other costs needed. So, other than the direct materials (banana and its partner the stick), indirect materials and overhead (oil, stove and utensils), Aling Nene should add the cost of her time in making the banana cue (technically called direct labor). How much should she cost her time? Imagine how much she is willing to pay a helper do it, then use it as a basis.
If we sum up all these direct materials, labor and overhead, then we know how much our banana cue costs. Then pricing would be just adding enough margin to cover all other expenses (like the space used, or marketing time spent) and enough profit that the owner will be satisfied.
Knowledge is Power
If Aling Nene still has time, then she can compare if her price will be competitive with the price of the other vendors. If not, then maybe she can source out cheaper bananas or find ways to produce more, or use oil and utensils longer. Knowing her costs and price opens up a new world of maximizing her materials, time and other materials which would have not been available if she just copied the price of her competitors.