Five
Steps to Identifying Your Minimum Selling Price Per Unit - or
How Low Can You Go?
by: June Campbell 
Do you know the minimum amount
that you can charge for your product without losing money? As
well as being a necessary component of any business plan, this
information can save you from the economic disaster that occurs
when you sell your products or services for too low a price.
Essentially, the Minimum Selling Price
is calculated by adding your Variable Cost per Unit to your
Overhead Burden per Unit, then adding your Profit Margin per
Unit.
1. Determine your Total Productive Time
per Year. This is the number of hours that you will realistically
devote to your business. Identify the number of weeks per year
you will work at the business, and the number of hours per week
that you will work. When calculating the number of weeks that
you will work, remember to allow for holidays, vacations and
sick time.
2. Identify a unit. If you are selling
a service, the unit may be an hour of your time. If you are
selling a product, a unit could be one book, one software application,
one training workshop, one gift basket, etc.
3. Divide your Fixed Costs per year
by the Total Productive Time per Year to arrive at your Overhead
Per Hour. Your Fixed Costs are the sum total of what it will
cost you to run your business for one year. Do not include the
cost of equipment or real estate, which are considered capital
assets and are not included in this calculation. This figure
should include items such as office rental, office expenses,
business travel, telephone, Internet, advertising, automobile,
skill development, publications, business entertaining, bank
charges, insurance, legal and accounting fees, licenses, salaries,
etc. Estimate every business expense that you will incur for
the following year, and then decide on your Management Draw.
Your Management Draw is the wage you pay yourself for running
the business. Let's say that your total Fixed Costs, including
Management Draw, come to $50,000 per year and your Total Productive
Time Per Year is 2000 hours. Your Overhead Per Hour will be
$50,000 / 2000 = $25.
4. Determine your Overhead Burden Per
Unit by multiplying your Overhead Per Hour by the Number of
Hours to Produce One Unit. If your Overheard Per Hour is $25,
and it takes two hours to produce one unit, then your Overhead
Burden Per Unit will be $50.
5. Calculate your Minimum Selling Price
Per Unit by Adding your Variable Cost Per Unit to your Overhead
Burden Per Unit and adding your Profit Margin Per Unit. To calculate
your Variable Costs Per Unit, identify the costs that are specific
to producing one unit. If your unit is a gift basket, for example,
you will need to consider cost of baskets, contents, decoration,
delivery, etc. Suppose your gift basket costs you $30 to assemble.
Now you must decide what profit margin you want to include.
Your business requires profit beyond your expenses and Management
Draw, since you will need funds to repay investors or loans,
funds to purchase capital assets and funds for future growth.
Let's say you decide you want 20% profit per unit. Your combined
cost per unit will be $50 + $30 = $80. Adding 20% profit brings
it to $80 + $16 = $96.
This tells you that you will lose money
at anything less than $96 per unit. If your market research
indicates that customers won't pay this amount, you will need
to find a way to reduce expenses or to add perceived value to
the product without adding to the cost.
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