Before you can set a price for your product or service, you have to determine the costs involved in running your business. If the price you set for your product or service doesn't cover your costs, you will have to infuse more cash into the business until your resources are depleted and your business fails.
Exactly how much should you charge so you don't ruin your business? You must add fixed costs--equipment leases, loan repayments, management costs (such as salaried employees) and depreciation--to the variable costs of raw materials, inventory, utilities and hourly wages/commissions. You must also calculate the costs generated by markdowns, shortages, damaged merchandise, employee discounts, costs of goods sold and desired profits, and then add them to the operating expenses listed above. You can then arrive at an initial price for your product.
The most important aspect of cost vs. price--a factor that you must grasp if you are to learn how to price correctly--is that, ultimately, the market dictates the price you may charge for your product or service. Your costs of providing customers and clients with that product or service simply establish a minimum or break-even figure and the maximum price you could demand (and get) for your product or service.
Excerpted from 303 Marketing Tips: Guaranteed To Boost Your Business