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Kentucky is home to more than 6,700 arts related businesses that employ 24,400 people – nearly four times as many as Toyota or Ford. The arts are a big business in Kentucky and the Kentucky Small......

Kentucky is home to more than 6,700 arts related businesses that employ 24,400 people – nearly four times as many as Toyota or Ford. The arts are a big business in Kentucky and the Kentucky Small Business Development Center (KSBDC) is working to grow that business with an exciting new program – Access To Market (ATM).

ATM is a year-long program that will select 50 Kentucky artisan businesses based on a simple application process. Program participants will receive step-by-step business coaching, product development, pricing expertise, and wholesale relationship strategies. In addition participants will build an on-line presence with websites and social media, develop wholesale clients, and move from local to regional and national sales via participation in regional and national tradeshows.

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  • 1. “How Much Does That Cost?” or “That Costs How Much?!?!”KSBDC Access To Market Program Pricing Workshop January 25, 2013 Vallorie Henderson Management Consultant
  • 2. Importance of Proper Pricing • Underpricing – Lose money with each sale – Business failure • Overpricing – Loss of sales – Business failure • Proper pricing – Business success!
  • 3. Wholesaling vs. Retail• Keystoning• Be consistent every place you sell• Don’t undersell the retailers• Corporate gifts or sales to the trade
  • 4. The Real PriceThe real price of your product or service is the amount the customer is willing to pay for it.
  • 5. Pricing Strategies• Promotional: Temporary strategy to generate interest, launch a new product, or sell in quantity.• Close-out: Lower prices to sell off unwanted stock, excess inventory, or out-of-season or perishable goods.• Quantity: Lower prices for customers who purchase multiple units or large quantities.• Product line: A range of products based on varying benefits.
  • 6. Pricing Strategies• Bundling: Items bundled together at a price lower than if purchased separately.• Psychological: Hitting price points that are significant ($99.99 sounds better than $100.00).• Captive: Charging a low price for the initial product but higher prices when customers need refills or upgrades for the item.• Loss leader: Charging below cost to try to attract customers to other products.
  • 7. Pricing Strategies• Destroyer: Charging a price below average to drive out competition (not appropriate for most small businesses).• Skimming: Charging a high initial price on new, innovative products due to popularity and a lack of competition.• Discrimination: Charging different people different prices for effectively the same product.
  • 8. How to PriceDetermine…A. What the market will bearB. What the competition is chargingC. Your production costs • selling price must be greater than costsA. Your break-even point • how much you must sell in order to cover expenses
  • 9. What Price is Right?What will the market bear?• Conduct customer surveys – Ask what is considered a reasonable price• Shop the competition – What does the competition charge?• Market research selling – Selling small quantities at fairs or in sublet space
  • 10. Who Is the Competition? Know competitors by name Identify their strengths and weaknesses Understand their pricing strategies Know what they offer customers (superior customer service, expert installation, etc.)
  • 11. What Are Your Expenses? Cost of Goods Sold – The direct cost of producing your goods or services • Production labor, materials, packaging, and shipping – Fluctuates up and down relative to sales Fixed Expenses – The indirect costs of being in business • Overhead, administrative costs – Exist whether or not you have sales
  • 12. Paying YourselfIf you don’t include your compensation inyour pricing strategy, the money will neverbe there to pay yourself.Build in the ability to pay yourself in two places: COGS: in the beginning, you’ll probably be the production labor force, so include an hourly labor rate here. Fixed expenses: You will also manage the business, so include a manager’s salary here.
  • 13. Paying Yourself Until you reach break-even, you may choose to pay yourself only the hourly labor rate included in COGS. Once you reach break-even, you may choose to pay yourself the manager’s salary included in Fixed Expenses.
  • 14. The Break-Even Analysis Tells you how many products or services you need to sell to reach break-even (no profit and no loss) At the break-even point, you will cover all your expenses but realize no profit (profit occurs with the next sale)
  • 15. Financial Terms• Gross income: Amount of income a business earns before expenses are considered; total sales revenue.• Gross profit: What remains of income after subtracting COGS. Gross income – COGS = Gross profit• Net profit: What remains of gross profit after subtracting fixed expenses. Gross profit – Fixed expenses = Net profit
  • 16. Financial Terms On the Income StatementIncome Sale of widgets (10@$75/ea) $ 750Total gross income $ 750 Gross incomeCOGS/Variable costs materials & labor (10@$25 ea) $ 250Total COGS $ 250 – COGSGross Profit $ 500 = Gross profit Gross profitFixed/Overhead costs Rent $ 300 Utilities $ 100 Accounting $ 100Total Fixed expenses $ 500 – Fixed expensesNet Profit (loss) $ 0 = Net profit (loss) BREAK-EVEN
  • 17. What You Need to Calculate Break-Even1. Gross income (price) per product At first, an educated guess based on your research; you’ll use this number in your calculations.1. COGS per product Research the direct cost to produce your products (materials, labor, packaging, shipping, etc.).1. Fixed Expenses Research the indirect costs of being in business (rent, utilities, insurance, etc.).
  • 18. Break-Even Formula (2 Steps)#1 Gross Income (per widget) – COGS (per widget) = Gross Profit (per widget)#2 Fixed Expenses (per month) ÷ Gross Profit (per widget) = Break-Even Point
  • 19. A Widget Business Calculates Break-Even Widget business assumptions Gross income per widget: $ 9 COGS per widget: $ 4 Fixed expenses per month: $1,000 Break-even calculationsStep 1: Gross Income – COGS = Gross Profit $9 - $4 = $5Step 2: Fixed Expenses ÷ Gross Profit = Break-Even $1,000 ÷ $5 = 200 Must sell 200 widgets Duplicationmonth to break even © JIST Works. per Prohibited.
  • 20. Do the Numbers Work?Income Consider: 200 widgets sold. Sale of widgets $ 1,800 Gross income per widget: $9Total Gross Income $ 1,800 COGS per widget: $4 Gross profit per widget: $5COGS/Variable Costs Materials & labor $ 800 #1 Gross income – COGS = Gross profitTotal COGS $ 800 per widget per widget per widget ($9 – $4 = $5)Gross Profit $1,000Fixed/Overhead Costs #2 Fixed expenses ÷ gross profit = B/E point Rent $ 300 per mo per widget Utilities $ 200 ($1000 ÷ $5 = 200) Owner’s salary $ 500Total Fixed Expenses $1,000 I must sell 200 widgets per month to reach B/E.Net Profit $ 0 BREAK-EVEN
  • 21. Fixed Expenses forSarah Sues Sandwich Shoppe Fixed Expenses: Rent $ 600 Utilities $ 150 Telephone $ 100 Business Insurance $ 25 Owners Salary $2,000 Miscellaneous $ 50 Total Fixed Expenses: $2,925
  • 22. COGS For the Swiss GobblerSupplier Price Sheet Sarah estimates Ingredients per COGS Swissand Labor Costs Gobbler GobblerTurkey @ $3.00/Lb 10 slices per lb. 2 slices $ .60Bread @ $ .75/Loaf 30 slices per loaf 2 slices $ .05Sw Chs @ $3.00/Lb 10 slices per lb. 2 slices $ .60Mayo @ $2.00/Jar 32 ounces per jar 1 oz. $ .06Mustard @ $1.00/Jar 32 ounces per jar 1 oz. $ .03Tomatoes @ $ .50 ea 8 slices per tomato 2 slices $ .13Lettuce @ $ .60/Head 30 leaves per head 2 leaves $ .04Secret Sauce @ 3.00/Jar 32 ounces per jar 1 oz. $ .09Wax Paper @ .03/Sheet precut sheets 1 sheet $ .03Labor @ $8.00/Hour 20 sandwiches per hr 3 minutes $ .40Total COGS: $ 2.03
  • 23. Monthly Break-Even Point Three things Sarah must know to calculate her break-even point:1. Sarah estimates her monthly fixed expenses will be $2,925.2. Sarah has determined that it will cost her $2.03 to create her most popular sandwich (COGS).3. Sarah believes that a fair price to ask for this sandwich is $4.95 (gross income).
  • 24. Sarah Sues Break-Even PointStep 1: Gross Income - COGS = Gross Profit $4.95 - $2.03 = $2.92Step 2: Fixed Expenses ÷ Gross Profit = B/E per Mo $2,925 ÷ $2.92 = 1,001 Sandwiches/Mo Sarah Sue knows that she will have to sell 1,001 Swiss Gobblers per month to break-even. If Sarah Sue is open 25 days per month, how many sandwiches will she have to sell each day to reach break-even? 1,001 ÷ 25 = 40.04 sandwiches per day © JIST Works. Duplication Prohibited.
  • 25. Selling Multiple ProductsMary is an artisan who makes unique creations from a studio in herhome. She makes one-of-kind stuffed animals in three sizes:small(babies), large (adult animals), and giant (such as 6-foot-tallgiraffes). Her COGS can be calculated as follows: • Mary sells her small stuffed animals for $35. Her materials costs average $5, and the small animals take Mary about 1 hour to make. She calculates her production labor at $10 per hour. • Large animals sell for $70. materials costs average $18 and they take about 1.5 hours to make. • The giant animals sell for $150. Materials costs are typically $35. Mary spends about 4 hours making a giant animal.
  • 26. Mary’s Lions, Tigers, and BearsA friend of Mary’s has a shop in the village that sellshand-painted children’s furniture and bedding. She hasagreed to display Mary’s stuffed animals in one corner ofher shop for a flat fee of $300 per month. Mary also hasa business phone line for which she pays $75 per month.She plans on drawing an owner’s salary of $1,000 permonth. Monthly Fixed Expenses: Rent $ 300 Telephone $ 75 Owner’s compensation $ 1,000 Total Fixed Expenses: $ 1,375 © JIST Works. Duplication Prohibited.
  • 27. Mary’s Lions, Tigers, and Bears © JIST Works. Duplication Prohibited.
  • 28. Know Your Daily Sales GoalsBased on B/E points of 1500, 500, and 300per month:  If you’re open 25 days per month, how many units do you have to sell each day to reach B/E?  How many do you need to sell each hour?Ask yourself:  Is this reasonable?  Is there time to produce this much product?  Do I want to produce/sell this much?
  • 29. Pricing for Service ProvidersStep 1.Determine personal income requirementsAnnual Operating Expenses $10,000Owners Gross Wages + $30,000Total Income Requirements $40,000Step 2.Calculate available working hrs.52 weeks x 40 hours per week 2,080 hrsMinus 40 vacation hours and 56 holiday/sick hrs – 96 hrsEquals available hours 1,984 hrs
  • 30. Pricing for Service ProvidersStep 3.Estimate billable hours: 1,984 hours available per year divided by 4 quarters = 496 hours per quarter Billable Hrs.Available Hrs. X Percent Billable = Per Qtr.Qtr 1: 496 X 20% (1 day/week) 99 Hrs.Qtr 2: 496 X 25% (1 out of 4 days) 124 Hrs.Qtr 3: 496 X 30% (1 out of 3 days) 149 Hrs.Qtr 4: 496 X 40% (2 days/week) 198 Hrs.Estimated Billable Hours: 570 Hrs.
  • 31. Pricing for Service Providers Step 4. Calculate the Hourly Billing Rate 1. Total income required (Step 1) $40,000 per yr. 2. Divided by number of billable hrs per year (Step 3) ÷ 570 hrs per yr. 3. Equals hourly rate = $70 per hr.
  • 32. When is the right time to review your prices? Do so if: You introduce a new product or product line Your costs change Your competitors change their prices The economy experiences either inflation or recession Your sales strategy changes
  • 33. Is It Reasonable? Will the market bear this rate? Can I adjust my prices? Can I reduce my COGS or fixed expenses? Is my salary goal too high? Is my sales goal too high? Can I accomplish this amount of work and manage my business while maintaining a reasonable schedule? Is this business venture worthwhile given my financial and lifestyle goals?
  • 34. Business PlanAs you complete this information, insert it in your business plan: 2. Selling strategy – Pricing strategy