Small Business Basics
Setting the Sales Price

(Date posted: March 30, 2010)

This business basics page shows how to set the sales price for the services offered by your small business.

The heart of any business is making sales to customers at a profit. If you can't make a profit, you probably won't stay in business. Therefore, you need a sales price low enough to attract customers and high enough to make a suitable profit. The topics on this page show how to calculate an appropriate initial sales price.

Here are the topics:

Introduction to procedures
Owner's pay rate
Depreciation expense
Operating and other expenses
Example 1 -- Resume service
Helpers' pay rates
Materials and other job costs
Other adjustments for handyman service
Example 2 -- Handyman service
Final thoughts

Part of being able to make sales to customers is understanding how a business operates. Other pages in this Business Basics section can help you in this endeavor.


IMPORTANT

Before using this information to start a business be sure to read the following notice: Disclaimer

Introduction to procedures

There are two methods of setting a sales price. One method uses an hourly rate; the other uses a lump sum amount. Some customers may be wary of paying you on an hourly rate. Thus, they may prefer a lump sum bid.

The following topics show how to calculate an initial sales price under both of these methods. I'll be using myself as an example for these calculations. I'll begin with my proposed resume service. Then I'll add some other items to show the calculations for a handyman service.

When calculating a lump sum amount, I'm assuming the example job will take about 5 hours of my time. The estimated amount of the owner's time for a proposed job is used to calculate various portions of the lump sum sales price. I'm also assuming I'll have jobs requiring 50 hours of my time during the first full month of operations. Thus, I can divide monthly expenses by 50 to arrive at an hourly expense rate.

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Owner's pay rate

The owner's pay rate is used to set the amount of profit desired. I recommend that this rate be set low at first. After you become fully qualified to perform the service and well known as a provider of the service, you can raise this rate. You may choose to keep raising this rate until you are satisfied with the profit or start receiving resistance from customers.

Assumed values

I'm assuming $20 an hour for the owner's pay rate in this example. (However, the pay rate you use will depend on your minimum desired profit and current economic conditions.)

Hourly rate -- Under this example, the owner's pay rate portion of an hourly sales price will be $20.

Lump sum -- The owner's pay portion of the sales price will be $100 for the example job. (This is $20 an hour times 5 hours.)

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Depreciation expense

Depreciation expense is used to allocate the cost or current value of equipment (and certain other long-term assets) over its remaining life. Let's say a certain type of equipment has an estimated remaining life of 60 months. Then its cost or current value would be divided by 60 to arrive at the monthly depreciation expense for that item or group of similar items.

Assumed values

 

Schedule of depreciation

       Description Cost or value Life in months Monthly deprec
  Computer   750 36 $ 20.83
  Computer program   65 36   1.81
  Multi-function laser copier/fax/printer   450 48   9.38
  Office equipment   50 60   0.83
   
       Total monthly depreciation   $ 32.85

Per the schedule above, the assumed depreciation for this example will be $32.85 per month.

Hourly rate -- To arrive at an hourly rate for depreciation expense I'll have to divide the monthly amount by the estimated hours spent on jobs for my first full month of operations.

Under this example, the depreciation expense portion of the sales price will be $0.66 per hour. (This is $32.85 monthly depreciation divided by 50 estimated working hours.)

Lump sum -- The depreciation expense portion of the sales price will be $3.30 for the example job. (This is $0.66 an hour times 5 hours.)

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Operating and other expenses

These expenses include startup costs, advertising and promotion, operating expenses, and miscellaneous expenses for a month. However, I am only showing a portion of the deferrable startup costs. This is in accordance with my recommendation of minimizing startup costs in order to achieve immediate profits.

Assumed values

 

Monthly operating and other expenses

  Advertising $ 75
  Business insurance   50
  Computer supplies   25
  Governmental fees and licenses   50
  Internet access   30
  Office supplies   25
  Other operating expenses   50
  Reference book   15
     
       Total monthly expenses $ 320

Per the schedule above, the assumed operating and other expenses for this example will be $320 a month.

Hourly rate -- To arrive at an hourly rate for operating and other expenses I'll have to divide the monthly amount by the estimated hours spent on jobs for my first full month of operations.

Under this example, the operating and other expenses portion of the sales price will be $6.40 per hour. (This is $320 monthly expenses divided by 50 estimated working hours.)

Lump sum -- The operating and other expenses portion of the sales price will be $32 for the example job. (This is $6.40 an hour times 5 hours.)

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Example 1 -- Resume service

The total of depreciation expense, operating expenses, and miscellaneous expenses is often referred to as "overhead" in the business world. In this example, I am including a portion of startup costs in this overhead amount.

I'm not including any rent or utility expenses in operating expenses for this example. I recommend using a kitchen table and chairs as a home office for most people starting a small business. In this case, there is little or no increase to normal living expenses. Any direct expenses for a home office, such as office supplies and business telephone, are already included in overhead.

Assumed values

 

Composition of sales price

    Hourly rate Lump sum
  Owner's pay rate $ 20.00 $ 100.00
  Depreciation expense   0.66   3.30
  Operating and other expenses   6.40   32.00
     
 
       Total hourly rate $ 27.06    
       Total lump sum (5 hours)     $ 135.30

Hourly rate -- Under this example, the sales price will be $27.06 per hour.

Lump sum -- The sales price will be $135.30 for the example job. (This is the $27.06 hourly amount times 5 hours.) Of this amount, $100 (the owner's pay) is profit.

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Helpers' pay rates

This topic (and following topics) concern a handyman type of service. In certain circumstances, you may need helpers to assist you on a job. A helper's pay rate normally would be less than the owner's pay rate. Helpers may be co-owners, family members, friends, or casual laborers. Be sure you take care of any governmental requirements before using helpers on a job.

Most people in this type of business would charge the customer more than the actual expense for helpers. This extra amount, or up charge, will increase the profit on the job.

If there were any additional expenses involved, such as payroll taxes, these would be added to the helpers' pay rates before applying the up charge.

Assumed values

I'm assuming this example job for a handyman service requires the same 5 hours as in previous topics. I will need two helpers to assist me. I'm assuming each helper will cost me $12.50 per hour. (However, your pay rate for helpers will depend on availability of workers and current economic conditions.)

The up charge on the $12.50 hourly pay rate will be $1.88 per hour. This is 15% of the actual cost of each helper. Thus, the total hourly amount charged to my customer in this example will be $14.38 per helper.

Hourly rate -- Under this example, the helpers' pay rate portion of the sales price will be $28.76 per hour. (This is $14.38 an hour times 2 helpers.)

Lump sum -- The helpers' pay portion of the sales price will be $143.80 for the example job. (This is $28.76 an hour times 5 hours.)

Up charge -- The profit portion of the helpers' pay rates is $18.80 for the example job. (This is $1.88 an hour times 2 helpers times 5 hours.)

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Materials and other job costs

This topic also applies to a handyman type of service. It adds the expense category for materials and other job costs.

Most people in this type of business would charge the customer more than the actual expenses for materials and other job costs. This extra amount, or up charge, will increase the profit on the job. This up charge is effected by charging customers the retail price of materials and other costs. Whereas the business owner usually receives a builder's discount when paying for these items.

Assumed values

 

Materials and other job costs

  Deadbolt lock $ 25
  Lockset   35
  Pre-hung door   160
  Can of paint   5
  Package of 4-inch wood screws   5
     
       Total costs $ 230

The customer is charged the retail price for these items. I am assuming a 15% builder's discount. Thus, the up charge (profit portion) is 15% of the retail price.

Retail price -- Per the above schedule, the materials and other job costs portion of the sales price will be $230.

Up charge -- The profit portion of the materials and other job costs is $34.50 on this example job. (This is the $230 retail price times 15%.)

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Other adjustments for handyman service

This topic will adjust the depreciation and operating expenses from previous topics to illustrate a handyman type of service. On the depreciation schedule, the computer setup is deleted and handyman related assets are added. On the operating expenses schedule, the computer related expenses are deleted and job supplies are added.

Assumed values

 

Schedule of depreciation

       Description Cost or value Life in months Monthly deprec
  Job equipment   450 60 $ 7.50
  Office equipment   50 60   0.83
  Pickup truck -- 50% business portion   3,500 60   58.33
  Protective gear   65 60   1.08
   
       Total monthly depreciation   $ 67.74

 

Monthly operating and other expenses

  Advertising $ 75
  Business insurance   50
  Governmental fees and licenses   50
  Job supplies   30
  Office supplies   25
  Other operating expenses   50
  Reference book   15
     
       Total monthly expenses $ 295

Hourly rate -- Under this example, the depreciation portion of the sales price will be $1.35 per hour. (This is $67.74 divided by 50 hours.)

The operating expenses portion of the sales price will be $5.90 per hour. (This is $295 divided by 50 hours.)

Lump sum -- The depreciation portion of the sales price will be $6.75 for the example job. (This is $1.35 an hour times 5 hours.)

The operating expenses portion of the sales price will be $29.50 for the example job. (This is $5.90 an hour times 5 hours.)

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Example 2 -- Handyman service

The total of depreciation expense, operating expenses, and miscellaneous expenses is often referred to as "overhead" in the business world. In this example, I am including a portion of startup costs in this overhead amount.

I'm not including any rent or utility expenses in operating expenses for this example. I recommend using a kitchen table and chairs as a home office for most people starting a small business. In this case, there is little or no increase to normal living expenses. Any direct expenses for a home office, such as office supplies and business telephone, are already included in overhead.

Assumed values

 

Composition of sales price

    Hourly rate Lump sum
  Owner's pay rate $ 20.00 $ 100.00
  Depreciation expense   0.66   3.30
  Operating and other expenses   6.40   32.00
  Helpers' pay rates   28.76   143.80
  Materials and other job costs   N/A   230.00
     
 
       Total hourly rate $ 56.01    
       Total lump sum (5 hours)     $ 510.05

Hourly rate -- Under this example, the sales price will be $56.01 per hour. However, this hourly amount does not include materials and other job costs. These items are always a separate lump sum charge.

Lump sum -- The sales price will be $510.05 for the example job. Of this amount, $153.30 (owner's pay and the two up charge amounts) is profit.

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Final thoughts

You can make the calculations shown in the above topics using a computer worksheet or an electric calculator.

Hopefully, your initial sales price will allow you to attract customers. However, you may want to adjust it as determined by your desired profit and current economic conditions.

As noted above, I recommend a rather low sales price at first. It is easier to raise a lower sales price than to decrease a higher sales price. Also, a lower sales price makes it easier to recover from any mistakes you make. When you are charging a rather high sales price, customers don't expect you to make any serious mistakes.

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