A
new company is highly motivated to obtain clients, thereby, bringing in cash to
support the new company's initial employee and administrative costs. However,
it is important to understand that obtaining new clients at any price is not a
strong financial decision. Obtaining market share while not charging enough to
cover for COGS and administrative costs to support the business will eventually
bankrupt the company. When determining the rate to charge for goods and/or
services, it is critical to understand the direct costs, administrative costs
and profitability margin you require. Taking these cost requirements into
consideration over a 6 month or an annual period of time divided by the unit of
measure of goods or services over the same time period will enable you to
determine the average unit cost or service hour cost. This average cost coupled
with a percentage increase for profitability is what should be charged for each
good or service.
With a startup company it is imperative that a
budget has been completed and is accurate. Please see the blog on budgeting.
This will be the start-up company's guide to price its goods and services. The
company should also complete a competitor pricing analysis. This will determine
what your competitors are charging for the same goods and services. Unless the
customer or future customer can justify that your goods or services are worth
the additional cost, you will have difficulty maintaining or adding new
clients.
Posted September 16, 2010 at 12:08 PM
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