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Costing/Pricing Methods Add to toolbox


Costing and Pricing are related, but are very different!

Costing and Pricing are the two foundations that your business is built on: 

  • Costing: otherwise known as expenditure of the business and includes the cost of obtaining the goods for the business before they can resell it to their customer.
  • Pricing: the function that supports the costing of the business. This is the selling price that you determine for the product/service that you sell to your customers.

To determine exactly what your full costs are you must work out 3 elements:

  1. Direct (or Variable) Costs: costs that increase with the amount of volume of output. So, the more you make the more you pay.
  2. Indirect (or Fiex/Overhead) Costs: this cost does not have any effect on the amount that you produce/serve customers. This type of cost always exists whether you manage to sell anything or not. Examples include rent and insurance costs.
  3. Semi-Variable Costs: mixture of fixed and variable costs. These costs are fixed for a set level of production or consumption but they become variable after the level is exceeded. Examples include utility and labour costs: if you keep your office open from 9am-5pm Mondays to Fridays there is a fixed price for the utility bills and wages of your staff. However, as soon as you start asking your staff to come in and work on weekends and use lights and heating 7 days a week as a result of this your utility bills will go up and you will have to pay your staff overtime.

It’s extremely important to know what these specific costs are so that you can calculate them correctly and charge your customers an adequate selling price for your product/service.

Otherwise it will be very easy to lose money very quickly, if for example you cannot cover your expenses. This could result in you having to go out of business.

Ensure you monitor market conditions and the changes of prices for the materials you use to create your product/service, as they will have to be calculated and the selling price may need to be changed accordingly.