by Elena Fawkner

It goes without saying that the bottom line of any successful business is profit. Don't make a profit and you won't be in business for very long. Making a profit is pretty simple really. You just have to make more than you spend. The trick is to know how much you have to make to exceed what you spend. And you spend more than money when running a business. You spend something infinitely more valuable. Time. And, as we all know, time is money.

To maximize profits, accurate pricing is absolutely critical. Your prices must be high enough to cover costs and enable you to earn a reasonable return but low enough to remain attractive to prospective clients.

New entrepreneurs often have difficulty accurately pricing the value of their time and expertise. Some take the approach that they can work cheaply because they are fast and they're prepared to take any work, now matter how low-paying, to fill in the time between more lucrative assignments. For this group, the mindset appears to be that any work is better than no work. Although this may seem reasonable when you're first starting out and you just want to make your mark as early as possible, the downside is that this short- sighted approach can create in customers a "cheap" mindset that is difficult to shift once the business becomes established.

Another group of entrepreneurs, though, takes the approach from the outset that they are worth top dollar and demand fair pricing for the value they provide and won't accept anything less. This group appears to be more successful than the former in the longer run. Sure, they may find it slow to start with. After all, they are new in town, they can't rely on repeat business and they can't ride the wave of their own impressive reputations. But by setting the bar high to start with, when their businesses DO become established, they've set the tone and their businesses usually have a firmer foundation for it.

This article looks at the fundamentals of pricing for the new home-based business entrepreneur.

Basic Principles of Pricing

Here are some basic principles to keep in mind when considering your pricing strategies:

Prices must at least cover costs. If you don't at least cover costs, and this includes an amount for your time, you will incur a loss. If your business is incurring a loss it's a hobby.

The best way to lower price is to lower costs As price equals costs plus profit margin, it's obviously better to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices.

Prices must reflect the environment in which they operate Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition, product utility, product longevity, maintenance and end use.

Prices must be within the range of what customers are prepared to pay It's all very well having the best bread slicer in the western world but if your price is more than customers are prepared to pay for it, so what? On the other hand, there is absolutely no reason to charge less than customers are prepared to pay either.

Prices should be set at levels that will shift products and services and not to beat competitors alone It's easy when you start delving into all of the sophisticated analysis and research around about optimum pricing levels to forget that, at the end of the day, you set your prices as high as you can while still shifting your products and services. So don't think that keeping pace with competitors is enough. It isn't. You may have competitive advantages that mean you can price higher than your competitor and still charge more.

The price you set should represent a fair return for your time, talent, risk and investment Don't be coy about demanding a reward for what you bring to the table. Your expertise and talent has objective worth. Don't just give it away. Charge for it.

Price = Cost + Profit Margin

The basic price you will strike is simply your costs plus a profit margin. It follows that before you can set your prices you must know exactly what your costs are. Costs fall into three main areas:

Direct Costs Direct costs are those things directly related to the creation of your product such as raw materials, parts and supplies.

Overheads Overheads are business costs not directly related to production and include things such as taxes, rent, office supplies and equipment, business related travel, insurance, permits, repair of equipment, utilities (electricity and telephone) and professional advice (accountant, lawyer).

Labor Labor costs include all wages paid to employees *including yourself*. It's amazing how many home-business owners forget to include their time as a cost of business! Calculate your labor costs by multiplying the number of hours worked by an hourly wage. You should also include fringe benefits (typically 15% plus).

Once you have ascertained your total costs, add a profit margin. A 15-20% profit margin is standard for most home-based businesses. Although you have included your own wages in your labor costs, if you don't add a profit margin there will be no money for growth or expansion of the business.