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.

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 Price
The 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 Price
Determine…
A. What the market will bear
B. What the competition is charging
C. Your production costs
• selling price must be greater than costs
A. 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 Yourself
If you don’t include your compensation in
your pricing strategy, the money will never
be 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 Statement
Income
Sale of widgets (10@$75/ea) $ 750
Total gross income $ 750 Gross income
COGS/Variable costs
materials & labor (10@$25 ea) $ 250
Total COGS $ 250 – COGS
Gross Profit $ 500 = Gross profit Gross profit
Fixed/Overhead costs
Rent $ 300
Utilities $ 100
Accounting $ 100
Total Fixed expenses $ 500 – Fixed expenses
Net Profit (loss) $ 0 = Net profit (loss)
BREAK-EVEN

17. What You Need to
Calculate Break-Even
1. 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 calculations
Step 1: Gross Income – COGS = Gross Profit
$9 - $4 = $5
Step 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: $9
Total Gross Income $ 1,800 COGS per widget: $4
Gross profit per widget: $5
COGS/Variable Costs
Materials & labor $ 800 #1 Gross income – COGS = Gross profit
Total COGS $ 800 per widget per widget per widget
($9 – $4 = $5)
Gross Profit $1,000
Fixed/Overhead Costs #2 Fixed expenses ÷ gross profit = B/E point
Rent $ 300 per mo per widget
Utilities $ 200 ($1000 ÷ $5 = 200)
Owner’s salary $ 500
Total Fixed Expenses $1,000 I must sell 200 widgets per month to reach B/E.
Net Profit $ 0
BREAK-EVEN

21. Fixed Expenses for
Sarah Sue's Sandwich Shoppe
Fixed Expenses:
Rent $ 600
Utilities $ 150
Telephone $ 100
Business Insurance $ 25
Owner's Salary $2,000
Miscellaneous $ 50
Total Fixed Expenses: $2,925

22. COGS For the Swiss Gobbler
Supplier Price Sheet Sarah estimates Ingredients per COGS Swiss
and Labor Costs Gobbler Gobbler
Turkey @ $3.00/Lb 10 slices per lb. 2 slices $ .60
Bread @ $ .75/Loaf 30 slices per loaf 2 slices $ .05
Sw Chs @ $3.00/Lb 10 slices per lb. 2 slices $ .60
Mayo @ $2.00/Jar 32 ounces per jar 1 oz. $ .06
Mustard @ $1.00/Jar 32 ounces per jar 1 oz. $ .03
Tomatoes @ $ .50 ea 8 slices per tomato 2 slices $ .13
Lettuce @ $ .60/Head 30 leaves per head 2 leaves $ .04
Secret Sauce @ 3.00/Jar 32 ounces per jar 1 oz. $ .09
Wax Paper @ .03/Sheet precut sheets 1 sheet $ .03
Labor @ $8.00/Hour 20 sandwiches per hr 3 minutes $ .40
Total 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 Sue's Break-Even Point
Step 1:
Gross Income - COGS = Gross Profit
$4.95 - $2.03 = $2.92
Step 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 Products
Mary is an artisan who makes unique creations from a studio in her
home. She makes one-of-kind stuffed animals in three sizes:
small(babies), large (adult animals), and giant (such as 6-foot-tall
giraffes). 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 Bears
A friend of Mary’s has a shop in the village that sells
hand-painted children’s furniture and bedding. She has
agreed to display Mary’s stuffed animals in one corner of
her shop for a flat fee of $300 per month. Mary also has
a business phone line for which she pays $75 per month.
She plans on drawing an owner’s salary of $1,000 per
month.
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 Goals
Based on B/E points of 1500, 500, and 300
per 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 Providers
Step 1.
Determine personal income requirements
Annual Operating Expenses $10,000
Owner's Gross Wages + $30,000
Total Income Requirements $40,000
Step 2.
Calculate available working hrs.
52 weeks x 40 hours per week 2,080 hrs
Minus 40 vacation hours and 56 holiday/sick hrs – 96 hrs
Equals available hours 1,984 hrs

30. Pricing for Service Providers
Step 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 Plan
As you complete this information, insert it in your
business plan:
2. Selling strategy
– Pricing strategy