By Christina Suter on Sep 19, 2015 at 12:31 PM in Business Issues

Overhead Cost and Product Cost

Overhead costs: rent, phone, insurance, site hosting, all the costs that support the business whether I earn money or not.

Variable costs: every time you sell a product or sell a service you have a cost. For example, decals for a t-shirt you’ve sold. Non-product specific, things that vary per month, like how much you pay your lawyer or Adwords that month.

Fixed costs: the same, usually overhead costs, but sometimes not. They are pre-commitment costs.

Most people look at costs for goods and how much it costs to make and package a product. But you always have overhead costs and soft costs, the hours that are hard to account for.

Hard Cost and Soft Cost

Hard costs: things you’ve prearranged that you’re going to pay for. Overhead costs, product costs, monthly bills like rent.

Soft costs: your hours, the marketing you’ve put out, your time. Time preparing for the client, time servicing the client, time marketing, time doing customer service and talking to your employee.

When you price out your product, write out all of the product costs. What are the costs for you creating that product? What are all the overhead costs? Also include any other monthly, quarterly or yearly or monthly pay. And then figure out how much you sell per year. Take the total number of the cost you pay out and divide by the number of products you sell. That will tell you how much of the business each portion is to cover. If a shirt, ink, stencil, and packaging costs $5 and they sell it for $10 they think they’ve earned $5. But when you include all the other costs, you make less than $5. You may find once you include all the costs, you are losing money because in total it costs you $12 to make the shirt and you’re only selling it for $10.

How much time do you spend on your business? Do you work 20, 40, 60 hours a week on your business? How much do you want to earn per hour? Take all the costs we spoke about, take your time, and how much you’d like to make per month and calculate what that means if you sell 1,000 products per month. If you aren’t charging enough, increase the final cost. SO, your t-shirt you were selling for $10, that you found out cost you $12 to make, should now be increased to $18.

Compare the price to your marketplace.

You have to build your business to a point where you earn enough money to cover costs and to take money home. Creating space in your business is the only way your business will grow. If there is no space in your industry to increase the price, either get more efficient at producing the product, or consider if maybe the industry you’re in is a losing industry. You may need to adjust your brand so you can charge more.

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