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What you Need to Know about Business Costs

April 1 2016 | By Helen Baginska

Have you ever wondered where the difference in price lies between two identical bottles of wine – one bought at the restaurant and the other at the liquor store? The answer is – the difference in cost.

Many new entrepreneurs harm their own business by underpricing their products and services. We looked into product pricing for small and medium size businesses and put together an insightful article to help you understand costs to consider before setting up the price for your product or service.

Total Cost = Fixed Cost + Variable Cost

Fixed (Overhead) Cost

Fixed Cost refers to all ongoing business expenses. The total amount to be paid to stay in business regardless of if you sold the product or delivered services. Overhead cost includes rent, utilities, salaries, office supplies, insurance, taxes, licenses, government fees, advertising, etc. To continue to operate you must be able to provide your staff with everything they need in order for them to continue to offer those critical to your business services.

Even though this cost is called "fixed" it is most definitely not as the price paid to your suppliers is not the same from year to year. Factoring in price increases for your overhead cost is the key to successful cost allocation and correct pricing.

Variable Cost

Variable costs are the costs that vary depending on the volume or number of units. Those are the expenses that keep changing proportionally to the business activities. It could be either a number of units produced or the number of accounts serviced.

Let's have a look at what's involved in the basic cost of a bottle of wine at the restaurant:

  • Labor Costs – hiring, training, uniforms, salaries
  • Occupancy Costs – rent, property taxes, utilities, insurance
  • Cost of Goods Sold – food and beverage cost (the major cost)
  • Administrative Costs – office supplies, accounting, legal services
  • Utilities – electricity, phone bills, etc.
  • Marketing – advertising, coupons, website, social media promotions
  • Repairs and Maintenance – kitchen appliances, dinnerware

Putting together a list of all possible costs will allow your business to price your products in the most effective way. Remember that all prices must cover costs and profits, so if you miss an expense or two while calculating, that amount will eat a part of the profit. Review prices frequently to assure that they reflect the cost dynamics, marked demand and revenue objectives.

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