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Production Costs | Pricing Strategies | Pricing Tips | Pricing Resources
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To determine if your business is profitable you must know all of the
costs to produce your product. Knowing your costs will help you determine
your price.
The different categories of costs are:
Start-up Costs: When you start up your business, you will have some
capital or one-time expenditures, such as purchase of equipment, processing
facility, logo design, etc. However, any depreciation and interest expenses
on loans for startup costs should be factored into your operating costs.
Operating Costs - Variable Costs: Variable costs are the costs
of producing your product. Variable costs are sensitive to quantity produced
and go up or down in relation to the size of your operation. These costs
include ingredients, packaging, labelling, production labour (direct labour),
distribution, and shipping.
Operating Costs - Fixed Costs: Fixed costs are the costs incurred
regardless of the quantity produced. They are generally the overhead costs
and include rent, insurance, telephone, salaries, and accounting.
Cost of Ingredients
You will need to determine the cost of your ingredients. Once you have
determined the costs associated with the production of your formula, divide
that amount by the number of units of product that this will yield so
that you can identify your ingredient cost for each unit.
Labelling and Packaging Costs
You need to include the fixed and variable costs of your labels and packaging.
Variable (direct) costs vary directly with volume sold and include label
and printing costs and packaging costs. You may also have fixed (indirect)
costs such as graphic or package design, and the costs for printing plates,
and labelling equipment. These costs would be constant regardless of volume
of business. The cost of packaging includes the actual packaging covering
your product, packing material for shipping, and any printing on the packaging
material.
Labour Costs
The amount you pay the people who produce your product needs to be added
to the labour costs. Even if you are doing the production yourself, you
need to include a cost for your own labour. Start keeping track of the
time it takes to make your product. In addition to preparation and cooking
time, be sure to include the costs for packaging and shipping preparation.
Distribution and Promotion
Costs
It is important that the method you select for distribution and promotion
meets these criteria:
- the method suits your product and personality
- it’s a match with your target market
- you can produce enough product to meet the demand
- it is the most cost-effective method to deliver your product to your customer
In determining the cost, be sure to include:
- the cost selling directly (either doing it yourself or a staff person)
- retailer’s, wholesaler’s, broker’s fees or commissions
- the cost of shipping
Costs for promotion generally do not vary with the quantity of product manufactured.
