Can I ask you all a stupid question? (fees, insurance, small business)

[tatiana1]

If you're renting an office space (such as an Executive Suite) or a commercial kitchen, how do you calculate the rent you pay into the final price of your product or service? Or it is not even included in the price since it is an operating expense? Please help. Thanks

[Padgett2]

Your price has to be high enough to cover ALL operating expenses. Simply put, your Gross Profit (or price) is what you charge. Your Net Profit is what is left after you pay everything, rent, cost of goods, utilities, salaries.

If your price isn't high enough, you will be operating at a loss. So Yes, your final price must include an allowance for the rent.

[8 SNAKE]

Originally Posted by tatiana1

If you're renting an office space (such as an Executive Suite) or a commercial kitchen, how do you calculate the rent you pay into the final price of your product or service? Or it is not even included in the price since it is an operating expense? Please help. Thanks

Not a stupid question at all, but I'm not so sure that I agree with the thought process (as I understand it). Your end price will, to a large degree, be what the market will bear. In other words, the market won't care what your rent is and will only pay based on the product or service provided.

As a business owner, you certainly have to account for all of your expenses and ensure that you can operate at a profit. The trick is figuring out what your end price and volume will be, and then working back from there to ensure that your income will be sufficient to cover your expenses and leave you with an acceptable profit margin.

[tatiana1]

Originally Posted by Padgett2

...If your price isn't high enough, you will be operating at a loss. So Yes, your final price must include an allowance for the rent.

Only problem with that is my competition. My price has to be competitive. If my competition is charging $20.00 and I have to charge $30.00 (to cover my rent), then I am afraid I will not be in business for long. I think most people look for price when shopping, not necessarily quality. My product is high quality but still, customers want a cheap price or at least a price that is close enough to the one charged by my competitors. There's got to be some way around it coz there's something I am not getting.. Thanks for the info though

[tatiana1]

Originally Posted by 8 SNAKE

..Your end price will, to a large degree, be what the market will bear. In other words, the market won't care what your rent is and will only pay based on the product or service provided.

Exactly. I can't add the rent to the price of the final product because it will be too high for any demand to exist. I know people who work from home don't have that dilemma because they live there anyway so there are no office or commercial kitchen rental expenses involved. In my case I have to rent outside commercial space so it is only complicating my pricing dilemma. Already it is hard to come up with the right price for a product but this further complicates it. Many first-time businesses fail because of not correctly pricing their products or services...I'm so lost..I need to take time to figure this thing out. Thank you for the advice.

[UpperPeninsulaRon]

Originally Posted by tatiana1

Exactly. I can't add the rent to the price of the final product because it will be too high for any demand to exist. I know people who work from home don't have that dilemma because they live there anyway so there are no office or commercial kitchen rental expenses involved. In my case I have to rent outside commercial space so it is only complicating my pricing dilemma. Already it is hard to come up with the right price for a product but this further complicates it. Many first-time businesses fail because of not correctly pricing their products or services...I'm so lost..I need to take time to figure this thing out. Thank you for the advice.

You must separate your cost of production from your selling price dilemna. The market does not care if your cost of production happens to be higher than your competition, i.e., you rent a commercial kitchen versus someone using a lower cost alternative.

Let's start with the concept of fixed and variable costs. Fixed costs do not change over a wide range of production. Renting your commercial kitchen, cost of insurance, your accountants fees, etc. are generally fixed - they do not change regardless of what you produce. Next there are variable costs. These increase with each incremental unit of production. You mentioned a commercial kitchen, so let me use a cookie as an example. Each cookie has a certain cost for material & labor - so much flour, so much sugar, so much variable labor, etc. to make each cookie.

You know that you must charge at least as much as it costs to make each cookie, plus the amount to cover your fixed costs, plus the amount of profit that you want to make at that volume of cookies.

So, if you you find out that your competition can sell a similar product for less than that amount, go no further. You will never make money.

[M3 Mitch]

There are 2 prices you need to think about: what price will the market bear for your product, if you are making a premium product you can charge more than a regular product, but you are right that it can't be much higher. The second is the price you have to charge to make a profit at a particular volume of production.

Continuing with Ron's cookie example, you have a basic cost of the variable cost per cookie. This will go down some but not drastically with increases in production volume - you can buy a bigger bag of flour at a better unit price, for example.

How much of your fixed cost goes into each cookie depends on how many cookies you produce. If you can sell only a couple of dozen cookies per month, you don't really have to do an exact calculation to know you can't pay for the fixed costs of a rented kitchen.

It might make more sense to figure out a reasonable target price for your product, then figure out the volume you need to break even for a specific set of fixed costs.

If we keep going with the cookies, you can see it might make more sense to make them at home (assuming you can do that legally) to keep your fixed costs very low and allow you to start to test the market and to get people to try your product, allow you to develop some sort of "following" without having to risk signing up for a rented space, etc.

Some areas have "small business incubator" facilities available that allow you to rent a commercial space in a relatively entrepeneur-friendly environment.

A friend of mine opened a Russian restaurant nearby a few years ago. He was determined to produce really high-class and higher-priced cuisine, and had a really nice dining room, very advanced kitchen, etc. But this area was just too cheap to support that, and he didn't adapt by lowering his price. So he went out of business eventually. There is more to the story of course, but a big factor was that he anticipated an unreasonably large and profitable clientale that just wasn't available in his location.

[UpperPeninsulaRon]

Mitch's point about the "small business incubator" is a very important one. While your competition may be slaving away using his or her home kitchen as a production facility (and, trust me, it is far from being free), working in the incubator facility can give you a huge leg up. You will meet lots of experienced business people ready and willing to give all kinds of free advice, make important contacts, work in a businesslike environment at a reasonable cost, and in my opinion, be in a much better position to succeed.

[harry chickpea]

I have to take exception to the idea that customers are price driven to the lowest cost. Using a well worn example, I used to be able to buy a package of mushrooms at a 99cent store for 99 cents, at Publix for $2 and at Whole Foods for $3. I saw a lot of seniors and poorer people in the 99 cent store, but the mushrooms at Publix were far more popular.

Customers are attracted to glitz, and retained by quality, and will only abandon a brand they have adopted under duress or when fads change. To continue the cookie example, look up the story of Famous Amos Cookies.

[Humanoid]

The idea that you have to price competitively with similar business is not all that accurate.

In the extreme case you have things like Veblen goods, which completely violate the standard supply/demand curve. Veblen goods are products that are desired because of their high price, if you lowered the price you'd likely sell nothing. With most product classes there is a huge range of prices for what amounts to the same product packaged/branded in different ways.

With the business I'm involved with we produce a number of goods all of which are priced very competitively (less than the majority of other similar businesses). We target the "budget market" and we do very little advertising as the prices drive sells. There are some other similar businesses that are selling the same goods (there is no different in quality etc) for more than double ours, but they have a rather good marketing machine and spend a lot on advertising. So, despite the products being very similar, they've created a brand/image that gives their products a "specialness" that ours do not.

Anyhow, you shouldn't be thinking about what price you "need" to sell a product first. You first need to think about what market segment you want to sell your product to and then determine what price the market is likely to bare. With some markets if you price too low the product won't sell.

There is also the issue that you don't need to sell your product for one price. Almost every major business utilizes some form of price discrimination (usually via market segmentation) to sell their products for a variety of prices. The basic idea behind price discrimination is that you want to know what the maximum each client is wiling to pay for your product and charge them that amount. Of course, there is no way to know this so you have to use a variety of strategies to approximate matters.