We have talked extensively how to figure out the cost of making your product and putting together the product budget. We discussed direct material, direct labor and overhead cost. Knowing your product cost will ensure that you price your product high enough to fully recover the cost.
Computing product cost
Most entrepreneurs struggle with how to price their product. By taking the time to create a budget, you can quickly determine a baseline for a price. Below is the summary product budget for baking 1,000 cakes at “My Cake Shop”.
By taking the time to create my budget, I know it cost me $105.03 to bake a cake. This is my product cost which becomes a starting point for my pricing strategy.
Questions for thoughts
Here are some key questions to ask as you make your product budget:
- What industry do I belong to and who are the key players in that industry
- How do the key players affect the cost of goods in my industry
- How can I cut cost by partnering with the key players
- What activities are essential to delivering my product or service to my customers
- Are there any activities I am engaging in that are not value creators for my customers but yet eating up cash
We have discussed knowing your product cost goes beyond just knowing what you pay; but understanding why you pay, what you pay. By accounting for the factors of production that make up your product cost, you can analyze if there are possible ways of reducing cost.
This helps you stay pro-active rather than being reactive in your business.