How can you calculate the total product cost
Price calculation: Calculate prime costs and determine profit margin
As informative and entertaining as statistical income analyzes or exemplary case studies may be, a good order situation, reasonable product prices and fees and customers who are willing to pay are far more important for the self-employed:
- Online calculators such as the simple hourly rate calculator (Excel file, 146 KB) from Hamburger Firmenhilfe offer assistance in calculating fees and prices. The publicly funded “Advice Hotline for Self-Employed” of the management consultancy Evers & Jung provides this and many other materials, checklists and tools also to non-Hamburgers free of charge.
- The BMWi start-up portal offers a lot of useful tips on acquiring new customers and retaining regular customers. Some of the content is a bit textbook-like - it is still worth browsing: there are always suggestions here.
- The Wilhelminian-era edition on the subject of "Marketing" (PDF, 566 KB) also offers useful orientation knowledge.
- You can find practical tips on the subject of price and fee negotiations, for example, in the "Calculate and negotiate prices" section of akademie.de.
Now it's time to get down to business: Among other things, we're dealing with the Calculation of prime costsandProfit margins. Above there are tips for Price calculation for service providers.
Step 1: Determine cost:
Of course, you always need a good overview of the market and the right target group for your products or services. But of course your own costs must also be included in the price calculation.
Your prime costs are made up of the material, manufacturing, development, administration and sales costs of a product. So if you were to sell at the price of this total cost, the expenses would just come back in.
So of course you want to make a certain profit margin so that something is left for you in the end. By a profit margin we mean the difference between the price and the cost. The usual profit margins vary quite a lot depending on the industry.
The basis of every concrete price calculation is first of all the cost calculation before we then think about the profit margin.
This is what Hans’s cost calculation looks like:
In order to bring you closer to the basic principle, we will again fall back on absolutely fictitious numbers and simplify the relationships a little.
Hans calculates the cost of one of his snowboards as follows:
Direct material costs € 100 (e.g. the wood required for a snowboard)
+ Material overheads 10 € (e.g. a portion of the warehouse rent)
= Material costs 110 €
+ Production wage € 120 (Hans assumes 6 working hours each € 20)
+ Production overheads 50 € (e.g. the depreciation of various machines that Hans uses)
= Production costs 170 €
= Manufacturing costs € 280
+ Administrative overhead costs € 35 (e.g. for office supplies and a temporary help in accounting)
+ Sales overhead costs € 50 (e.g. costs for the web shop, e.g. for Strato or Shopware)
= Costs 365 €
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So how does Hans find his final price?
From his target group analysis he has learned that his potential customers have a certain price sensitivity, but also pay a little extra for real quality products. He has also looked at the competition and, as an expert, can estimate material and manufacturing costs very well, he also has an approximate idea of the profit margins of other providers. He puts his desired profit margin at 40%.
At cost of 365 €
+ Profit surcharge € 146 (a profit margin of 40%)
= € 511 cash sale price
If Hans were to add the 19% sales tax, he would get all in all 608.09 €.
He could take that as a price. But then additional factors such as discounts are not taken into account. Hans would therefore like to allow for some leeway in order not to fall below the profit margin of 40% in the event of any price reductions.
So Hans does the math:
511 € (the originally calculated amount)
+ a customer account of € 15.33 (3% discount)
Here, too, the sales tax of 19% is added and Hans ends up with a list price of € 626.33. Since he would prefer € 629.99 as the final price in his shop, he uses € 529.40 as the net amount in order, together with € 100.59 sales tax, to hit the spot at his desired price.
If in doubt, Hans can also fine-tune his price calculation using the shipping costs in his shop. He could also include customer discounts in his calculation.
Price calculation for service providers
So much for snowboard builder Hans. But if you work as a service provider, for example as a freelance interpreter, coach or consultant, the price calculation is of course a little different.
Your calculation is then based on two principles:
- All operating costs you incur: office rent, insurance, personnel costs, travel and travel expenses, taxes and so on.
- The working hours available to you, ideally over a whole year. Don't forget to take vacation and sick days into account as much as possible. But there is more to your working hours: bookkeeping, customer management and other general organizational work.
For example, a calculation of the working hours of a freelance consultant could look like this:
Days in 2018: 365
- Number of Saturdays and Sundays: 104
- Public holidays in the federal state of North Rhine-Westphalia: 11
- Vacation days: 25
- Sick days: around 10
= Days of attendance 215
x 8 working hours per day = 1,720 working hours for the entire year.
After deducting an estimated 30% loss of time for administration, customer acquisition, travel times and so on, there are effectively 1,204 available hours.
From these two parameters (costs and effective working hours) you then get your hourly rate by dividing the costs by the number of hours. If we stick to our example and assume annual costs of € 60,000, the hourly rate is approximately € 50.
But what is missing again is the profit. Even as a freelancer or service provider, it is not enough if you break your costs. After all, you also want to finance your own private life. The fictitious consultant would therefore charge 100 € as an hourly flat rate in order to keep around 50 € as his own earnings.
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