PRICING PRODUCTS AND SERVICES FOR MAXIMUM PROFIT A Special Report For One-Person Businesses By A. William Benitez The TAURIAN NETWORK  Pricing products and services can be very difficult because there are so many potential variables. These variables are subject to change for each individual. There is a concise method for calculating the price of any product or service. The most significant variable is the question, "How much do I want to make." This question can only be answered by the individual. With this question answered, it is easier to decide how much to charge for your product or service.  To simplify the process, answer this question with an hourly figure. You can start with a monthly figure and divide it by the number of hours you plan to work. The result will be an hourly figure that can be applied to any product or service to calculate the labor, overhead expenses, and profit. This figure together with the cost of materials, or the product itself, contributes to successful pricing. Lets start putting together all the aspects of figuring a job. This information is geared to pricing services or products that you make yourself. If you are selling a product that you purchase wholesale to sell retail, this information still applies but with some additional details that are included at the end of this report. Start by setting the amount you wish to make for each hour. It is impossible for me to tell you how much this should be. It must be based on many factors including how extensive your skills are and how promptly you complete jobs. Also consider your popularity with potential customers. Supply and demand are prime considerations for pricing. For this report, lets start with $15 per hour. This is an entirely arbitrary figure so don't let it influence your decision. Start with as high a figure as possible making certain that it is realistic. Don't worry, you can increase this as often as the volume of your business allows.  Now the next step. Your work space involves significant cost. Here again there are many variables. You may be fortunate enough to use your garage, a utility building or even a room in your home. Even if you don't rent a commercial space, make certain you calculate the cost of commercial space. When you decide to go into business, your garage and driveway may become busy. Your neighbors may complain and there may be some local regulations prohibiting commercial use of residential properties. You may be forced to move your business into a commercial location. To find this cost check out commercial spaces of similar size. Use this figure to calculate the monthly rent and add the cost of utilities such as electricity and telephone. If you don't have a business phone, use a portion of the cost of your home phone. To start you might consider twenty percent of both the electric and telephone bill. As an example, take twenty percent of a total rent (or a mortgage payment), of $600.00. The total would be $120.00 per month. For the sake of simplicity we will assume that you will be working one hundred sixty hours per month. Divide the $120.00 rent figure by one hundred sixty hours for a total of $.75 per hour. If the phone and other utilities are $200.00 per month, twenty percent would be $40.00 per month. Dividing this by one hundred sixty hours leaves a total of $.25 per hour.  Next on the list is equipment. Some businesses require much more equipment than others. For example, a woodworking business requires a large collection of power and hand tools. These tools involve not only an initial investment, which you may have already made, but they must be maintained. Plus, over the years, they may require replacement with newer and better models. All these costs must be considered. The simplest way to deal with the cost of replacement is a depreciation schedule. Equipment of any kind can be depreciated over several years for income tax purposes. This is the procedure to use for these calculations. Long after a tool has been depreciated for income tax purposes, actual depreciation continues and at some future date equipment must be replaced. So once you have an hourly figure for depreciation, make it a permanent part of your charges. Lets start with an annual figure and proceed from there. If you don't know how to figure depreciation, just take the actual cost of the equipment and divide it by three or more years. Payment for your products and services must cover this amount to ensure that you always have good equipment. Remember that this figure is for this purpose only. Depreciation for income tax purposes is separate from these calculations. One major thing to remember is that you can deduct the full purchase price of equipment (subject to certain maximum amounts) during the year of purchase if you elect to do so. This major deduction can be very helpful during the first years of a business. Check with a tax professional to make certain this will work for your. In any case, for the purpose of calculating your hourly rate, you have flexibility. For this report we will use a total annual depreciation figure of $2,400.00. This would be $200.00 per month and give us an hourly figure of $1.25 per hour. Remember that the purpose of obtaining this money is for tool replacement. You should set up a savings account for this purpose and deposit the money in that account. If you do this there will never be any problem when some piece of equipment needs to be replaced or repaired. Calculate depreciation on your business vehicle. Vehicles can be depreciated over a three or five year period. Old vehicles may be depreciated over a three year period. Lets use a $5,000.00 cost depreciated over five years or sixty months. To arrive at the hourly figure divide $5,000.00 by sixty and that sum by one hundred sixty hours. This figure will be $.52 per hour. If you also use the same vehicle for your personal needs, you must determine the percentage of business use. For the IRS, I suggest you simply maintain a log of your business miles and use the per mile figure that is allowed. For this purpose just calculate the percentage of use and multiply the value of the vehicle by this percentage. For example, if you have a $15,000 vehicle and use it about one third of the time for business, you would still wind up with the same $5,000 figure for your calculations.  With a work vehicle you also must consider maintenance and fuel. The best way to figure this cost is to maintain concise records. This will be very helpful for income tax purposes also. Lets say that we need $200.00 per month to maintain the vehicle and keep fuel in it. This will give a total of $1.25 per hour. This figure should be high enough to cover the normal maintenance cost on your equipment. Insurance is the next item to consider. Keep your vehicle properly insured even if your State doesn't require it. Also get fire, theft and liability insurance for your business. This includes coverage for your commercial space, on job sites, and completed products. In some States liability insurance is very expensive but it is wise to stay insured. Health insurance is also important. Self employed people often remain uninsured. Avoid this situation even if you are in great health. Shop for a good policy at a fair price but don't shop price alone. Keep health insurance cost down by purchasing it through a small business association. The National Association for the Self Employed is a good example. They handle several good group policies for their members and the cost is lower than for an individual policy. Don't assume that the policy is a good one just because you are purchasing through an association. Some associations work with substandard companies. Insist that the company have a rating of at least "A" with A. M. Best Co.. Many agents will tell you this is not important for a health insurance company but it is critical if you want to be insured by a financially sound company. These companies charge higher premiums but they also perform better and they will be there when you need them. A policy that covers catastrophic illness or accidents will have lower premiums than one with extensive coverage. A high deductible amount also will keep premiums down. After shopping through at least a dozen companies and purchasing a bad one, I believe the National Association for the Self Employed has the best policies at a fair price. As an example for the cost of insurance as described above use the figure of $275.00 per month unless you have established your own figure. This will be a total of $1.72 per hour for insurance coverage. We mustn't forget taxes. We all face the federal income tax and must be prepared to pay them. Most self employed people have faced some problems with income taxes. These problems usually occur because you fail to make provisions to pay the taxes during the year. The best way to deal with income taxes is to pay them quarterly as required by the Internal Revenue Service. If you do this they will be paid on time. However, if you don't do this, at least open a savings account to save a portion of all your income for taxes. I suggest you put aside at least ten percent of your gross income. Ten percent may not seem enough, but remember that this relates to gross income. Your actual taxes will be calculated on your net profit after deducting all expenses.  It is not possible to know in advance exactly how much your taxes may be. The Social Security alone amounts to approximately fifteen percent of your net profit. Add your income tax to this and the amount probably will range from twenty to forty percent of your net income depending on your income bracket. If you decide to handle this with a savings account prepare to pay a penalty and interest for failing to submit quarterly payments. A net income of $30,000.00 per year will incur Social Security and taxes amounting to approximately $8,000.00 depending on your family size and other considerations. This will require you to charge $4.17 per hour on every job. What if you cannot pay your tax bill? Borrow the money. If this isn't possible proceed carefully. File your complete and accurate income tax form on time but without the payment enclosed. Do not fail to file because this can bring serious problems. Try to acquire the money while waiting for the IRS to contact you. When you receive a notice by mail, respond promptly. Explain your situation and offer a payment schedule with the highest monthly payments you can afford. They may accept your proposal or send you some forms to fill out to learn how much you can afford to pay. Do what they ask promptly and they will set up a payment schedule for you. Make all the payments on time. Some States also have income taxes. These should be handled in the same manner as federal income taxes. Courtesy and professionalism marked all my experiences with the IRS. I was audited once and twice I requested and received fair payment schedules. They have never harassed me in any way. On the other hand, I know of people who have delayed filing or made agreements and failed to honor them. Their bank account balances were confiscated several times by the IRS. This can be devastating to a business and quite embarrassing when all your checks begin to bounce. The IRS will work with you if you honestly want to resolve your situation but they will not be ignored. Depending on where you live, there are other taxes. In my area a license isn't required for the work I do, but many areas do require a license. I do pay a tangible personal property tax on my equipment. Check this out in your area. Most States have a Sales Tax. In Texas even the labor-only jobs are taxable. Check this out in your State. This is not an actual cost to you since the customer pays it to you and you pay it to the State. The problem sometimes arises because the tax accumulates and the funds may not be available when the payment is due. A special bank account for depositing sales tax receipts may be helpful. Consider overhead costs for time spent figuring jobs, preparing proposals and presentations. This must include picking up materials, running errands, bookkeeping costs and related items. This may require some quesswork but the figure can be adjusted in the future. Get paid for this time by including it as part of your hourly charge. Start with $400.00 per month for an hourly amount of $2.50. Profit is important. It is the motivator for all businesses. There are two ways to calculate profit. You can make the profit part of the hourly figure or figure it separately. A higher percentage must be used if it is part of the hourly figure since it doesn't include the price of materials or products. If you add it to the hourly figure use at least twenty five percent. Otherwise twenty percent is acceptable. Let's try a sample job. The first step is to calculate the cost of materials. To do this, use any drawings and related information to prepare a materials or products list. Then assign an accurate price to each item. If you are already purchasing the material or product regularly, this should be quite simple. Otherwise, contact suppliers to get price quotes on the items you will need. For this job we will assume the materials or products will cost $500.00 and the work will take twenty eight hours. First lets calculate our hourly charge by listing all the items discussed previously. 1. Hourly Wage (You must decide this) $15.00 2. Rent of Space ($120 divided by 160) $ .75 3. Phone and Utilities $ .52 4. Depreciation of Tools ($200 divided by 160) $ 1.25 4. Vehicle Depr.($5,000 cost/60 months by 160) $ .52 5. Maintenance & Fuel ($200 divided by 160) $ 1.25 6. Insurance ($275 divided by 160) $ 1.72 7. Taxes ($8,000/12 months divided by 160) $ 4.17 8. Misc. Overhead ($400 divided by 160) $ 2.50 TOTAL PER HOUR $27.68 9. Profit (25% of Total hourly figure) $ 6.92 TOTAL CHARGE PER HOUR $34.60 Round this amount off to $35.00 per hour. Take 28 hours times $35.00 which equals $980.00. Add this to the $500.00 for materials for a total of $1,480.00. To calculate the profit separately, multiply 28 hours times $27.50 for a total of $770.00. Add $500 for materials, which brings the total to $1,270.00. Twenty percent of this amount is $254.00 for profit. Added to the $1270.00 brings the job price to $1524.00. If this is a job of average difficulty, check your figures by multiplying the material cost by three. Three times $500.00 is $1500.00. This proves out your job calculations. More complex jobs will take more time and the checking multiplier also should be higher.  -------------------------------------------------------------------------------------- Remember the rule of supply and demand. Your prices can and should reflect the demand for your work. This is common practice in most businesses. Check hotel rates during peak and slow seasons to see how they vary. Check vacation resort prices during various seasons. Check airline fares and see how they give special prices when business is slow and higher prices during peak periods. If you are getting more work than you can possibly do, don't go out and hire employees. This could change your life. If you enjoy the peace of mind of a one-person business, keep it that way. Instead of hiring help, increase your prices until the work levels off. This formula shows you how to figure out what you must charge to make a living, not how much you can charge. Your customers willingness to pay determines how much you can charge above this amount. The right price for any product or service is the amount that a willing buyer will pay a willing seller. Beyond that there are no limits. For some reason there is a preconceived notion that a self employed person can only make wages. Many also believe that they must sacrifice a decent income, medical benefits and vacations to do the work they love. If you believe this is inevitable, it probably will be true for you. There is no question that it is true for many self employed people. First hand experience has proven this to me. I also know that it doesn't have to be that way. If you have the skills to produce or sell a good product and have the attitude to provide first class service, you can charge enough for it. My experience has proven that people will pay more for first class service and products. You can make a very good living as a self employed person in your own one-person business. A final note for those of you that are purchasing products at wholesale to resell at retail. Most of the above still applies when figuring your total hourly charge. To price a product you must determine several things. First determine how much per month you need to make to attain your hourly figure of $35. For this simply multiply 160 times $35 for a total of $5,600.00. The next step involves projections and adjustments. Project the number of units or product you will sell in a month. Let's assume you can sell 100 products each month. In order to attain your goal of $5,600.00 you must sell your products so that each one will leave a profit of $56. If this product costs you $22 you must sell it for at least $78. If your product is something like books and the $78 dollar price seems out of line, you must recalculate. Then you must determine the highest price that you can charge and still sell the product successfully. If this figure is $26, then you know that you will have increase sales significantly to attain your $5,600.00 goal. You would have to sell 300 products per month in order to reach your goal. By working back and forth like this and testing prices you can determine the best price for any product. Remember, test more than one price. It isn't unusual for a product to sell better at a higher price. So try both higher and lower and go with the most popular. Thanks for checking out this special report. Remember your satisfaction is guaranteed with all my products. Below is a list of related publications that you may find valuable. Also remember that I look forward to hearing from you. You can reach me by mail at 308 Corral Lane; Austin, TX 78745 or by fax at (512) 292-1778. Email billbenitez@ureach.com. You may also visit our web store at http://www.abenitez-ebooksandmore.com ...   List of Publications: THE SELF EMPLOYMENT SURVIVAL MANUAL: How To Start and Operate a One-Person Business Successfully. SIMPLIFIED WOODWORKING I: A Business Guide for Woodworkers HOW TO MAKE MONEY ON COMPUSERVE Contact me for additional information and prices on any of these publications. Thanks.

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