2.4 Pricing

دوره: Finance for Non-Financial Professionals / فصل: Costing / درس 4

2.4 Pricing

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For example, when business is bad and competition is high everyone is just kind of going through a rough spot. So, I'll bid that job at just over the direct cost because, I know other people are suffering too and they're gonna bring down their prices. Well, you know, I mean I'll always take extra business but if I take the job, I might have to pay some overtime cuz we're already at capacity, I'm already full.

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Okay so, that’s basically Module 2. We’ve been speaking about costing and how we determine the cost of what we do, so that we can feed that cost into our financial equation. Now costing is important because costing helps us strategize prices, and prices, right? Revenue equals Price times Volume, so what can I sell something at? And understanding the different ways that I can cost something. That I really, I wanna know variable and fixed and I wanna know that break-even, I want to know what I need to do, to neither lose money nor make money. But then I also wanna know what are all the costs associated with what I do? What is my full costing? So that depending on the business environment, depending on the competition, I can set my prices at different levels. For example, when business is bad and competition is high everyone is just kind of going through a rough spot. I really wanna know what’s, what’s my direct cost? Because if I get if I get somebody wanting a bid from me, and I wanna bid this job, well man, right now times are hard, I need every extra dollar in my company that I can bring in. So, I’ll bid that job at just over the direct cost because, I know other people are suffering too and they’re gonna bring down their prices. So I’m gonna use the lowest bid I can give, but I gotta make sure it’s not gonna cost me any money, right? So, that’s when I’m probably gonna wanna just look at, what are my direct costs, and if I can sell something and bring a little bit of money in, fine, it’ll help cover my rent this month. It’ll reduce my, my losses that I’m likely to incur. How about when business is going really well, when I’m at, working at capacity, and then I get somebody asking for a quote? Well, you know, I mean I’ll always take extra business but if I take the job, I might have to pay some overtime cuz we’re already at capacity, I’m already full. And there’s risk associated with every job that you take on in business, right? Whether you’re selling products or services, there’s always a bit of risk. So when things are going well maybe I wanna really make sure that I use Full Costing on that, and price at or above Full Costing for a job. Because, if I’m gonna take on the extra work, I want I want the profit from that job to be worth it. So, this is why we use these different costing methods this is why it’s good for us to know how we arrive at them and when we use them. And how we’re going to fit this into our overall business strategy, financial strategy. Okay, thank you very much. And in the next lesson we’re gonna look at, or the next Module I should say, we’re gonna look at ratios. How we use ratios to evaluate businesses and see how they’re doing, and gain some insight into what’s really going on. I’ll see you then.

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