Whats the lowest cost I can charge customers

Snorlaxx

Going back to my 2nd level accountancy here, but there is a way to determine based on costs incurred what the lowest price tag I can put on a product is, does anyone know the process?, the product is a service BTW , not manufacturing goods

frankythefish

Snorlaxx wrote: »

Going back to my 2nd level accountancy here, but there is a way to determine based on costs incurred what the lowest price tag I can put on a product is, does anyone know the process?, the product is a service BTW , not manufacturing goods

Strange question. Well why not free. But seriously, some might enter market at rock bottom prices incurring losses in order to gain market share upon which they raise prices.
Is it breakeven formula you want perhaps? https://www.myaccountingcourse.com/financial-ratios/break-even-point

Snorlaxx

frankythefish wrote: »

Is it breakeven formula you want perhaps? https://www.myaccountingcourse.com/financial-ratios/break-even-point

No, Break even we have based on what we think we can charge customers(which are just random figures).

If we do as you are saying and give at rock-bottom prices, we'd be out of business by month 4 because there are levys etc we need to pay.

So what we're trying to do is, gather all costs i.e. levy's, rates, labor etc and try determine what is the lowest we can charge without making a loss but hopefully be cheaper then the competition

Heres Johnny

This will set you on the right path of thinking, but nobody can answer without knowing more about your business and its competitors


Calculate your fixed costs, they are the ones that you incur without selling a single unit of your service and do not change as you sell additional units of your service (could be your van and your wages)

For example 50,000 euro

Calculate how many units of your service you will sell

For example 2,000 units (could be 2,000 hours of labour for example)

Calculate the variable costs per unit sold, the amount it costs to provide an additional unit of service

Example 30 euro (diesel/travel costs etc...)

Now, your costs in your business are 50,000 fixed plus (2000 x 30) 60,000 variable which is 110,000 cost to provide 2,000 units

Your selling price must be 55 euro per unit of service to break even

If you charge 60 per unit you will make 10,000 profit

If you charge 65 per unit you will make 20,000 profit

Work from here

You are probably describing your marginal cost - the cost of any extra unit produced.

As above it isn't simple for services.
If you have someone sitting around waiting for work your marginal cost is probably the levy.
None of us can tell you.

davindub

Snorlaxx wrote: »

No, Break even we have based on what we think we can charge customers(which are just random figures).

If we do as you are saying and give at rock-bottom prices, we'd be out of business by month 4 because there are levys etc we need to pay.

So what we're trying to do is, gather all costs i.e. levy's, rates, labor etc and try determine what is the lowest we can charge without making a loss but hopefully be cheaper then the competition

Probably ABC costing will get you the best result. Basically you want a OHAR for each of the above based on budgeted work and costs.

Snorlaxx

davindub wrote: »

Probably ABC costing will get you the best result. Basically you want a OHAR for each of the above based on budgeted work and costs.

correct yes, the very same.
We know or in cases where we dont we can guesstimate our costs for the year.

But because this is a service not a good as such, it makes it more difficult to put a price tag per customer to ensure we at least cover all expenses.

davindub

Snorlaxx wrote: »

davindub wrote: »

Probably ABC costing will get you the best result. Basically you want a OHAR for each of the above based on budgeted work and costs.

correct yes, the very same.
We know or in cases where we dont we can guesstimate our costs for the year.

But because this is a service not a good as such, it makes it more difficult to put a price tag per customer to ensure we at least cover all expenses.

Google it, you should find some case studies. But at it's simpliest, service costing = fixed costs div by jobs/hrs or whatever will get you started.

ABC just recognises that more than 1 driver is needed, for example road tax would be better divided by travel distance etc, Labour hours would skew this cost to price longer travel distances the same as short distances.

TBH it might take a few goes to get something that works. But a few methods for you, service costing, traditional costing, target based costing (if you need to be competitive).

Enjoy!