How do I decide what I can charge? [2006]
- Date : (2006-01-04)
- Author : SAIE
How do I decide what I can charge?
Noludwe wanted to open a fish and chips shop and came to see us, asking for a loan of R 5000. We sat down and chatted about her dreams and soon worked out that she could start her business from her home if she got her pricing right from the start. She was amazed “How is this possible?” she asked. “I thought that I would have to get premises and equipment and pay for staff.” We established that her home was near a station and that many people walked past her front door on their way to work each day. We also found out that she had a two-plate cooker and that there was already a supply of cooking oil, flour, and salt and pepper in her cupboard. At the time, she had no fridge to store fish overnight.
I put a R100 note on the table and said that it was all that was needed if she followed a simple rule. The simple rule of costing is..Whatever you pay for it… sell it for double! “If you pay R 5 for a piece of fish, sell it for R 10 once you have cooked it.” I explained. “On your first day, buy R 80 worth of fish, if you follow the simple double-up rule you will have R 160 at the end of the day once all the fish is sold.” Noludwe was getting excited and wanted to know how to continue the process. “If you take R 40 for your family for food you will still have R 120 to buy more fish on the second day.” I continued “Just, don’t buy more fish than you can sell in a day!”
Noludwe took the R 100, keen to try out the plan. When I phoned her three weeks later, she was happy to tell me that the R 100 had grown into R 600. After three months she had bought the fridge and a freezer and had R 2000 in her bank account. I challenged her to pass on the learning that she had benefited from. She decided to give R 100 each to two of her friends in two other areas and told them her story and the simple costing rule that she had learned.
The Double-Up rule for making things.
We have worked with thousands of businesses in many different sectors. The simple double-up rule works every time when you are making something to sell. It works with everything from clothing to woodwork, from food production to building and even to gold and diamond jewellery!
If you take all the costs of the materials that you use to produce the items and double them, then all your costs will be covered and your time will be costed in as well.
If you are making dresses, add up the costs of the material, cottons, zips and buttons. If all these costs come to R 85 then you should charge double or R 170 for the dress. If you charge any less, you are probably not making enough money to pay for your time that you spent in making the item.
What-the-customers-will-pay rule for re-selling things.
The double-up rule works when you are making things, but what happens when you are buying something to re-sell?
You cannot use the double-up rule if you are buying goods, simply to resell them, without making anything out of them. For example, if you buy a crate of drinks for R 5 each, you will be unlikely to be able to sell them for R 10 each. Here you will have to check out what your competition is charging. If most people are charging R 7 each for the same drinks, you will not sell very many if you charge R 10! You will need to sell them for the same price or a little bit less if you want people to buy from you. It is very important to work out exactly how much each item is costing you so that you make sure that you are covering your costs properly and not just charging what everyone else is charging. This can be a problem with selling fruit for example. If a trader is used to selling apples at 50 cents each, she needs to check that she is not paying too much for the fruit. If she buys a box of 40 apples for R 26, she is paying 65 cents for each apple! If customers are only prepared to pay 50 cents, she needs to stop selling apples as they have become too expensive. She should not pay more than 30 cents for apples if she wants to sell them at 50 cents. Perhaps she needs to try oranges until it is the season for cheap apples again.
What-my-time-is-worth rule for selling a service.
The double-up rule won’t work if you are selling your time as a service. Here you need to work out the cost of your time that you spend working on the service directly.
The first step is to decide how much money you want to earn each day. If you want to earn R 2000 a month then you need to earn an average of R 100 for each working day. (Four weeks of 5 days give you 20 working days in most months!). 20 days x R 100 gives you R 2000. If you want to earn R 5000 a month then you will have to find R 250 for each working day.
Your next step is to work out how long the job will take you to complete.
If you decide that you need to earn R 150 per day and somebody wants you to do the work but they decide that they will supply their own materials to make clothing, or paint a house, or fit a ceiling, you need to work out how long the job will take you. If you think that the job will take you two and a half days, it will probably be a good idea to charge them for three days (R 450) so that you cover yourself if the job takes a little longer than expected to complete.
What you charge depends on how busy you are!
Your costing depends on how much you are selling! If you are only selling a few items each month then you will have to charge a lot for each item to be able to cover your expenses. If you are selling many items each day, it will be easier to cover your costs. For example; If you want to earn R 3000 a month and are selling fish, if you only sell 10 pieces of fish a month you will have to charge more than R300 for each piece of fish! If you sell 1000 pieces of fish in the month (50 pieces a day for 20 days) you will only need to make R3 per piece of fish after you have paid for the fish itself, to be able to make your R 3000.
If you are going to be successful and charge prices that people are willing to pay, you need to work on your business regularly so that you can easily cover your costs.
