Starting a Business – What Steps Should You Take First – Part 2

Question: What is real cost?

A1: Say you are selling a pen and it cost 35 cents you can sell it for $ 1 and make 65 cents right, WRONG! You have other expense to consider like advertising, bank fees, shipping fees, loan or credit card, rent (store or online) ink, paper and there maybe more. If you are making the item you are selling you must look at the price of all of its parts. Lets look at these a little closer.

If you are making a product for sale you need to take the total cost per part and divide by the number of finished products you can get out of that part. If you are selling glasses and you get 6 in a box at a cost of 6 dollars then the cost is 1 dollar a glass. If you are putting a design on the glass say from a piece of fabric and the fabric cost 2 dollars a yard and you can get 4 glass out of the yard the total cost per glass is 50 cents so your glasses total cost is $ 1.50 and so on for all parts included in the finished product. You must also figure in the cost discussed below.

ADVERTISING if it cost you a dollar to advertise you need to set a markup of say .01 cents per pen so total cost is now 36 cents if sold at $ 1 dollar you could make 64 cent per pen but there's more cost.

BANK FEES if a credit card was used for the purchase you have a charge from the credit card gateway as well as the bank so lets say together the fees for the sale are 35 cents. Now add that to the advertising and pen cost and now your pens total cost is 71 cents. If you sell the pen at $ 1 dollar you could make 29 cents per pen but there's more cost. NOTE the bank and gateway charges will vary by dollar amount of transaction.

SHIPPING FEES will be charged to the customer at purchase. This will vary by size, weight, carrier, and shipping zone. If you use a shipping calculator then you are set. If you do not use a shipping calculator you need to set a shipping charge. To find out what to charge if you have the product on hand take it to the shipper you plan to use and find out what it would cost to ship farthest away from you and either charge that as a flat fee for all or find a spot in between your lowest and highest points. Another good way to judge this is by looking at other sites and see what they are charging to ship. If you decide to ship for free this adds onto the your pens cost.

LOAN or CREDIT CARD – If you used a loan or credit card to open the business you need to figure your monthly payment into the cost of your pen. If your payment is $ 50 a month then you need to figure out a reasonable amount of markup to help offset this cost. If you set a markup of 50 cents per pen your total cost is now $ 1.21 if you sell it at $ 1 you have lost 21 cents a pen and you must sell 100 pens to make your payment for the 50 dollar month so you would lose $ 21 dollars .

RENT – You will pay some sort of rent (website or store) you need to figure out a reasonable amount of markup to help offset this cost. If a website cost $ 29 dollars a month and you set a markup of 30 cents per pen you must sell 100 pens to make your rent for the month.

INK AND PAPER – If 2 ink cartridges cost you $ 50 dollars a month and paper cost you $ 10 dollars a month your total cost is $ 60 dollars. If you set up a markup of 60 cents per pen you must sell 100 pens to pay for the ink and paper cost for the month.

CAUTION you must be careful to not over price your pen or no one will buy it. A good way to do this is to find like pens and see what they are selling for and make your decision to charge more or less according to what you find.

Question: How do you determine what your real cost is?

I use spread sheets to figure my real cost. Set up a column for advertising, credit card or loan, rent. One sheet should give you monthly cost. So advertising is $ 1, loan / credit card $ 50, rent $ 30, ink and paper $ 60, so your monthly cost is $ 141 dollars.

On the next spread sheet put in your figures with your markup figure we decided on above for loan / credit card rent and advertising added to your pens cost. Set up a column for product number, product cost, advertising, credit card or loan, rent, credit card fee and bank fee, ink and paper. So your pen cost 35 cents, advertising .01 cents, credit card fee 18 cents, bank fee 17 cents, loan / credit card 50 cents, rent 30 cents, ink and paper 60 cents so your cost is $ 2.11 per pen. Just to get to the break even point if you sell your pen at say $ 2.55 you would need to sell 83 pens. Now I am pretty sure you will be selling more than 1 type of pen so you would spread these figures out over all of the pens. This would make your pens cost cheaper.

I also make another sheet and on this sheet I play with the price of our pen. I use our set price and put in sale prices or discount to see just how much I can put the pen on sale for because everyone likes a bargain and the goal is to sell a lot of pens.

For help on promoting your online business read my other article. Website Promotion Services – for the New Online Business Owner it contains many free and useful tips.

Businesses fail because they did not look at the whole picture. Someone opens a business and thinks just like the first paragraph says that they will make 65 cents a pen, they forget about the little stuff like ink, paper, advertising and other nickel and dime items and these other items can directly affect the profit or loss of your business. That is why you need to figure out your real cost. The example above does not include everything as there will always be something small that will come up.

I've worked all my life and figure if I work as hard for myself as I do for other people then I CAN NOT fail. My business is growing and I look forward to quitting my job. PS writing this article is a free form of advertising while helping others learn how to start a business.

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