From the course: Finance for Non-Financial Managers

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Considering all of your costs: Fixed, variable, and the contribution margin

Considering all of your costs: Fixed, variable, and the contribution margin

From the course: Finance for Non-Financial Managers

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Considering all of your costs: Fixed, variable, and the contribution margin

- What can be so hard about pricing a product? Don't you just figure out what your costs are and then add some sort of markup for profit? Oh, that it were that easy. If your price is too high, regardless of your cost, someone in the market will underprice you, assuming that the quality of product or service is similar. In many case, you will be a price taker and you will have to manage your costs so that you can earn a profit given a certain price is determined by the market. The biggest mistake small business owners make in product pricing is not considering and covering all of their costs when entering a market. Now, let's consider a really simple example to illustrate a very complex point. It's summertime and I'm going into the snow cone business. You know, finely crushed ice that is flavored, perfect for those hot summer days. I have figured that, on average, the paper cone costs about three cents per snow cone. The…

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