When you are pricing your products you need to take into account all of the costs involved. This includes direct costs, such as supplies. However don’t forget to add in your overheads too.
What Are Overheads?
While it’s really easy to factor in costs when pricing your products, like the cost of supplies or the time involved in making your product, indirect costs, such as a proportion of your Internet bill (if you work from home) also needs to be taken into account.
Your overheads are all the things that make the creation of your products possible – excluding supplies, shipping and your time. This includes your computer, electricity, software, stationery, rent and any other regular costs you entail. You should also include selling and payment processing fees as an overhead of your business.
If you work from home, some of these costs will be split with your family costs – for example if you use the Internet for your business and your family uses it for leisure, if you use it 50% of the time, then 50% of the bill is an overhead of your business.
How to Calculate Your Overheads
The best way to calculate your overheads is to work out an annual cost for everything like phone bills, electricity etc and divide this by 12, giving you a monthly cost.
You may also want to depreciate your equipment. This means that if a machine costs you $450 and you believe it needs replacing in 3 years, the ‘cost’ of this machine is $150 a year. Your accountant will be able to advise you better based on your needs.
You don’t include shipping as an overhead. If you charge for shipping then the cost of shipping is covered by your revenue. If you offer free shipping then this is a direct cost and you should cost this into the base materials cost of your product.
If you calculate your overheads correctly and include this into your pricing