How to Factor the Cost of Rent and Labor for a Product Price
Pricing strategies are an essential part of business. To turn a profit, a company has to factor in not just the costs of producing and selling its products, but also other costs associated with running the company. Incorporating both fixed and variable costs, including rent and labor, can help a business accurately assess how much it needs to charge to meet its financial expectations.
Some businesses determine product pricing based only on the costs associated with their production, but that’s a recipe for a business loss. A business has to calculate its overhead expenses and factor them into what it bills the customer. If your overhead percentage – consisting of everything besides direct labor and materials associated with the product – isn’t included, you may find yourself selling your wares at too low a price to make a profit.
Rent can be incorporated into the product price several ways. If the facility is the company headquarters, a home office or another location that doesn’t directly produce the products, it can be included as part of general overhead and divided among the entire catalog of business offerings. If it’s for a facility that manufactures or sells some products but not others, segmenting the costs among the products that the facility makes gives a more accurate estimation.
When possible, allocate labor costs to the products that they directly influence. For example, if you have two workers responsible for selling glassware, their salaries should be reflected in the glassware prices. For general office expenses, such as HR personnel who serve the whole company, the salaries should be spread around the costs of all products as part of the general overhead expense.
Pricing also has to represent market demands. If incorporating rent and labor costs into your product price places you at a level above what the customer will pay, you may have to allocate those elsewhere to make the sale. While this may move product in the short term, take that into account when developing a long-term strategy. If you’re constantly having to perform these accounting maneuvers to avoid being overpriced, it may be time to allocate your resources toward more lucrative offerings instead.