As a business, how do you calculate the sale price of something your producing/servicing?

[DWW]

I'm curious about how businesses calculate the sale price of their service or product which they are making. I'm thinking about IT to be specific. If you're developing a system which is targetted for a specific area and there isn't any competition (not a custom product for one group, but something that you could sell over again and add customized features and whatnot) as oppose to a $59.99 shelf product, how do you calculate the cost?

I tried asking a few retired business owners (my father) and friend's boss but they were kind of evasive and didn't really help much. I think the reason being is they just got lucky and picked good numbers or were good salesmen.

I've read several places that if you charge too low, you will be seen as someone who isn't "serious" and therefore aren't as "safe" for that company--they don't feel insured if you don't charge a lot. I've heard the phrase "don't leave anything on the table" for that situation. Yet if you ask too much you might be laughed into oblivion/shot down.

Anyone have tips?

 

[EyeMWing]

(<Cost of materials> + <Cost of labor>) *<Markup coefficient>

A custom solution like this probably merits a coefficient of 1.5 to 1.75 depending on how much labor is required for the customizations and always be negotiable with your markup.

 

[kranky]

Are you selling to businesses?

If so, part of the decision has to be based on how much your product/service saves the customer. Can you give an example of a different product/service that would have similar benefits?

 

[DWW]

(<Cost of materials> + <Cost of labor>) *<Markup coefficient>

Hrm no one seems to follow that though heh. A friend's boss has developed a hotel management piece of software and its rediculously overpriced ($25,000 to $50,000 in some cases) even for larger hotels. They have buyers all over--even in europe which I don't understand considering its cost.

The idea was directed towards government institutions. Do you think they could [easily] budget $10,000 for a workplace that averages 500-1000 people ? (of course depending on what the product is... but lets pretend its a necessity for them doing business)

The other idea would be to sell it directly to the county or province level for one large fee but that'd be a much harder sell I think. If I could get it adapted in individual places one at a time to get things rolling...I bet that'd be easier.

I estimate it'd take me 6 months to fully develop a polished product. I've never really looked at "what I'm worth" but I think for 6 months (60 hour work weeks) I would be worth far more then $10,000. I guess the calculation varies depending on the type of product.

 

[kranky]

Well, government institutions don't have any need to be more efficient, so you'll have to figure out how to pitch the idea to get them interested. You don't have any established company or products, and that's going to make it harder.

Think about it from their position - why would they want to use your product? Will it make their life easier? Need fewer people? Do more work with the same people? Will it make them look good to their boss? Figure that out and that's how you'll know which way to pitch your product. If it's cost savings, then be able to accurately tell them how much they'll save in a year with your product. Let's say it's $100,000. If you could really save someone $100,000 a year, you could easily charge $20,000 or more.

If it's not cost savings, then what is it? Making people more efficient? Let's say there are 500 people who use the product. Each person saves 5 minutes a day. That comes to about 10,000 hours saved in a year. If an hour is worth $15 average, that's $150,000 saved in a year. The problem is that the $150,000 isn't cash. It's only time. You might find that the person you are trying to sell to doesn't care all that much about saving 5 minutes per day per person. It's not putting any more money in his budget. Some people will care, some won't.

In my experience most government decision-makers' top priority is: If this goes wrong, how do I not take the blame?

So they will be concerned that your company can properly support the product. They'll want to see that other people are using it successfully, so they don't have to be the guinea pig. You might need to make it available to the first couple of customers really cheap just to get them to use it so you have some references. With software, you usually make more on the support than on the product anyway, so you might be able to practically give it away as long as they pay for software support. That typically is around 15% annually of the purchase cost.

 

[DWW]

Originally posted by: kranky
Well, government institutions don't have any need to be more efficient, so you'll have to figure out how to pitch the idea to get them interested. You don't have any established company or products, and that's going to make it harder.

Think about it from their position - why would they want to use your product? Will it make their life easier? Need fewer people? Do more work with the same people? Will it make them look good to their boss? Figure that out and that's how you'll know which way to pitch your product. If it's cost savings, then be able to accurately tell them how much they'll save in a year with your product. Let's say it's $100,000. If you could really save someone $100,000 a year, you could easily charge $20,000 or more.

If it's not cost savings, then what is it? Making people more efficient? Let's say there are 500 people who use the product. Each person saves 5 minutes a day. That comes to about 10,000 hours saved in a year. If an hour is worth $15 average, that's $150,000 saved in a year. The problem is that the $150,000 isn't cash. It's only time. You might find that the person you are trying to sell to doesn't care all that much about saving 5 minutes per day per person. It's not putting any more money in his budget. Some people will care, some won't.

In my experience most government decision-makers' top priority is: If this goes wrong, how do I not take the blame?

So they will be concerned that your company can properly support the product. They'll want to see that other people are using it successfully, so they don't have to be the guinea pig. You might need to make it available to the first couple of customers really cheap just to get them to use it so you have some references. With software, you usually make more on the support than on the product anyway, so you might be able to practically give it away as long as they pay for software support. That typically is around 15% annually of the purchase cost.

You pretty much read my mind as far as getting it out there I had planned to give it to a few local gov places for free and then word about it would spread a little to the other offices and so forth. I personally know a couple "higher ups" in the local office and I could easily get them to adopt it I think (especially for free). It would make them look good to their boss and peer offices, cutting edge and that crap...(and its not costing them anything really)...and it gets me and my product "out there" sort of deal.

Of course I'd take a business stance before diving in. I'd get an office, paperwork and that and start a real business not just something from the basement. I know image goes far in business in that respect... no one wants to deal with "joe who works from his basement" because he isn't really reliable..they dont have a sense of "security" with him nor the day to day support. I'd even hire one or two people to handle support issues and installs at different sites so I could focus on furthering it and stuff like that I figure.

Anyhow thats just the thought so far.