You’ll need to make sure the price covers your costs and provides enough profit to maintain and grow the business. Some of your costs are fixed no matter how much business you do. If you lease premises your rent will be the same whatever the level of production or sales. Staff salaries, too, will remain the same. Other costs vary depending on how much you produce or sell. For example, if you buy in goods to resell them what you spend will depend on your level of sales. If you travel to deliver your particular service your expenses will depend on how many journeys you make.
You can divide all the expected costs of a business into two lists – the fixed costs and the variable costs. One fixed cost will be what you are hoping to make from the business. This should cover the value of your time and the cost of any money you invest in the business. If you don’t allow for this you may find you are working to benefit everyone but yourself! To break even, you need to make enough from your sales, after allowing for the variable costs associated with those sales, to meet your fixed costs including what you need for yourself.
Look at the diagram below and see how the total revenue line (the total income) crosses the total cost line. This is the break-even point where your profit will equal the amount of money you hoped to make from the business. Normally you’d be aiming for total revenue a little further up the chart.
One of the critical figures is what you decide to charge for your goods or services, not least because this affects the volume of sales.