A new company is highly motivated to obtain clients, thereby, bringing in cash to support the new company’s initial employee and administrative costs. However, it is important to understand that obtaining new clients at any price is not a strong financial decision. Obtaining market share while not charging enough to cover for COGS and administrative costs to support the business will eventually bankrupt the company. When determining the rate to charge for goods and/or services, it is critical to understand the direct costs, administrative costs and profitability margin you require. Taking these cost requirements into consideration over a 6 month or an annual period of time divided by the unit of measure of goods or services over the same time period will enable you to determine the average unit cost or service hour cost. This average cost coupled with a percentage increase for profitability is what should be charged for each good or service.
With a startup company it is imperative that a budget has been completed and is accurate. Please see the blog on budgeting. This will be the start-up company’s guide to price its goods and services. The company should also complete a competitor pricing analysis. This will determine what your competitors are charging for the same goods and services. Unless the customer or future customer can justify that your goods or services are worth the additional cost, you will have difficulty maintaining or adding new clients.