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You have made up your mind; your friends like your home-made muffins, so you are going to sell them.
This will enable you to  earn some extra pocket money and even start saving something for a rainy day.
But how much are you going to sell your muffins for?
This is probably the most difficult question an entrepreneur has to answer.
If you  set your price too high, your customers  may not buy many.  So, is it better to sell at a low price? No, because, if your price is too low, you might not only lose money  but also the opportunity to make more profit.
This means that if your costs  (the money you spend to make your muffins) are higher than your selling price, you make a loss.
So, the first thing to calculate is how much it will cost to make your product - this is called your minimum price.
If you sell too low, but still make a profit, you miss out on what your customers would have been willing to pay.
In other words, if one muffin costs HK$2 to make and you sell it for HK$3, you have made a small profit but what if your customers would have been willing to pay HK$5?
Try to find out how much your friends would be ready to pay before you decide on your final price and remember to check out your competitors' prices.
Of course, muffins are just an example; you can choose to make and sell anything you like, depending on your talents.
If your price is too low, you might not only lose money  but the opportunity to make more profit
Make the cost count for you
First, write  a list of all the items you will need to use to make your product. If you want to sell a service, value the time you will spend performing it once.
Find out if these costs are fixed (they  stay the same whatever the numbers of items you make, like the cost of  a muffin mould and cooking utensils) or variable (the more you make, the more you use this component, like flour  if making muffins). Value the cost of each of your products or service component. Valuing your time is hard: how much would you earn if you were doing a similar job for someone else?
Add all your costs and divide the total cost by the number of items you have made: this is called your unit cost. What if you make one more item?  Calculate the cost of this additional item using this simple formula: margin equals price minus cost. The cost of the extra item is marginal cost.
quiz time
Are you a money maker?
Match the right definitions about prices and profits.
1 Productivity
2 Competitors
3 Marginal cost
4 Value
A Other people selling similar
products or services.
B How much customers are
willing to pay for one item.
C The amount of time
you spend doing a job.
D The cost of making one product.
Think before you set a price
Cost plus You add a margin to your cost.
Market price You ask around to find out how much your  customers would  pay.
Competitors' price You note down what similar products your competitors sell and at what price.
Supply and demand prices Vary according to how many people want to buy your products (demand) and how many competitors you have (supply).
Price sensitivity Do your customers buy your product because of its price or because they like your product?
Here are a few activities you can research on this week's topic:
1 List the possible products or services you would be able to sell to your friends or neighbours. How much would they be ready to pay for it?
2 Select a few items and go round different shops: are the prices the same or similar to yours?
3 Take an item and show it to at least five friends: ask them how much they would be willing to pay. Then add indications on the item (second-hand, brand new, latest fashion...): do they value the item the same way with the new indications?
Answers
1. c, 2. a, 3. d, 4. b



How to decide on a price: sell cheap or expensive?