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Estimating Cost

To ensure you are not losing money on your operation you must estimate the cost of your product or service.

To be able to estimate how much money you can to make from sale of your product, you must find out what the customer is willing to pay for your product.

You also need to find out how much the product will cost you to purchase, produce or import.

The difference between the two amounts shows how much money you will have left to pay your rent, telephone, internet access, marketing and your own salary (or the profit of firm).

Example of estimating cost

If you sell CDs at $25 on the internet and promote it as “No postage & packaging”, your calculation could look like this:

Sales price 25.00 $.
- Purchase price at CD company: 18.75 $
- Packaging and padded envelope: 01.00 $.
- Postage: 02.00 $.
= Contribution margin: 03.25 $ (13 %)

Contribution margin

This calculation shows you that each time you sell a CD at $25. You will have $3.25 left. This has to cover expenses other than those related directly to purchasing, packing and dispatching the CD.

This amount is also called the contribution margin or gross profit.

Go to next business issue: Pricing - The Market

Success usually comes to those who are too busy to be looking for it.
- Henry David Thoreau, American author, poet, philosophe

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Pricing - Focus on Expenses
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Pricing - Market in Focus
Estimating Cost
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