Problems with Costings

[nellie010203]

Hello, I'm new on here so apologies if this has been addressed before! I am struggling with standard business plan templates and I feel sure that there must be a simple answer but I've been unable to find it (numbers are not my strongest point..)

My problem is that my product is a training video, so it costs a lot initially to create it, but it can then of course be sold an infinite amount of times, in theory. Ordinarily a product would cost x amount to make, which would then be marked up by a certain amount to make y, the retail price. In the case of a training video the cost price far exceeds the price I will be selling it for.

My questions are;

1. As I am not marking up a cost price, how do I come to a reasonable retail price for the product?
2. I'm struggling with forecasting how many I will need to sell; some simple software assumes that as the product costs, for example, £2000 and is sold at, for example, £200 that I will clearly be making a massive loss!!

I feel sure this must be a standard business model but as I say, I'm struggling to find any help with it.

Thank you very much in advance for any advice :)

[vangogh]

Welcome to the forum Nellie. No need to apologize. You can't know every question that's ever been asked here. The way I think about a business plan is it's a tool to help you understand how your business will work. Don't worry about getting the numbers right, because there isn't necessarily a right and wrong to them.

You're going to have to make some assumptions about your business and then adjust those assumptions once you have a way to measure what's actually happening. The numbers on the plan can let you try different assumptions to see how they would work. For example to make $100k you could sell a $1 product 100,000 times or you could sell a $10 product 10,000 times, etc. Plugging in the numbers helps you see things like this. How many products do you need to sell at a certain price point. How many would you need to sell at another. While you won't know exactly how many products you'll sell next year and the year after, you can probably guesstimate something reasonable.

As far as the cost of your product is concerned keep in mind that initial cost of developing the software is part of the cost. You can spread it out over the lifetime of the product (though with software you'll continue to upgrade the software and there will be ongoing development costs).

Think of the numbers for you. Don't try to figure out what the right number is. Try to plug in different numbers so you can understand the relationship between your cost, your price, and the number of sales you need to make. I prefer to be very conservative with these numbers. I'd rather they tell me business will be harder than I think as opposed to being easy.

I hope that helps.

[Brian Altenhofel]

1. As I am not marking up a cost price, how do I come to a reasonable retail price for the product?
2. I'm struggling with forecasting how many I will need to sell; some simple software assumes that as the product costs, for example, £2000 and is sold at, for example, £200 that I will clearly be making a massive loss!!

Retail price should be an input, not an output. It should be based on what the value of the product is to the market. If the market price for training videos of similar quality for the same or similar activity is $200, then I'd try to enter the market as close to $200 as I can. If I'm still needing to build my brand, I might come in at $185 so there's enough of a gap to grab some marketshare through buyers who are willing to forego the comfort of brand recognition for a slightly lower price while not undercutting so much that it devalues my own product and future products.

Like with software, I'd want to recoup my initial investment ideally within a year. Let's say the video cost $2000 to produce. My first goal would probably be to get to ~40% gross margin or so (~$2800 in sales) - still on a shoestring, but enough margin to market the product. How many videos do you have to sell to get to that point at $200 retail? 14.5 (assuming each copy costs $5 to press and package). Once I'd sold that many, I'd set a new goal of 60%. At that point, the gross margin should be getting to the point where one video sold contains enough margin to sell one or more videos from the gross margin. One nice thing about something like video is their gross margins tend to go up the longer they stick around. The formula I used for gross margin is below:

TC = Initial Cost + (Cost per copy * number sold)
GP = (Retail * number sold) - TC
GM = GP / TC


Your customer acquisition costs (sales and marketing) come out of the gross margin and will eat a ton of it early. However, it should remain stable once you find that sweet spot on how much to spend per sale (not wasting too much, and not leaving too many opportunities on the table). Keep in mind that early on your operating income may still be negative until you get your sales and marketing processes tuned and get to the volume to support your operating expenses. You can probably do the rest of the math to plug in where you need to be to cover your operating expenses and turn a net profit.

[nellie010203]

Thank you so much both of you for replying and for some really helpful and positive advice. This has helped clear my head a bit and made much more sense of it all; the product itself is about 90% complete, so marketing and sales are next on my agenda.

I've only just over the past few days made the definite decision to give up my job and launch this full time, so I am very excited, motivated and a bit scared!! I think this forum will be a massive help over the next few months.

[MosheC]

Your question is very common for a new business owner. But considering you're not limited to the amount of copies you can sell. Think of the cost of creating video the same as you would the cost of opening a grocery store. You're paying a lot of money upfront, but you're not going to sell all the inventory all at once. If you have not started shooting the video yet, I would advise researching your clients. That way, you can make sure that you're answering their questions and thus improving your chances of making the sale.

I would also advise researching websites that will teach you how to get started and how to make the sale.

[turboguy]

To me you have to figure out what pricing gives you the optimal profit. Your production cost is $ 2,000 but you are not trying to cover the production costs with one sale. If you sell 2000 of the videos then your production cost is $ 1.00 for each one you sell. If you sell 20,000 it is 10 cents. Yes, if you sell one it is $ 2000.00.

The next thing you need to do is either survey or talking to potential buyers to see what the sales would be at any given price point. Let's say that for $ 1,000. your sales would be zero. For $ 500.00 they would be 3. For $ 200.00 they would be 100, for $ 100.00 they would be 1000 and for $ 5.00 they would be 10,000. So at a price point of $ 1000. you would have a loss of $ 2000.00. For $ 500.00 you would have a loss of $ 500.00. For $ 100.00 you would sell $ 10,000-2,000 or make $ 8000.00. For a selling price of $ 5.00 you would have $ 48,000 in profit.

That can be done in a graph which would be better but those numbers are just as an example and if you can determine the numbers you can find the price point that gives you the greatest profit. It may well be $ 150.00 if $ 200.00 is the typical price.

[Vathani Ariyam]

I think the you need financial adviser's help to prepare a business plan and a cash flow, that will help you to calculate the costings. If you want to arrive at a price for a product, you need to take all the costs associated to produce that product into account plus the profit margin.