Simple pricing strategy using the break-even
However, I inquired if he had spent some time looking at the costs. Well, I do not think I will have many problems assuming them… Humm, what about the prices? He was thinking of matching the prices of competition, or even undercutting a little bit.
It is the way a rookie entrepreneur thinks, but I proved him wrong. I asked him to download our Simple Breakeven Calculator Android app (from Google Play, for free) so I could show him an easy way to find out why he had not got the right pricing strategy… or why his future business was in danger from day zero.
With an internet search we managed to establish the cost of the stall for weekdays and for Saturdays, so we had an approximation of his fixed costs (obviously, there is more than that, like needing tools for cooking, all the gear, maybe the van…). Then, I asked him to give me a price for a food portion (what he was thinking of pricing it) and how much was he considering the cost per portion to be (this is the variable cost). Once we had these three figures I made the break-even calculation, which measures how many portions he should be selling to start making a profit. So, are you capable of selling 50 portions a day? He was not sure, but at least now he has another tool to assess his strategy and his pricing. For instance, he is capable of generating different scenarios of fixed costs (alternative cooking facilities, or even outsourcing to transform fixed into variable costs), variable costs (affecting the quantity and/or quality of the portions), and prices (which would affect the dynamics of the competition in the market and it is related to the sensitivity to price that consumers have).
Hope many other entrepreneurs make good use of the tool!