One critical factor in achieving profitability is accurately setting your selling price with your desired Profit Percentage. Many businesses use a markup method to add their Profit Percentage to their breakeven. This will always yield a smaller than expected Profit because it is based on a percentage of the breakeven. You should calculate your Profit based on the Sell Price of your services.
Here’s the correct way to calculate your sell price from your established breakeven and target profit percentage.
Sell Price = Breakeven ÷ (1-Profit %)
For example: 25% Profit and $150 Breakeven
Sell Price: $150 ÷ (1 – .25) = $200
Sell Price: $150 ÷ (0.75) = $200
Profit: $200 – $150 = $50
You can check that the Sell Price you calculate yields the correct profit percentage by dividing the Profit amount by the Sell Price.
($50 Profit) ÷ ($200 Sell Price) = 25% Profit
Of course, this calculation assumes that you have accurately determined your breakeven, but that’s for another post.