Be careful not to fall into this trap. Labor costs are calculated by multiplying the number of hours worked by hourly wage. Be sure to include fringe benefits either in the hourly wage calculation or in overhead expenses. Include all the business costs not directly related to the actual production of the product or service. Direct costs, labor, and overhead expenses are the bare minimum that must be reflected in the pricing strategy of any business.
Profit is the money left over after all direct costs, labor, and overhead expenses have been paid.
In order to insure that there will be money left over, a profit factor or profit margin must be calculated in initial pricing. After the total costs are calculated, the profit factor is added to get the final price. A mistake many home-based business owners make when first starting out is not adding in a profit margin to their pricing strategy. If this is not done, there will be no money for growth or expansion of the business. The percentage a retailer adds to the wholesale price it pays for an item is called the markup.