Cost price is the amount of money it costs to produce a good or service, and what you can sell those goods and services for without making a profit.
When you run a business, you want to make a profit. Profit is the difference between what you sell the items or services for—the selling price—and what they cost to produce—the cost price. It can also be called unit price or production price.
The term can be used to refer to both self-produced products or services, or products and services you buy from a third-party to sell on to your clients.
How to work out the cost price
If you produce the item yourself, you work out the cost price by including all the costs to produce it. You should include both direct charges such as labour, delivery costs, and purchase of raw materials, and indirect charges, such as rent, electricity and marketing costs.
If you buy the item before selling it on to your client, you have to include the price of the item, but also customs, shipping and so on.
If you sell services, you should include the costs that you incur to deliver the service. This also goes if you hire a third-party to perform the service, or parts of the service on your behalf.
Why is it important?
You should calculate the cost price before you sell anything to your clients. You have to know what it costs to produce your products or perform your services, so that you can set the right price and reach your break-even point
If you don’t charge enough for your products and services, you’re going to end up operating with a loss.
When you set the prices, you should make sure to also consider market conditions, competitors, and customer expectations.