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Accounting & Bookkeeping

Definitions for common pricing terms

Break Even: The point when revenue equals costs.

  • How much revenue do you need to not incur a loss?

Cost of Goods Sold (COGS) : Cost of goods sold (COGS) can be calculated by multiplying how much it costs to make each good or service by how many of those goods or services you've had to make. For example, if each shirt costs you $5 to make and you've made 100 shirts, your COGS is $500.

Gross Profit: Gross profit is calculated by subtracting your COGS from Revenue. For example, if your Revenue is $2000 and your COGS is $500, then your Gross Profit is $1500.

Net Profit: Net profit can be calculated by subtracting Overhead from Gross Profit. This is your "real" profit as it is how much you're making in revenue, minus how much it costs you to run your business. In this example, your real profit is your Gross Profit subtracted by your Overhead, which equals $1000.

Overhead Costs: Overhead refers to costs not associated with making or selling goods or services. It's costs associated with advertising, rent, phone bills, etc. For example, if all of your bills not related to producing your shirts add up to $500, then that is your overhead cost.

Profit: The remaining money you have after subtracting costs from your revenues.

  • Use profits to reinvest into your offering so that it can continue to grow.

Revenue: The product of how many units you want to sell and the price of what you’re selling

  • You want your revenue to be greater than your costs.

Sales Goal: The units of products or services needed to hit (and exceed) the target break even number.

  • Is this a realistic number?

  • What are your goals for one month, one quarter, and one year?