Many SMEs and startups make pricing decisions using a mix of intuition, market benchmarks, and “what we think the customer will pay.” A minimum cost system is not intended to be perfect analytical accounting. It aims for something more useful: to provide a simple, consistent foundation to know what you are selling with a margin, what you are selling practically at cost, and which activities are draining cash without you realizing it.<\/p>\n
The goal is to build a simple allocation system that answers three key questions: how much does it actually cost to deliver this product or service, what margin does it leave, and what is the minimum defensible price without compromising profitability.<\/p>\n
The first step consists of separating costs into three operational blocks. Direct cost includes everything that can be clearly assigned to a specific sale. In products: raw materials, purchases, specific manufacturing, or associated transport. In services: billable team hours, project-based subcontracting, variable licenses per client, or travel expenses linked to delivery.<\/p>\n
The second step is to choose the unit of allocation. In services, the most practical unit is usually the hour. In products, the unit sold or the batch. If your business combines products and services, you can apply two different rules: cost per unit for products and cost per hour for services, later adding a simple overhead layer based on percentages.<\/p>\n
The third step consists of calculating an internal cost per hour if you sell services or if delivery depends mainly on the time invested. Do this with an honest approach: sum the annual cost of the staff attributable to delivery and divide it by the actual productive hours.<\/p>\n
The fourth step is to allocate operational indirect costs using a single rule. The simplest option is usually to apply a percentage markup on the direct cost.<\/p>\n
The fifth step is to treat overhead as what it truly is: a cost that must be covered by the margin. In a minimum system, there are two particularly useful formulas. The first consists of applying an overhead percentage on sales; for example, if your monthly overhead is \u20ac18,000 and you invoice \u20ac90,000, overhead represents 20% of sales. The second consists of establishing a contribution margin target that guarantees covering overhead and generating a profit.<\/p>\n
A well-applied minimum cost system doesn’t just give you a pretty Excel sheet: it gives you decision-making power. Because, when it comes to pricing and margins, deciding without numbers usually turns out to be much more expensive than the effort of measuring.<\/p>\n