The floor under your price
How to work out the true cost of one unit
Most SA small businesses set prices by looking at the competition, guessing a number that feels right, or marking up the most visible input cost (usually materials). The result is a margin that exists on paper, mostly evaporates by the time everything is paid, and nobody can quite explain why the bank balance never grows. Unit cost is the floor under your price — the number you have to clear before any profit happens at all.
The three components
Total Batch Cost = Materials + (Hours × Rate) + Overhead Cost Per Unit = Total Batch Cost ÷ Units Produced
- Direct materials — the raw inputs that physically go into the product: fabric for a clothing label, ingredients for a food producer, steel for a fabricator. Include wastage if it’s consistent.
- Direct labour — hours worked on the batch by production staff, times their loaded hourly rate. Admin time, sales time, and management time are overhead, not direct labour.
- Allocated overhead — the share of rent, electricity, equipment depreciation, insurance, and other fixed costs the batch absorbs. Picking the allocation method is the judgement call.
The loaded labour trap
A worker on R70/hour does not cost you R70/hour. By the time you add UIF (the 1%+1% Unemployment Insurance Fund split between employer and employee), leave accrual (about 6% of wages for annual leave plus statutory sick leave), the 13th cheque if you pay one, the 1% Skills Development Levy on payrolls above the SARS threshold, and provident-fund contributions, the loaded cost is closer to R85/hour. That’s a 20% gap — and it’s the gap most pricing models miss.
The rough rule: cash wage × 1.15 to 1.25 for the loaded rate. Bigger employers with full benefits skew higher; casual labour without benefits skews lower. Whichever loading you pick, apply it consistently across all unit cost calculations so quotes compare like with like.
Allocating overhead — pick a method
Overhead is the genuinely difficult part. The cost is real, but how it should be split across products is a judgement call. Three common methods, each with a place:
- Per direct labour hour — divide monthly overhead by total production hours. Allocate per hour worked on the batch. Suits labour-intensive operations: clothing, food prep, trades.
- Per machine hour — same logic with equipment time as the base. Suits capital-intensive manufacturing: CNC, printing, metal fabrication.
- Floor-space share — allocate by square metres occupied. Suits shared workshops or co-located businesses splitting one rental.
The method matters less than the consistency. The wrong method applied consistently still produces useful relative comparisons — “Product A costs more per unit than Product B” is reliable even if the absolute numbers shift with allocation method. The right method applied inconsistently is useless.
When overhead dominates unit cost
When overhead is more than 40% of unit cost, your operation has high operational gearing — a small drop in volume produces a big increase in unit cost because the same fixed cost is spread across fewer units. This matters most for SA manufacturers with expensive equipment running below capacity.
Example: a CNC shop with R100k/month overhead. At 500 units/month, overhead per unit is R200. At 250 units/month, overhead per unit is R400. The other costs are unchanged — the unit cost shift is pure overhead absorption. Pricing has to either reflect the worst-case volume, or set a minimum order quantity that keeps unit cost reasonable.
From unit cost to selling price
Unit cost is the floor. The selling price needs to clear unit cost, cover everything not in unit cost (sales commission, marketing, admin, finance costs, owner salary), and leave a profit. Two common approaches:
- Cost-plus — unit cost × (1 + markup %). Simple and explicit. Common markups in SA SMEs run 50–150% depending on category.
- Target margin — price = unit cost ÷ (1 − target margin %). If you want a 40% gross margin, divide unit cost by 0.6. Margin-driven pricing is harder to think about but easier to compare across categories.
Use the Markup vs Margin Calculator to convert between them — the two are easy to confuse and the difference is significant. A 50% markup is a 33% margin; a 50% margin is a 100% markup.
The fastest way to drop unit cost
When unit cost is too high, the levers in order of how much they usually move the number:
- Volume — bigger batches spread the same fixed costs (overhead, setup time) over more units. The single biggest lever in most operations.
- Materials — supplier negotiation, alternative materials, reducing wastage. Usually the second-biggest lever, especially for materials-heavy categories.
- Labour productivity — process changes, better tooling, training. Slower to realise but compounding.
- Overhead reduction — usually the smallest lever because overhead is already lean in most SMEs. Don’t start here.