|Posted on July 2, 2012 at 11:30 PM|
What Do I Charge?
This always seems to be major question among new business owners.
For many of us trying to determine a price for our product or service always seems to be a pickle. Most of us are guilty of not keeping good records of how much money and time we are spending on our business. We don’t know if we are charging too much or too little. Take a look at this video posted on Remake America, this is a common example of not finding a correct price point.
When I first started making my headbands and scarves I would search the internet high and low to find out how I should price my products. I gathered a lot of useful information and instruction, and learned that there are many ways to figure out your overhead, labor, wholesale price, sale price, etc. All of these categories tie into one another.
Below I put together a few formulas I use for figuring out the price of my own products, which are handmade. However, you can make adjustments as necessary to fit the product or service you are selling. Remember that there are many ways to come up with a price for your product; this is only a starting place to get you going. Not everyone’s business consists of actually manufacturing, packaging, and retailing a product. This information really pertains to every kind of business, except for the paragraph about finding your wholesale price (which would not be needed in a service based business).
Step 1: Accurately (and honestly) calculate your “break-even” cost.
Materials + labor + overhead = “break-even” cost
Materials: Think about the cost you are paying for the DIRECT goods that go into your product or service.
Labor: Your labor cost is made up of the amount you pay yourself by the hour and how much time it takes to make a product or complete a service. Keep a time sheet and accurately record how much time you’re spending to make a product or complete a service. Multiply the time spent working by what you have set as your hourly wage. If you’re not sure what your hourly wage should be, then do a little research. For instance you can look up the average pay for almost any job on www.glassdoor.com.
Overhead: Overhead would be considered the INDIRECT cost you pay to keep your business running. Some common overhead costs that many business owners incur are rent, utilities, marketing expenses, business related fees, office supplies, etc. Look carefully into this area because sometimes you can miss legitimate expenses that need to be added here. Overhead should be calculated and examined monthly, quarterly, and yearly. INC.com has a short and sweet article on calculating overhead cost. Click here to read.
Once you have these numbers together then add them all up.
Materials + labor + overhead = “break-even” cost
The result should be a “break-even” cost.
Step 2: Determine your Profit Margin.
Sale price - Break-even cost = Profit Margin.
Profit Margin / Sale Price= (Y)
(Y) * 100 = Gross Profit Margin Percentage
In order to find your selling price you need to know what your profit margin will be. Simply put, a company’s profit margin is the difference between the break-even cost and the selling price of that product.
EX: If my total break-even cost to make my product was $4.00 and I sold the product for $6.50, then my profit-margin was $2.50 (38.46%). So every item you sell should help to cover your expenses and return back to you $2.50. To find your profit margin percentage then divide the profit margin by your revenue. In this case $2.50 divided by $6.50 equals 0.3846. Multiply 0.3846 by 100 and you have 38.46% profit margin. I now know that 38 cents of every dollar I made will go towards covering my overhead expenses. There are a few websites that will calculate all of this for you, click here to try one out.
Now your profit margin can be any number you want. However, price wisely because your customer will only pay what they feel your product is worth. If you’re not sure of what to make your profit margin price, just ask some friends and family what they feel your product is worth. Try researching the prices for comparable products. Your profit margin should create a fair price for your company and the customer.
Step 3: Get your Wholesale price
Finally, we are narrowing things down to a wholesale price. You have done all the hard work of calculating your expenses, keeping up with your time sheets, and in-depth research to reach a profit you are content with. You should now have a break-even cost and a profit margin price. Add these two numbers together and you now have a wholesale price.
Break-even" cost + profit margin = wholesale price
Pricing your product is sort of…“Save a little here, spend a little there”. Basically, it’s a process.
Sometimes people get disappointed at first to find that their wholesale price ended up being much higher than what they believe their customers will be willing to pay. Don’t get discouraged; within your break-even costs there is always room to work those numbers lower. Some cost will be fixed, in which you cannot change what you’re paying. However, any costs that are variable can be negotiated or sourced at a lower price. For instance, my product requires fabric. I get better deals on fabric when I buy in bulk or from wholesale suppliers. The lower price I pay for fabric creates a lower break-even cost, which lowers the price my customers pay. The key is to get the best price and quality for the goods that make up your product. This can be a long grueling research project, but it has to be done eventually if you want to stay ahead of the game and grow your business. If your overhead costs are too high try to print less, get lower rates on your phone service, work with free lancers, etc.. Maybe the wages you desire to pay yourself are not realistic. This can be a tough one to accept, believe me! But this is how you will know if your business is worth the time and energy required to keep it up over time.
Selling your product at a wholesale price to other companies or distributers is purely optional. In my opinion if you can figure out a wholesale price for your product, you can actually make nearly double or more in profits each time a customer buys at retail price directly from you. In addition your product can be sold globally from many locations versus from one.
Many experts suggest that you multiply the wholesale price by two to get a retail price.
Wholesale price x 2 = Retail Price (100% markup)
Remember, that when it comes to retail pricing everything is not simply multiply times two. Market research is important. In fact after doing some market research on your product, you might feel that your retail price is too high or too low. Let’s say you own a candy company. You make and sell chocolate truffles at a wholesale price of $2.00 each. The “standard” retail price of your truffles should be $4.00. However, you can set the retail price of your truffles to be $3.00 or even $3.50. You could even retail your truffles at $5.00 each. Now, you may be wondering, “why would I change my retail prices in these ways?” As I mentioned above, market research will show you the way. Everyone’s business is different and pricing depends on many things like brand power, quality of goods, competitors pricing, etc.
Does anyone else use a special formula to determine what their product or service price should be?