Pricing Your Products Correctly

Pricing Your Products Correctly

You’ve invested your creativity, time and hard earned money in developing your product. But before you can get your product into the hands of eager customers, you’ll
need to price it. Pricing is part art, part science, but here are some guidelines to get you
started.

When you’re first starting out, it’s tempting to price your product according to your
competitors’ prices. But working from your competitors’ line sheet doesn’t take into
account what it costs to deliver your finished product into your customers’ hands.

To find the actual cost of your product you’ll need a few numbers:

Labor: What it costs to assemble your product and pay yourself. If have a staff member, their pay can go in here too. While it’s often tempting to devalue your personal labor, because you’re doing what you love, resist it. Paying yourself a fair wage lets you keep doing what you love by putting food on your table and money in your bank account.

Material: The cost of the raw materials that make up your product. This can include
packaging and hang-tags.

Overhead: The cost of doing business, including rent, power, phone, internet, shipping
and any other expenses you incur while doing business.

One of the easiest ways to work out your COGS is to take it monthly. Figure out your
monthly labor, material and overhead expenses, and divide it by the number of
products you can make in a month. It’s also wise to add in a small margin, 30% or so, to
cover any extra costs you incur.

Labor + Material + Overhead = Cost of Goods Sold x 30%

As time passes, the numbers in this equation will change. Your power bill may rise,
you’ll decide to rent a dedicated workspace, or you could even find a more competitive
materials price. Reevaluate your pricing equation at least yearly to ensure you’re not
losing money.

Before you find your wholesale price there’s one more number to add into the equation:

Profit: This is what your business earn from your product.

Profit is often misunderstood as the money you pay yourself, but it’s actually what you will invest back into your business to help it grow by doing things like hiring staff, buying
equipment or renting a workspace. Profit is key to the longevity of your business, so
build it into your pricing from the beginning.

Now your equation looks like this:

Labour + Material + Overhead = COGS X 30% + Profit = Wholesale price

Now on to retail pricing. For many new companies, the most simple method is
multiplying your wholesale price by 2.

Wholesale Price x 2 = Retail Price

This is the amount you’ll charge direct consumers who buy from you face-to-face, online
or at a trade show. As your business grows, you’ll want to raise the number by which
you multiply your wholesale price as high as 3 or 4.

As I said at the top, pricing is part art and part science. You’ll have to work with your
numbers to find a price that works in your market, brings in the money you need to
sustain your business, and considers the funds you’ll need to take your business to the
next level.

{Featured image via Regina’s Studio}

Written by Andreea

Andreea Ayers is a mom of three and a successful entrepreneur who has sold two businesses. She currently works with entrepreneurs to help them grow their business by getting their products into stores and in the media. You can learn more about her at AndreeaAyers.com.

3 Responses to Pricing Your Products Correctly

  1. Hey Andrea,

    I agree, we tend to price our products using our competitors as a guide, plus that’s just easier :-) But, to do it right folks need an easy calculation to follow and you’ve laid it all out nicely. It helps that you’ve covered both wholesale and retail.

    Thanks,
    Liz

  2. This article is extremely helpful!!! I’m going to book mark for future reference. Will definitely post this on my Etsy Team
    = )
    Melanie

  3. Sandy Dell says:

    Great article, as usual, from Andreea. She is a value resource for product based producers!

    Sign up for our FREE e-course on Pricing Your Products: http://sellingtogiftshops.com/

    Sandy

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