Pricing for Product Based Businesses
Pricing for Product Based Businesses
Pricing is not all about the numbers. You need to consider things like how it affects the perceived value of your work, your positioning in the market place and that you ensure your pricing model is sustainable for you and your business.
It is important though that you understand the numbers as a base to build your pricing strategy from.
There is cost formula to help you set your pricing for products.
This is the cost of each material directly associated with the making of your products.
Be sure to think beyond the obvious and include all the costs associated with the making of your product. For instance, don’t forget to include the tags and packaging used to display your items.
Consider the time you have spent designing, creating, finishing and packaging your product. Be sure to include the time spent tying on the tags, or the trips to the post office.
Now you need to decide what you want to be paid for your time? Bear in mind, minimum wage in Australia is $18/hr.
Overheads include all costs associated with running your business that are not directly associated with the manufacture of your products.
Obvious ones include phone/internet, electricity and rent, but make sure you consider those less obvious items such as; website hosting, petrol, market stall fees, office supplies, storage costs and any magazines/books used for research purposes.
Take the time to sit down and make a list of ALL the costs you have in your business, go through your records as there are bound to be numbers you don’t naturally think of.
Profit is the part of your price that is on top of your overheads, materials and labour that allows you to GROW your business.
NOTE – LABOUR IS NOT PROFIT!
Now it’s time to do the MATH
Working out how to add a portion of your overheads into each product can be a little tricky. I like to use the HOURLY BURN method. I learnt this method from Megan Auman of Designing an MBA.
Work out your monthly overhead expenses and divide that by the total number of hours you spend each month producing products.
Total Monthly Expenses / Total hours spent producing = HOURLY BURN
Your Hourly Burn is effectivly how much you spend on Overheads each hour while you are producing items to sell. Your overhead per piece is then your HOURLY BURN multiplied by the number of hours it takes you to make that item.
Hourly Burn x Production Time of an item = OVERHEAD (for that item)
Let’s say your monthly overhead expenses come to $600 and you are producing products for 64 hours a month. Your Hourly Burn would equal $9.375. If you have an item that take 4 hours to make you overheads for that item would $9.375 x 4 = $37.50
Once you know your Materials, Labour and Overheads and can figure out your production costs.
Labour + Materials + Overheads =
Now comes the fun bit! It’s time to add in your PROFIT!
Production Costs + PROFIT = WHOLESALE RATE
Working out your profit can be as simple as setting a blanket percentage rate, for example multiplying your production costs by 1.5 or 2. You might not feel ready to charge such big profits and start with 15% or 20% of the production costs.
It’s ok to be flexible here, because you have already accounted for your labour. This bit is the cream. It is important to include this step though. Even if you keep it small for now, you should develop the habit of adding profit into all of your prices. This is the money that allows you to build your business and cultivate the life and business you want.
You might find that some items in your business have more room to add profit than others, so it might not be a flat rate across your range.
Let’s assume you worked out your profit, and therefore have set your wholesale rate. Now it’s time for a RETAIL RATE.
WHOLESALE RATE x 2.2 = RETAIL RATE
Retail stores have loads of overheads. Think for a moment about their rent, staffing, insurance, display, marketing, and of course, the shipping costs to get your lovely items into the store. Most retails want to double the price of your wholesale rate and still compete with you and others on price. If you make it hard for retails to do so they won’t be interested in carrying your stock.
Working on the above figures means that you are able to dive into wholesale without undercutting yourself at any stage and giving any stores a suggested mark up of 2.2 times above your wholesale cost makes stocking your products an easier decision for retailers to make.
I know adding ALL THESE numbers up for the first time can be really overwhelming but if you don’t do the math, you will never able to price your items confidently. Stick with it. Do the numbers a few times over, try different profit margins and different wholesale rates. Even if you feel more confused now that before I promise you that you are not.
Clarity will come – but you’ve taken the big first step by getting really familiar with the costs involved in your business.
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Pricing is not all about the numbers. You need to consider things like how it affects the perceived value of your work, your positioning in the market place and that you ensure your pricing model is sustainable for you and your business. It is important though that you understand the numbers as a base to build your pricing strategy from.
Do you have a big goal you are working towards, a new business idea you want to start or a book you’ve been wanting to write – but you never get the time to commit to it. This is the best way to reach to reach big goals.
How do you price your services when your main cost is your time? How do you account for the value you offer or make sure your business overall is actually profitable?