I will walk you through these topics as we go through the week, but I wanted to make you aware that while numbers are vitally important, and you do need to know them, they aren’t the whole picture.
I do believe they are the best place to start though. In this post I will share with you my suggestions for a Pricing Formula and let you in on how I price products and services.
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.
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 = PRODUCTION COSTS
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.
Pricing for Services
There are two main ways to charge for services; Flat Rates and Hourly Rates.
This is when you work out an average amount of time it will take you to complete certain “jobs” and charge based on this. Logo Design for example might take anywhere between 2 hours and 2 weeks depending on the client but you might average around 6 hours of design time so charge based on this.
Flat rates make things straightforward and easy for clients to understand and the process is very black and white, they know your prices outright, and there are usually no surprises.
On the contrary, hourly rates vary based on how long you’ve spent working on a specific project. It’s important to keep a record of the time you’ve spent working on a project, and on the upside, you get compensated for the extra time you’ve spent working on changes and revisions.
Use whichever system feels right to you.
In terms of how to decide on prices for your services it is just as important to go through the equations above. The overheads might be bigger, the labour might be bigger while the materials are small, or non-existent. That’s ok – the process should be the same.
Work out what you want to be paid per hour for your labour, add in your overhead costs and your materials. Then add on your profit.
This gives you a wholesale or “baseline” price. It’s good to have this even with services because it allows you to offer affiliate commissions, offer discounts of standard fees etc, all the while knowing what your baseline is and that you are still being compensated fairly for your work.
We will talk more tomorrow about the effect pricing has on the perceived value of your products as well as the role it plays in positioning you in the market place (and what that even means) but first take some time to figure out your numbers.