Friday, May 9, 2014

Pricing Your Products.

Before I even type a word on how to price, I want to stress that if you plan to sell to stores or just at shows, this is very important to understand. Everyone is in business with one common goal and that is to make money. Be sure to really know how to price what you sell before you venture off into the big world of selling both wholesale and retail. Pricing isn't easy but there is absolutely a formula that will help you to both price your products fairly so that you are both making enough and at the same time not pricing yourself out of the market you plan to sell in.

1. Production Costs + 2. Labor + 3. Profit Margin = 4. Wholesale Price.

1. What is a production cost?
The cost of raw materials, transportation fees, custom taxes/surcharges and a percentage of your overall expenses for doing business (rent, equipment, licenses, and insurance). Most small businesses like ours do not yet have rent to consider but you may have other expenses that should be included in this list as well.

2. What is a labor cost?
Calculate the overall production costs and then divide by your total number of products made to determine the per-product production cost. Sometimes in a very small business where it's a one man show, typical of our type of industry, this is something over looked or plain and simply omitted.

Now that you have this figured out, you will want to add the production cost and the labor cost together to come up with the actual cost to make your product.
3. Next is to come up with the ideal profit margin.This isn't something that is an exact science I am afraid. A lot of consideration needs to be given at this point. For example I like to double my overall cost to make the product. So I take the production cost and the labor cost, add them together. Let's just say I am making a car freshener and my production cost and labor cost come out to $.90 per piece (this is not a real number, I just tossed in a figure to show you what I mean.). Ideally I'd like to wholesale that at a 100% profit but lets just say that if I wholesaled them at $1.80 and the rest of my competitors are selling them for $1.50, I would likely get less business and in fact they are a fairly simple product to make so instead of making $.90 profit, I would choose instead to make $.60 profit and hope that over the long haul with increased buying power of the supplies to make them I could cut the production costs down.

4. The biggest thing to look at is how many will I be making, how fast can I make them, are they simple or hard to make and determine that profit margin  accordingly. Ideally, the cost of making the product and the profit should be equal in determining wholesale prices. So for most items if it costs $1.00 to make in total the wholesale price would be $2.00.

Wholesale Price x 2 = Standard Retail Mark-up.

This leads me to retail mark up. I see SO MANY candle & soap makers out there selling themselves short and in doing so actually driving themselves out of business. It breaks my heart to see this! I can not tell you how many times I have been told that they can't get a higher price for their product and retail at a wholesale price. What I will tell you is that I have sold my products in nearly all 50 states, every province in Canada and in Europe and I know my product is priced wholesale competitive to Yankee, etc. so when someone tells me that you can't get that price there, I ask if Yankee is sold near them. The answer is always: Yes. Trust me, it's about image, if you create a craft looking product expect craft prices. Make your product shine and you too can charge what the big boys do! Don't undersell yourself or your product.

So what you have to look at is what type of a profit margin are the places selling your product looking to make? Typically a gift shop will at least want to double their investment. So if they are buying an item for $2 they will want to make at least $2 so they will likely sell it for about $4. 
What this tells me is the best way to look at pricing is as follows:
If it costs you $1 to make an item, the typical wholesale will be $2
If a shop buys an item for $2 wholesale expect them to retail that item for $4
So the formula on most items will be:
Cost x 2 for Wholesale
Cost x 4 for Retail.

As I stated before these formulas are just suggestions and there can be reasons to deviate from this as well. But using it as a guideline will help you to know how to best price your products in the future! It's always a good idea before you make a product to know what others are selling it for both retail and wholesale so you can make the best decisions possible when choosing the supplies and pricing.

Happy Candle and Soap Making!

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.