Making a product is easy. Well, it’s easy when you compare it to setting your prices.
Here is one straightforward way to figure prices for what you produce:
- Materials + labor + fixed costs per unit + capital costs + profit = Wholesale
- Wholesale x 2 = Retail
Then, treat that as a starting point, and adjust for strategy and competitiveness.
Let’s talk through each factor in the formula.
You know to count all the direct and obvious materials. Don’t overlook the little things: thread, a shot of WD-40, seasonings. Whatever it is in your case.
Make sure you’re including all the time it takes, including setup and finishing. What about time for packaging and preparing for shipping?
There are at least two different ways to put a price on the labor. The first is, what would it cost you to hire someone to do this for you?
The second is, what is your time worth? If you tend to put a low price on your time, think about what your reaction would be if someone tried to hire you to do this.
Fixed costs are all the costs you have to pay whether you produce anything or not. Utilities, rent, interest payments, everything else. Pay attention to every single bill you pay and all your recurring payments that you may not normally notice. Total them all up for a single month. To allocate these costs to each item you make, you need to know how many items you can make, or you actually do make, in a given month. If you only produce one sculpture per month, it has to cover all the fixed costs. If you make 1,000 bars of soap per month, divide the total fixed costs by 1,000. That’s your fixed costs per unit for the formula.
Next, consider your equipment. How long will your equipment last? Can you make a guess of when you’ll need to replace it, and how much that might cost? Remember to save for upgraded equipment in the future. Make your best estimate of equipment cost per unit, and add that to your formula.
You deserve to make one, and if you don’t plan for it, you won’t get one. How much should you add per unit? One common place to start is to make profit equal to material costs.
Time to Adjust
OK. You added all the factors up. Like this:
- Materials + labor + fixed costs per unit + capital costs + profit
Each of these factors is too important to leave out, so this is the lowest price you should sell for. Since this is lowest price you can sell for, it is the wholesale price.
Most retailers will likely take your wholesale price and double it. That’s the most common retail pricing strategy, keystone pricing. Since you know that, you can set your retail price at twice your wholesale price.
- Wholesale x 2 = Retail
Now that you’ve done all that math, you know what your costs and pricing would be. Before you rush to the market, you’d like to know what other businesses’ costs and pricing are. Then you can decide how you compare, and what strategy you want to factor in.
Do some price checking on the other comparable products. How are they priced? Before you say there is nothing out there like yours, at least figure out something similar to compare to.
Next consider what tier of pricing you want to fit into: top of market to bottom of market. And before you go for the bottom of the market, I’ll remind you that you can’t win the race to the bottom.
It’s not easy
Given all the work you put into figuring out your products and actually making them, you deserve to get the pricing right.
By the way, the complicated pricing formula on the chalkboard with Einstein:
I heard it at the 2009 Oklahoma Entrepreneurship Conference from Dr. Glenn Freedman, who was then with the Oklahoma State University Center for Innovation and Economic Development.
- About the Author
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Becky started Small Biz Survival in 2006 to share rural business and community building stories and ideas with other small town business people. She and her husband have a small cattle ranch and are lifelong entrepreneurs. Becky is an international speaker on small business and rural topics.