Before you sell your first product, you need to make sure you’ll earn money on the sale. While this seems elementary, many entrepreneurs don’t understand how to price their products effectively, and can even end up losing money on that exciting first sale.
To set the right price for your product, you need to know, and understand the importance of a few numbers, most of which you probably have at your fingertips right now.
This is where many business owners go wrong. It’s tempting to pay yourself a small amount for the work you put into creating and selling your product, but you’ll only be able to keep it up so long. Price your labor (and that of anyone you hire) fairly and you’ll feel more fulfilled in your work.
This is what it costs to make your product, including physical materials, production costs, hangtags and packaging. Remember, if you pay for it, you need to be paid back for it.
This is what it costs to run your business; keep in mind you’ll need a phone, the internet, web hosting and a space in which to run your business with energy and lights.
Armed with those numbers, it’s time to find out what each product costs you. The best way to do that is to work monthly, tallying up your labor, materials and overhead costs. Add on a margin of about 30% to cover anything unexpected, like overnight shipping to an important customer, or an increase in your material costs.
Now you have an equation that looks like this:
- (Labor + Materials + Overhead) / Number of Products + 30% = Cost of Goods Sold
As your business grows the numbers you use will change. Re-evaluate your cost of goods sold at least once a year to make sure your price is still fair.
You’re probably thinking, “That was easy,” but you’re not finished yet. Before you price your product you need to think about profits.
Profits are the lifeblood of your business. They are money you can put back into your business to help it grow, by renting an office or dedicating the time to develop a new product. Success in business is all about thinking long term, and building profits into your pricing from the start helps set you up for that success.
So, now when thinking about wholesale pricing the equation looks like this:
- Cost of Goods Sold + Profits = Wholesale Price
For most new businesses, the easiest way to find your retail price (or the price customers pay on your website) is to multiply your wholesale price by 2.
As you gain recognition and a customer base you can increase that number to 3 or 4, but starting at 2 allows you to enter the market at a price that’s fair to you and encourages wholesalers and retail customers to take a chance on your new brand.
This equation will help get you started and find an initial price for your product, but ultimately you’ll need to tweak it over time to find the best fit for your business. It will change again and again as your business grows, but pricing your products correctly from the start will help set you up on the right path.
What do think is the best way to price your products...do you have an equation you use?
Andreea Ayers works with creative entrepreneurs to help them get media attention for their products and to increase sales by getting their products in stores. For advice, insight and lots of free resources, check out her site LaunchGrowJoy.com