Pricing products is the one area of business that many business owners struggle with the most. I can’t tell you how many times I’ve heard craft sellers say, “I don’t want to charge customers too much.” or “I keep prices low so that I can make a sale.” There’s nothing wrong with being considerate of others, but making emotional-based decisions is dangerous in business.
Some entrepreneurs use the “throw and stick” approach, where you slap a random price on a product or service and hope it works. Unfortunately, using an arbitrary number for pricing doesn’t work. Before pricing products, there has to be planning (who to sell products to), research (competitive pricing, customer preference), and strategy (targeting customers).
Cost of goods sold (cogs) and fixed costs (overhead expenses) are included. How you price your products determines profit margin, net income, and break-even point.
Pricing: Retail, Wholesale, Direct
There are a few ways to sell your handmade products. Products can be sold directly (online platforms or company websites), in wholesale, or retail. Regardless of how you choose to sell your goods, your goal is to make a profit. But to make a profit, you have to have an understanding of your business numbers.
Your pricing will be different according to types because there are many factors to consider. Out of the three, direct selling products gives the most flexibility because you can sell as a package, bundle, clearance, etc. Also, direct selling includes vending at events and craft shows.
Sometimes craft sellers are approached by the big box or boutique stores regarding product placement. However, as exciting as having products seen on the shelves, not all opportunities are profitable. So before choosing to sell your product at wholesale or retail, there are things you need to consider.
Selling at wholesale is selling your goods to a business at a discount. Usually at half price. Even if you sell your product at a discount, your business can still profit if you know the cost of producing the product. When approached about wholesaling, here are a few things to consider:
- Is there a quantity minimum?
- Is there a monthly cost for shelf space?
- Will the store purchase products at wholesale, or are products sold on consignment (when payout happens after product sales compared to upfront payment)?
- When is the store payout period?
Selling at retail is where you provide goods to a store, and they determine the final pricing. Keep in mind; you are selling to them at a lower price also. Getting into retail is hard, but it’s harder to stay on the shelf. Retail stores are a multi-million dollar business, so they want to make sure that you have an audience to bring in their store. Here are a few things to consider if you want your products sold at a retail store:
- Where will your product be placed on the shelf?
- Does the size of your product meet space requirements?
- If the size doesn’t meet requirements, are you willing to adjust the product size?
- Are you ready to pay an upfront cost?
- How much will it cost to produce large quantities of the product?
- Can you afford to take a loss if the store decides to discontinue products that aren’t successfully selling?
- Can you wait 60-90 days for store payout?
Now, here’s the fun part! The bulk of your product pricing will include the cost of goods, which is the actual cost of making your product. That includes inventory, labor, and packaging materials. If you don’t have hourly employees, calculate your labor cost by taking the number of products made within an hour divided by the hourly rate you would pay if it were an employee.
You can also price your product by adding a set profit amount to your cost of goods and overhead (fixed) costs. Fixed costs are your recurring monthly expenses at the same amount.
Here are a few pricing formulas to try:
Materials and supplies + labor + profit = Direct Price
Cost of goods sold x 2-2.5 = Wholesale Price
Wholesale price x 2-2.5 = Retail Price
Keep in mind that costs fluctuate depending on demand, natural disasters, and product recall. Variables that affect pricing include: increase in shipping costs, rise in materials and supplies cost, shortage of labor, or discontinuation.
It’s tempting to decrease the quality and retain or increase prices, but customers are savvy. Once customers feel cheated, your churn rate increases. So not only will customers stop buying from you, but they will also pass along the word to others.
Yes, you want to profit when selling your products, but keep it ethical and don’t nickel and dime your customers.
Profitable vs Emotional Standpoint
When pricing products from an emotional standpoint, it might get you sales in the short run, but you’ll lose money in the long run. It’s harder to adjust pricing when customers have been buying your goods at a specific price point for an extended period. Plus, you have customers who know the value and the market rate of products similar to yours. If they see that yours is below the average cost, they will suspect the quality level or take advantage of the lower cost before buying from another business.
First, keeping profitability in mind when pricing shows that you have a realistic approach to pricing. Second, you can make intelligent decisions. Third, you know your audience and what they are willing to pay because you’ve done the research. Lastly, you can make a living from your business.
Pricing your products might take a lot of time and work, but the results will pay off in the end. Even if you see the price point of competitors, you still should set your pricing by factoring in costs. The reason why is because every business is different. Just because you sell the same product doesn’t mean that both companies have the exact overhead costs.
Did you learn something new from today’s blog post? If so, please tell us in the comments section.