It’s time for us to continue on the trip of ‘how to price your product?’. In the previous parts (Part I – Material & Part II – Time) we’ve seen a few factors to take into account when you decide on your prices. These are actually the most fixed ones. Now it’s gonna get a bit more difficult. Let’s take your product to the market.
Basic formula
Since there is a basic formula doesn’t mean you actually have to follow it. But let’s get an idea of what the prices might be according to this formula.
- Time + material = cost
- cost x 2 = wholesale
- Wholesale x 2 = retail
In the previous two posts you can make the sum of your time and materials and by now you should be able to calculate the retail price. That easy? Well, it’s a start. But what you should check is if the final price would afford you to cover the overhead expenses. I know right… more things to consider. What are my overhead expenses…?
Overhead expenses
Overhead expenses are the monthly billings from for example the rent of your shop/atelier, programs you had to buy for bookkeeping/designing, website cost such as hosting and maybe maintenance. Once you’ve figured them all out, sum them up and divide them by the expected sales you will make. This might need some adjustments if you are just starting out.
TAX & Fees
I might not be the right person to talk about it since I am still figuring it all out… but don’t forget the tax or in Dutch the BTW. Depending on the country, the type of product this percentage of the price might differ. But at least you should think about adding it to the price otherwise it will cut into your profit. You might also want to inform your customers if they are not from the same country about the extra costs they might need to pay to import duties/taxes or whether you are responsible for those costs.
Besides the taxes, you should also take some fees into account if you don’t sell them on your own website but for example on Etsy. For each sale, you need to pay a fee to Etsy for their service. You could be transparent about these fees towards your buyers. Now they might know why your product is more expensive on Etsy compared for example to the same product in your store.
Competitors
What do your competitors ask? What price range are they at? And do they make similar products with the same techniques? In case of leather craft, you can imagine the difference between machine and hand sewing. The time spent will differ immensely, should you, therefore, give your time a lower value? Or is your time as valuable as the of others? Do they ask too much for the same product? Well, if it does sell, why shouldn’t you aks about the same?
Customers
The customers are the ones who will decide if they want to buy your product. So what is your product worth according to the customer? In the Netherlands, we are known to want the best quality for the minimal price… not that good of an image isn’t it… 😉 But eventually, we want to pay the best price, everybody does. So actually you will have to do some value-based pricing. Ask around… what would your friends pay you for your products? and what is their reaction to an example price?
Changing prices
The market will be changing continuously. Therefore you might need to adjust your prices every once in a while. But when and how much? For example, if your competitors have adjusted their prices you might need to alter yours to stay in the game. But you might also increase your price if the value or demand of the product becomes higher. Although you need to keep in mind you might lose some customers if you raise them too suddenly.
Sale
The sale is another difficult matter. Because why should your product cost less after a while…? It is the same product, the same time did you spent and the overhead costs won’t decrease in a few weeks/month time. On the other hand, you might want to introduce some new products to the market and get rid of the old ones… This might be the time to lower your prices and give some discount.
Summary up to this point
Crazy how much you need to think of everything to just put a price tag on something… But if you don’t you might be out of business in no-time… If you want to do this for real, you will need a formula that works for you. Right now we’ve got:
- materials + time = cost.
- cost + overhead expenses/expected sales should be equal to wholesale.
- wholesale x 2 = retail and should include the taxes and fees.
Whether you this formula works for you or if you need to alter it a bit is something for you to figure out over time for the specific market your interested in. Keep track of your own budget, expenses and income but also on the your market compeditor ones. Your time and effort is as valuable as the of others and if your products become too expensive for a certain type of customer you could look into the every step where you could save money to reach a larger customer group.
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