Business Tips Part 13 - Pricing Part 2

Now this blog might be Business Set up part 13, the number unlucky for some but I think this might actually be one of the most important blogs - pricing. In the last blog I briefly talked about pricing your items for sale, this time we look at the different terms that go into a pricing formula.

Material Cost - the cost of each material directly used including packaging

Labour Cost - Calculate how much your time is truely worth

Overhead Cost - Everything that is not labour or materials such as a trade show stand, equipment and promotional items.

Profit - Money in your pocket when you have paid all of your expenses

Mark Up - The % of materials and/or labout costs added to an item to reach a price.

There are so many different ways to create a pricing formula and the most important aspect is finding one you are comfortable with. Generally, the best formulas consider materials, labour/time, overheads and profit. However, if your time far outweighs your materials you may choose to just calculate on time.
Some example formulas include:
Wholesale price = (materials+labour time) x mark up
Retail price = wholes ale price x markup

It is recommended that a minimum markup for wholesale price is 100% to cover overheads and profit but if you can increase this it can only be to your benefit.

The retail price is what you suggest your wholesale customers (if you have any) sell your items at. If you sell directly to your customers online or in your own shop, you still need to sell at the retail price or you will be underselling your wholesale customers and risk losing them. Selling at retail also increases your profit margins and enables you to have sales or special offers because even if you have a sale at wholesale price you still make a profit.

Evaluating your prices every few months is essential. Pricing is a balancing act between your costs and what your target market is willing to pay - I find this balancing act very difficult as do many. An alternative method is to work in reverse starting with what you think people are willing to pay, half it to get a wholesale price and then realise that you have to use materials in line with this price. You may be surprised to find your profit margin may increase this way.

If through evaluation you discover that your prices are indeed too high, look at ways to reduce your costs, such as wholesale purchasing, before automatically dropping your prices.

Next time - we start looking at marketing and publicity.

Image from Salvagenation

Saturday, 29 August 2009 | 1 Comment

1 comment:

libertydoll said...

thank you so much for writing this post!

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