The Secret To Pricing Your Product Profitably

Are You Pricing Your Product To Make a Profit?

One of the very common questions we get from clients is, “is my product priced right?”. There are about as many ways to look at pricing as there are channels to sell in. Selling at a price that sells is easy. Selling at a price that enables you to grow your business profitably while expanding your reach – well, that’s a lot harder. We are taking a look at the factors to consider when determining prices for your product, and the potential pitfalls to look out for.

First off, a mention of what we are not addressing here, which is prices that are already set by a manufacturer or by common sellers in the market. In other words, products bought at wholesale that have a standard markup that all or most retailers abide by. For example, if you are selling branded apparel, items you sell are already going to have a manufacturer’s suggested retail price that is 2x, 2.2x or 2.5x the wholesale price you paid, depending on where it sits on the mass/luxury spectrum. Those rules around marketplace pricing have definitely changed over time, but that’s a topic for another day.

How To Price Handmade and Manufactured Product

If you are sourcing or making your own product and either selling it wholesale or directly to consumers, then of course determining the price is key to your business. You probably already instinctively know the 4 P’s of Marketing: product, price, place, and promotion. And it seems simple, right? The price is the target profit plus costs. Or, the price is the result of a simple calculation based on selling price minus cost of goods sold. Here are the key calculations to look at this:

Profit Margin = Price – Cost / Price

Markup = Price – Cost / Cost

COGS = Sum of all costs associated with manufacturing product

The Secret To a True Cost of Goods Sold

Seems pretty straightforward, right? The problem we run into with many small business owners, makers and entrepreneurs arises from the COGS calculation. Often we find the cost of goods sold fails to include some of the more hidden costs. Primarily, the opportunity cost of a founder’s labor. This is not just the wage or the “owner’s draw” you may be paying yourself from your business. It is the true value of your time input, which is the amount you could be making doing something else with your time – for example, working for someone else instead of yourself. Another cost to consider is that of working from your home. Sure, you can take a tax deduction for your home office. But if you make items at home, and store goods in your home, then your home is not just your office – it’s also your warehouse and distribution center. So you should be factoring these costs. Consider what it would cost to store and ship good from a third party distribution center. Other smaller items that can get overlooked include the freight to ship materials to you, as well as taxes and duties to import materials.

It’s important to note as well that we are looking at a self-funded business model. This applies to businesses that are boot-strapping. For a company that is investor-funded, the opportunity cost of founder labor or home office costs are supplanted by other cost considerations, such investors’ expected return on investment.