As I am speaking to more and more mom entrepreneurs, I realize that understanding the true cost of your product is a real problem for everyone – you just don’t know exactly what to include and therefore, are underselling your products and losing money and profits. I want to turn that around for you right now!
Some of you are probably asking yourself the following:
- I’d like to develop this product but have no idea of the costs involved
- I have a product but have no idea what to count as the costs
- I have a product but it’s too expensive and I’m selling it for less than I should
Ok, I want to get everyone on the same MONEY making page and make sure you are doing this correctly. So here are some ways you can investigate, add up the costs and properly price your products to make money and be PROFITABLE.
1. If you don’t have the actual proto-type yet but know what you want to make, then I want you to go to the stores where you see this being sold and look at similar products and what they retail for. If you feel like your idea is still a great one, and that there is room in the market for it, then write down the names of the companies and the prices they are charging for the similar items. Do this at several stores as well as other on-line shops that sell it too. Most items at retail are 8x the actual cost price. For Example: A $32 retail item probably cost around $4 to make. It might have cost LESS, but did not cost more. This step will give you a good idea what your BIG IDEA might cost you.
2. If you have a product in hand already – let’s be 100% SURE you have it priced correctly. Get a piece of paper and write down every single cost that went into making this item.
- Labor to make the item
- Raw materials – leather, buttons, snaps, fabric, etc.
- Shipping of raw materials – For example: You order 300 snaps from NY and ship it to LA. The snaps cost .10 each but the shipping is $9 – you have to divide $9 by 300 pc to see how much MORE each snap actually cost you =.03 cents. So in reality your snaps cost .13 cents each not .10.
- If you import from overseas then add in duty and freight charges to each item. I just average the costs. When I import 3000 units and it cost $3,000 to ship then each item gets $1 added on to the cost.
- Labels and hangtags
- Any packaging you use
Now, you are going to add ALL these numbers up to get your ACTUAL cost of goods.
Let’s say the item costs $25. Now multiply that number by 2.5 to get the wholesale cost – this is the price that you will sell it to other STORES. They will then mark it up again and sell it to the end user. 25 x 2.5 = $62.50 = Your wholesale price.
If you are selling this item yourself on your website you have two options.
1. If you are NEVER going to sell it in a store then you can basically pick your own retail price. For example: If you are a serviced based professional and are selling custom journals to your clients.
2. If you do plan to sell to stores, then you need to price your website retail prices along the same lines as the stores so you don’t offend anyone and become their competition – big no no.
If you choose #2, then take your wholesale price of $62.50 and multiply that by 2.2 which is an average store mark up. So $62.50 x 2.2 = $137.50 and your retail price will be $137.50.
The reason the cost is marked up 2.5 is to cover your overhead! This includes your sales reps commission, marketing, reordering product and your salary! If your product is coming out REALLY well priced and you feel you can sell it for more than 2.5 x cost then GO FOR IT!
So now you’ve used this formula and may have found that your products are not priced correctly. So what can you do? Well there is one quick fix – and some longer terms ones.
- Quick fix: Change price to reflect the correct one.
- Go back to the drawing board and see where you can cut costs. Maybe your materials are too expensive or you need to cut down on labor. You may need to research different materials, better sources, or perhaps move your production overseas to meet the price you want. Perhaps if you make sterling silver jewelry you can move to silver plate if it’s going to help you meet your desired price point. All is NOT lost here. There is always a solution.
- Ask your manufacturer for some advice too. They may be able to suggest ways to cut down on the labor costs. Sometimes simple things like changing the size can have a big impact on price if it does not affect the end result that you like so much. Try to be OPEN to change. Sometimes the change turns our to be better. It has happened to me countless times!
I hope this costing information helps keep you on track and PROFITABLE – we all want to make money doing what we love.