Now that you’ve had a chance to digest Part 1 of the “Pricing Your Products for Profit” series, do you have any questions? If you do, hold off until you finish this post. This Part 2 might answer your questions. But if you still have questions afterwards, leave them in comments and we can continue the discussion.
OK, where were we? The definition of terms. Right.
But first, let’s jot down these two pricing formulas we’ll be working with today.
[Material Cost (MC) + Labor Cost (LC) + Overhead (OH) + Profit] X 2.5 = Wholesale Price (WP)
Then,
Wholesale Price (WP) x 2 = Manufacturer’s Suggested Retail Price (MSRP or RP)
*For this post, instead of MSRP, I’ll be using Retail Price (RP) for short.
We covered the following two terms yesterday. For more detailed explanation, check out the post here.
1. Material Cost (MC) is any cost for supplies or materials (new or used) you use to make your products.
2. Labor Cost (LC) is salary(ies) your business incurs in employing its workers to make the item. So figure out what salary you want to be paid, divide that by number of items you can make within a certain period and you’ll find the labor cost per item. If you hire someone to help you, make sure to add that in too. For this exercise, we’ve determined that your LC for the necklace is $48 from the last post. That’s if you want to make $24 an hour. Remember, you can always adjust this amount, depending on how much you want to make as your salary.
Now, on to the next terms and how to put plug them into the {easy} pricing formula.
But first, my personal case story.
Herban Crafts Case Story
I own a shop called Herban Crafts with a friend. (Yes, I wear many hats.) Herban Crafts sells eco-friendly DIY kits. Currently we carry organic health and beauty products but will be adding other types of sustainable crafting kits to the line. Recently, a store in CA approached me for a Line Sheet – a sheet that lists all the products’ info that retailers work with when ordering from wholesalers. Usually, I like to talk to reps directly rather than via emails so I called her on the phone. She was very pleasant and when I asked her how she found my shop, she said she searched on Etsy for “DIY kits”. I ‘sold’ my line over the phone, describing what they are and what our company’s ethos are. She LOVED it. She couldn’t stop complimenting on how great she thought our products would be in her shop. Her excitement made my heart swell. So I emailed her the line sheet while imagining a pretty display of stacked boxes of the kits in her shop, selling out like hot cakes.
Organic Lip Balm Kit
After she received the line sheet, she asked for a discount. My heart sank. At that time, our price for the kit was $34.99 per kit and 40% off for wholesale. She said, she would have to charge a higher retail price than ours and she’d be competing with our price. I agreed. I should have known to set our retail price at same or higher than a retail business if we were going to offer wholesale. So, instead of giving her the discount she wanted, I raised the retail price to $39.50 and wholesale price at $20 – per our pricing formula. And I explained to her that she was right and that we raised our retail price so we won’t be competing against her. But she relented on the discount. And the next part is what got me. She said, “Other Etsy sellers negotiate their prices and she can find cheaper products on Etsy.” Her belief that Etsy sellers are known to be “cheap and willing to negotiate” below what their true values are really spoke volume. But I didn’t want her to think that we were ‘those’ Etsy sellers. I stayed my ground and didn’t budge from my wholesale price.
And she went on to say that her customers wouldn’t buy DIY kits at that price. While I really wanted to make a sale, I also did not want to lower our products’ value. I told her that, if her customers would’t buy kits at this price, then, her customers are not our target customers.
Soon after that disappointing conversations, we were approached by huge online giant retailer UnCommonGoods and Green Bride Guide to carry our line at $39.50 without flinching at the price. And this week, we were approached by a huge, ‘ginormous’ print style/fashion magazine to be included in their holiday gift guide.
Moral of the story? Stay true to your values. If you believe in your worth, others will recognize it and respect it. If one type of a customer is not a good fit, there are billion others that are.
Ok, on to the next terms. Boy, this is going to be a long post.
What do these terms mean?
Overhead
Overhead is any expenses that cost you to run your business, besides material and labor costs. These include, but not limited to, your studio/office rent, utilities, phone bill, membership fees, listing fees, PayPal fees, website hosting fees (if you blog or have a separate eCommerce site), advertisements, marketing, office supplies, etc…
If you have a home business/studio, you might be able to pay rent, electricity usage, phone line, internet connection, etc. to yourself, as your business’s overhead. But check with your accountant to see what portion can be used as your business expense, if at all. Each state’s law and your tax structure will depend on what can be used as business expense. So be sure to check with your accountant if you have a home based business.
You can calculate the overhead per piece by determining how much you pay a month on the average, then dividing the total amount by how many pieces you make in a month. In other words, if your monthly overhead is $200 and you can make 80 necklaces a month, that means the overhead is $2.50 per necklace.
Profit
How much profit do you want your business to make? How much are you planning to put aside as its profit before you put everything you make back into the business? If you are not ready to set aside something for profit, you can adjust this amount but don’t ignore it. Even if it’s just 10%, I’d suggest building this amount into your price. You can always adjust the amount later when you see it fit.
Vintage Cash Register
Image used with permission via Jade Eye Photography
Wholesale Price
Ok, now you are ready to plug in the numbers to determine your Wholesale Price. That’s right, the first price you are going to calculate is the Wholesale Price. Why? Let me explain.
More often than not, retail shops cruise Etsy to find that unique handmade item to carry in their shops. Then, they will ask the Etsy Shop owner for the “Wholesale Price” so they can buy from you to sell in their stores. So if you list your necklace at $50, they will automatically assume that your wholesale price is $25 because they want to make a keystone – double the markup from the wholesale price.
Now, I know what you are thinking. “But, I don’t want to deal with retailers and sell wholesale! Why do I need to find out what my wholesale price is?” Great question!
And the answer is – you are a retailer – a retailer of your own goods! So you see, when you are a retailer, your Wholesale Price is part of your total cost. So you need to find out what your wholesale price is also. Are you with me so far?
So using the above formula,
[Material Cost (MC) + Labor Cost (LC) + Overhead (OH) + Profit] X 2.5 = Wholesale Price (WP)
[$25 (materials to make one gold necklace) + $48 (LC) + $2.50 (from above) + $6.50 (approx 10% )] X 2.5 (Total Profit for the item + Misc cost) = $205 (Wholesale Price)
So, now you have your “wholesale price“. (This is the price you will put down on your “Line Sheet” - a information sheet of all your items with wholesale prices on it for retail businesses.)
But like I said, this is NOT your final sale price you use for your shop. You will use this price to determine your Suggested Retail Price and this is how you get that price.
Manufacturer’s Suggested Retail Price (MSRP) or Retail Price (RP)
Manufacturer’s Suggested Retail Price (SRP) or Retail Price (RP) is your final price for your item in your shop and to find that, you have to take the Wholesale Price and double it.
Wholesale Price (WP) x 2 = Manufacturer’s Suggested Retail Price (MSRP) or Retail Price (RP)
This formula is for a “keystone”, a 150% margin, 100% markup….whatever you want to call it, the formula for RP is to double your WP. You’d be surprised to know that some high end stores triple this markup. And after about 30 days, they reduce the price. Have you ever wonder how big stores can slash their prices at such big discounts sometimes? That’s because their original price was 3 times the wholesale price to begin with. And for their giant sales, they may lower the prices in half and still make a profit.
So, for the gold necklace in my example, your formula for RP is: $205 (WP) X 2 = $410.
The necklace pricing example used in this post is not from Peace of Indigo’s pricing structure. I just love her shop.
Rustic Recycled 22 Karat Gold Necklace
Image used with permission via Peaces of Indigo
Are you gasping for air? I thought so. I bet you didn’t think you could charge that much!
Oh, but you can.
What do these numbers mean?
I know pricing your items is hard. And I bet, after using this pricing formula to arrive at your real retail price, you are shocked. I bet you are saying, “Is she crazy? I can’t charge that much for my products!” I can hear you cringing. But let me ask you. What number in the formula doesn’t make sense to you? The material cost? The overhead? Your salary? When you wrote down the actual cost of doing business and getting paid for your work, the overhead and the material cost are inevitable, right? How about your salary? Doesn’t it make sense that you get paid for your work by paying yourself a salary? Why would you want to work so hard and make NO money? In all the start ups and entrepreneur books you read, they will all tell you that you have to pay yourself first. If you don’t, you’ll lose your passion, your drive, and your sense of worth. You’ll burn out and won’t be able to sustain your business.
And, let’s look at the term “Profit” and multiplying factor of “2.5″. Don’t you want your business to make a profit so it can sustain itself? You need to continue to buy supplies and cover overhead, right? How will you obtain the funds to do that without making a profit? Your business has to be a self sustaining operation, without having to put IN money. Without impinging on payroll for your employees, including you. If you can’t demand the prices to cover these expenses, then, you have to re-evaluate your business and see where you can adjust the numbers.
What is your product really worth?
Your product’s worth depends on many things but first and foremost, YOU have to determine its worth. You determine the value of your creativity and creating the perception of how much it’s worth. I heard one of the Etsy admins speak repeatedly, how she sold more when she raised her prices. She used to work many hours to make her products and listed them at “reasonable” prices, thinking, that’s how much they were worth. But it turns out, she didn’t value her items as much as some of her customers did because when she raised her prices “by accident” one day, the sales skyrocketed. When that happened, she made more money working fewer hours than when her products were priced lower. Why did that happen?
Because her customers saw ‘value’ in her products more when they cost more. They assumed that higher price meant it was more special and that was ‘worth’ more for them. Lower prices literally cheapen the perceived value of the items.
Along the same line, here is one of my favorite quotes on pricing by a best selling author and a serial (and entertaining) entrepreneur, Marie Forleo.
Generally speaking, people assume that if something cost more, that it’s better” ~Marie Forleo
I know that might not be true on everything but like the quote implies, in general, we tend to believe that you get what you paid for. Isn’t that right?
Watch this video by Marie on why you should raise your price, especially when you want to grow.
Here are some more videos on pricing from Marie. Although some of the situations portrayed are not retail businesses, the theory behind is spot on for any businesses.
1. Pricing Sweet Spot – what is your sweet price for your product?
2. How to Raise Prices – how to approach raising prices for your products.
Is there an easier way to calculate pricing?
I’m glad you asked because we live in the 21st century and we shouldn’t have to use calculators, right? LOL. Actually, there is a website that you can just plug in your numbers for it to calculate the prices for you automatically. How. easy. is. that? Just hover over the plus sign in the field and the info about it will appear in a line above.
But first, use this page to calculate your fees – PayPal and Etsy fees, to be specific, so you can find out your fees for the retail price. IGNORE the rest of the fields as they DO NOT include ALL your costs.
Then, use this page to find your pricing. Remember to leave the margin field at 150%. That means, your retail price will be doubled your wholesale price. You’ll have to figure out the “Make Cost” and include your overhead cost in that field.
Myra Roldan of Eco Etsy posted in detail about value system and her own calculator on “Pricing for Profit”. You can read about it here.
If you are the type to write down your prices on paper, here is a great Pricing Workbook you can download as a pdf file. It also asks some great questions for you to think about. some deep stuff…
So, are you ready now to make some money? Serious money? Sure you are! You deserve to make money and your customers deserve to own your unique handmade products to treasure them dearly.
We are worth it! And so are your customers!
If you found this article helpful, please share. I’m sure your friends would love to make more money and enjoy their fruits of labor too. You want to go back and read the Part 1? Here is the link.