I was talking to a friend the other day about her business. We were talking about all the different factors to consider when you look at pricing your product. Some factors you might not think about at first. It reminded me of when I first started Snippykit Boutique and all the money mistakes I made when it came to pricing. There are a few things you have to take into account when deciding on your price point.
Know your market
Who are you selling to? Does the market you are marketing to pay for that price point? What is your competition selling for? Don’t compete with corporate stores. You aren’t corporate!! Look for businesses that are your size. When you figure out your competition decide whether to match or beat them. Price matching can be tricky. You’ll have to make sure all your costs are covered.
Work out your cost
If you purchase a the wholesale product for $5, you shouldn’t sell it to your customers for $5. There are other costs associated with selling product. Include all your direct costs, including money spent developing a product or service. Yes, that’s right. Figure in your time! Next you’ll want to calculate your variable and fixed costs. Your variable costs are like cost of good sold, materials, packaging, etc. Fixed costs are your overhead such as rent, wages, utilities, etc. Add all of these costs together and divide by volume to produce a unit break-even figure.
Pricing Technique: Profit Margins
There are so many different pricing techniques out there. You will need to figure out your profit margins. Some businesses do a flat rate, many do percentages, while others have a variable rate on each type of item.
So for instance if I wanted to make 20% off of my items on top of your other variable costs. When you’re choosing this percentage, it’s important to remember two things.
- You haven’t included your fixed costs yet, so you will have costs to cover beyond just your variable costs.
- You need to consider the market. Make sure that your price is still within the “acceptable” price for your market. If you’re 3 times the price of your competitor, you could have a hard time selling your product.
Once you’re ready to calculate a price, take your total variable costs, and divide them by 1 minus your desired profit margin, expressed as a decimal. For a 20% profit margin, that’s 0.2, so you’d divide your variable costs by 0.8. In this case, that gives you a base price of $17.85 for your product, which you can round up to $18.00. Make sense?
Stay on your toes
Pricing isn’t a decision you will only make once. Things change in business. They always do. Your wholesaler prices seldom stay fixed for long. Your costs, customers and competitors can change, so you will have to shift your prices to keep up with the market. My suggestions is to keep an eye on what’s going on. Stay in contact with your customers to make sure your prices remain optimal. Your best customers will be more than happy to talk to you about it.
Don’t feel bad about making a profit. You are serving and helping your customers through your business. Think of profit as an applause your customers give you. They are giving you tokens of their appreciation with president’s faces on them. They are excited and happy to give these to you. Own your success and profit. I think your success can help inspire other. When you are ashamed of making a profit it may come across as being ashamed of your success. Own it girl! You worked hard and should be proud of yourself.
Feeling a little overwhelmed? Don’t be. Just ask yourself, “How do you eat an elephant? One bite at a time.” You can do this. As always I’m here to answer any questions you might have.
Challenge: Figure out what products you want to sell and figure out your price point.
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