How to Price a Product

Do you know how to price a product? I see so many people who under price because they think a low price sells a product. But that is the wrong strategy and you will find yourself in a business that makes no money.

This Pricing Strategy is All Wrong

The other day I saw someone who was selling a handmade necklace for $10, and it was quite a detailed design. Obviously, she is trying to compete with big retailers like Forever 21 and H&M who charge the same low price for necklaces such as these.

However, Forever 21 and H&M buy from wholesalers whose jewelry is made in factories with low wage workers, and due to the volume they create, these wholesalers can also get materials at ridiculously low prices.

Therefore, an indie designer will always have trouble competing in the low-priced market, if a lengthy amount of labor is involved in creating the product.

How to Price So You Make Money

If this is a handmade item, you have to take into account the labor involved when determining the price.

For example, if this necklace takes her one hour to make (and I am sure it does), then this means that she is essentially paying herself $10 an hour, less materials, less marketplace fees, less PayPal fees, less other business expenses, less shipping, less packaging and less other business tasks that take up her time (i.e. going to the post office to ship product, marketing her shop).

Therefore, if she ends up profiting $4 per hour and works an 8 hour day and a 5 day work week and a 50 week work year, then she is making approximately $8,000 a year, and this is the maximum annual income she will make.

Why is this the maximum? Because if it takes her an hour to make one necklace, then she cannot physically make more than 8 necklaces a day, so she cannot sell more than 8 necklaces a day, as you cannot sell more than you can make.

If she want to make more than $8,000 a year, she must do one or all of the following:

Raise her price.
Reduce the amount of time it takes to make a necklace.
Source less expensive materials.
Reduce other business expenditures.

Now I ask you – what is the maximum annual income you will earn from your business, based on this formula? If it is not what you want to make, you have to rethink your business model.

Same Pricing Model, If You Sell Services

It is the same thing if you offer services. If you want to make $500 a day offering graphic design services, for example, then you have to charge an hourly rate based on $500/8 hours = $62.50 an hour.

So if a graphic design will take you 2 hours to make, you will charge at least $125 for the job (because we are not including other expenses at this point) in order to make your goal of $500 a day. And that is not including communication with the customer and the time that takes up, as well as other non-revenue generating business tasks.

Plus, you also have to try and get enough jobs for one day to make up all 8 hours. There will be days when you don’t fill up all 8 hours with design requests, so you may want to factor that into your price as well.

You have to make money! That is the whole point of being in business. You don’t want to find out at the end of the year, when you are doing your taxes, that your annual income did not justify the amount of time and effort you put into your business. Make sure your business model works!