Tag: how to price a product

How to Price a Product

September 12, 2013 / Gail Oliver, Online Small Business Consultant

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!

Be Sure to Check Out

When Pricing Products Too Low Can Actually Prevent the Sale

September 9, 2013 / Gail Oliver, Online Small Business Consultant

Did you realize that pricing products too low can actually prevent the sale?

Over and over again, the most common question I get asked is how to price a product, or should be lower their prices because no one is buying. But it is not that simple.

Pricing Mistake Made By This Small Business Owner

The other day I was reading how a small business owner was wondering if the price of her handmade dog leashes seemed reasonable. She was selling them for $7 and said that it takes her one hour to make one leash. Right there, that sentence should have been enough to tell her “NO!”. As I have stated many times on my blog, you have to factor in your hourly wage if you are producing your products, otherwise you are making no money.

If the dog leash takes her 1 hour to make, then she is essentially paying herself $7 an hour less material costs, less PayPal fees, less the fees of her online marketplace, less other business expenses. I’m guessing, but I would think that leaves her making around $4.50 an hour. This is not even minimum wage. So, in other words, her pricing is way off the mark.

She is under the assumption that her product has to be cheap in order to sell, but that is not why people buy.

If you ask someone why they bought a dog leash, they will typically answer:

It was durable
It was long lasting
It was the right length
It could be easily retracted

In fact, Google search shows people are looking for a “dog leash that”:

Stops pulling
Doesn’t tangle
Floats
Won’t break
Can’t be chewed through

By pricing the leash so cheaply, she is actually hurting the prospect of sales because potential customers probably looked at the price and thought a $7 leash would not last long. If she simply changed the price to $20, which is in line with most competitive products anyway, and instead touted the problem solving benefits of the leash, she would not only sell more, but she would actually make money. What a concept!

FINAL WORD: People don’t buy things because they are cheap, they buy things because they solve a problem. You have to price your products to make a profit, otherwise why be in business?

About Me

Do you need your Brand Story written or an SEO-Optimized Blog Post or a Personalized Business Consultation? As a 20+ year marketing professional and small business consultant, all of my services are super affordable.

I have consulted for thousands of small businesses since 2012, and my advice has been featured in the NY Times, Success Magazine, Yahoo Business, American Express, Big Commerce, Business2Community to name a few – so this is professional advice you can trust!

My Publicity Pitch service has also gotten my clients featured in Real Simple Magazine, Apartment Therapy, House Beautiful, Vanity Fair, Houzz, Martha Stewart, Glamour Magazine, LONNY, DesignMilk, Emmaline Bride,– just to name a few.

How to Factor Your Labor into Your Prices So You Actually Make Money

May 10, 2013 / Gail Oliver, Online Small Business Consultant

Do you need to understand a Direct Labor Cost Formula?

Pricing is a critical component of marketing. So before you start envying the volume of unit or dollar sales another business is getting, you have to remember, selling a large quantity doesn’t always translate into large profits. It could be that someone is working really hard to make very little money.

The biggest mistake most online shops make is not truly taking into account the value of their labor. So before you set the price for your products, you have to understand your labor cost and what you want to pay yourself in terms of an hourly wage.

Direct Labor Cost Formula

Let’s say that you are a one-person operation and you are making iPhone covers. You decide you want to undercut everyone else in the market and charge $15 each.

Labor – If it takes you 20 minutes to produce one iPhone cover, that means you can make 3 in an hour. If you are selling each for $15, then you are essentially paying yourself $45 an hour (3 x $15). So that’s about $79,000 a year based on a 35-hour work week, and a 50-week year. But wait. This is not your true hourly wage.

Materials – Now you have to deduct your materials. Let’s say that a plain case is wholesale $1.80 each including tax. Then there is the printing charge, let’s say .40 each. You have to get it to the customer, so even if you charge for shipping, you still have packaging costs, let’s say .30 each. So the grand total for 3 iPhone cases is $7.50. These are fixed costs. In other words, no matter what price you charge, these costs stay the same.

Selling Fees – If you are selling on an online marketplace like Etsy, you now have to deduct your fees ($.95). So for the three iPhone cases that would be $2.85 total. These costs are variable, so they go down when your price goes down, and up when your price goes up.

Ok, so now your hourly wage is down to $34.65 per hour, which is $69,300 per year in theory, if you sell 24 iPhone cases a day, 5 days a week, 50 weeks a year.

Other Expenses – But what about other business expenses? Gas to drive to the printer and the post office, packaging costs, shipping materials, bank fees, business taxes, Internet use, advertising costs. You have to factor all of these costs in as well.

Now, obviously you do have to stay in line with your competition, so you can’t charge twice what they are for the exact same product, same materials, same delivery and so forth.

So, before you set your prices, start with your desired hourly wage and work backwards from there.

If you cannot come up with a pricing model that is also a viable business model, then it is not worth doing.

Can You Believe This Seller Didn’t Price for Her Labor

I’ll never forget the seller who was knitting dog leashes. She indicated that one dog leash would take her 2 hours to make and she wanted to sell the leashes for $10 each. I tried to tell her that this was a terrible business model but she just didn’t get it. So I tried to explain it another way.

I told her that if it takes 2 hours to knit one dog leash, then likely the MOST dog leashes she can make in one day is 4 (and that’s based on a 8-hour workday). If you can only make 4 leashes a day, then you can only sell 4 leashes a day because you cannot sell more than you can physically make.

Therefore, the MOST her business could ever make in one day is four leashes at $10 each = $40 gross (we still haven’t deducted any costs). Now, does it still seem like a good business idea?

Need Help with Your Business?

If you do not know how to market your business or are not making sales, ask me a question at attentiongetting@gmail.com or check out my Consulting Services and my Store.