Tag: pricing strategy

A Quick Pricing Strategy Check

May 22, 2020 / Gail Oliver, Online Small Business Consultant

by Gail Oliver, Online Marketing Consultant

How long does it take you to make a product or execute a service? So many people leave their labor cost out of the price, and you need to determine this otherwise you will be working very hard to make little money.

Example of a Poorly Priced Product

For example, I’ll never forget this young girl who was making dog leashes and selling them for $10. She was knitting the leash and said it took her two hours to make one. Can you see right away why this is a terrible pricing model?

If it takes her two hours to make one $10 leash, she is essentially paying herself $5 an hour less the cost of materials, selling fees, free shipping, packaging and other business expenses. Does it seem worth it? Surprisingly, it was not that obvious to her.

The Most You Can Earn in a Day

Now, another way to look at it, is if it takes her 2 hours to make 1 leash, and she wants to work an 8-hour day, then the most leashes she can make in one day is 4. This also means that the most leashes she can sell in one day is 4, as you can’t sell more in a day than you can make.

Therefore, the most she can gross in one day = 4 x $10 = $40, and again, this is GROSS not NET.

If you are the sole source of labor for your product or service, you have to factor your labor cost into consideration when determining your price. If your labor costs knock you out of being competitively priced, then this might not be the business for you.

Work Backwards When Pricing

Try working backwards to determine your price. For example if:

Your goal is to earn $40 an hour
Your product takes you one hour to make
Your total costs per unit are $10

Then you will want to price the product at at least $50. Then ask yourself?

Is a $50 price competitive?
Does this price make sense for the product or service?
Does this price offer wiggle room for discounts and sales?

If you need more help with your pricing strategy, be sure to check out the pricing strategy and planning worksheets in my 60-page Strategic Business Planner.

Want to talk about your business? Try my very affordable one on one Phone Consultations.

Other Things to Know This Week

Shopify and Facebook announced the launch of Facebook Shops where shoppers will be able to find, browse, and buy products through Facebook and Instagram, with checkout powered by Shopify.
If you sell face masks, have you thought about targeting brick and mortar stores that are reopening, as some have stated that they will provide masks to both their staff and customers, if need be. I wonder if they will see it as an advertising opportunity to have their brand on the mask? Is that a value added service face mask makers should offer?
Even Vogue says face masks will be the hot fashion trend of the summer.
Online daily sales for pajamas increased 49% in April, due to people working from home. The major fashion retailers have picked up on this trend and are offering pajama-style fashions, like this silky outfit from Zara.
I love how online stores like Old Navy, Nordstrom, Modcloth now have shop sections entitled, “Cozy at Home”, “All Day Comfort”, “Get Fit at Home”, “Self Care Shop” and “Work from Home”, zeroing in on people’s needs right now.

Have a great week!

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!