Piggybacking off our maker revolution post, let’s go more in-depth into product pricing and the different methods you can use to create a viable business while keeping all your customers happy in the process.
If you’ve registered for MoDA Market, then you would have already been advised on your pricing methods; if not you’ll want to start reevaluating current pricing to make sure you have both wholesale-friendly and retail-friendly prices for your current collections. This year the market will host more international buyers, which means you’ll be introduced to amazing profit opportunities. But as we’ve already discussed, only those makers that are prepared will reap the benefits! So let’s get into how you can be buyer-ready and confidently answer any questions they may throw your way….
The first thing to consider when it comes to pricing your products is what it costs you to make each product. When it comes to your production costs you need to consider every detail and effort that contributed to the production of the final product i.e:
Material Costs - raw materials and finished goods, packaging
Labour Costs - how much do you think you (or any staff) should be paid based on the quality of the final product and amount of time invested.
To figure out your production cost per unit divide your total costs (material + labour) by the amount of items produced.
In addition to your production costs, you should also include your operational costs or expenses (what it costs you to keep the business running and enables production):
Operational Costs - transportation costs (how much do you spend on travel to get those unique materials?), rental costs (do you rent a workshop or workspace to get your work done?) storage costs (do you have to pay for a space to store your materials?), etc.
To figure out your operational cost per unit divide your total costs by the amount of items produced.
So your overall costs can be calculated by:
Adding your production cost per unit to your operational cost per unit.
Now that you know the costs involved in making your products, you are in a better position to price your products beneficially...
The next step is to figure out how much you’ll make from the sale of each product by looking at your profit margin. Wholesalers expect deep discounts when they are purchasing your products and can you blame them? They’re buying your products in bulk and have to profit too to sustain their businesses.
So the question is: How can you make them happy without lowering your prices too much to the point where it hurts your business?
First you need to reevaluate your current prices.
Let’s break it down:
1. Look at the prices your products currently retail at (or you’d like them to retail at).
2. Then consider the cost per unit.
3. Subtract the cost price from the selling price.
This will give you your current profit, which you can use to calculate your profit margin.
If you make makeup pouches and are currently selling them at $2000 per pouch and it costs you $800 to make one, your profit would be $1200. Which makes your profit margin 150% (Total profit/ Total Cost x 100 : 1200/800 x 100).
But what happens when a wholesaler comes into the mix? Let’s see what happens to your profit margin if you go the “I’ll give you 50% off my retail price” route...
Wholesale price= $1000 (i.e. 50% of 2000) and Cost Price= $800, so Profit= $200. Which makes your profit margin 25%.
Not as sustainable right?
To arrive at a good wholesale price, focus on calculating it based on your costs instead of your current retail price. The easiest formula you can use is:
Wholesale price per unit = (Total Costs per unit) x2
This automatically guarantees a profit margin of at least 100%, covers all your costs and leaves room to protect your business should any unforeseen expenses or problems arise. Let’s revisit the above example with your new method:
Makeup Pouch Cost Price: $800, Wholesale Price: $1600. So your profit= $800, which makes your profit margin 100%.
By knowing how to calculate your wholesale price, you can now have a better idea of how much your products retail for. Typically (may differ based on your industry), a product’s retail price is 4-6x it’s wholesale price. So those makeup pouches could retail anywhere between $6400-$9600. And Yes! People will pay if your product is quality.
Don’t be afraid to price your products for what they are worth, people will always pay once they believe in the brand and the quality products it delivers. I’ll leave you with a tip:
Engage your customers every step of the way. If you’re ever uncertain about your product prices, engaging them will give you insights into how valuable your product is and how you can improve it; allowing you to make any necessary changes so that you can be confident in your prices.
Written by: Noelle Black