Pricing for Success
A few months ago I read a very interesting article written by Maggie Whittey from GusseySews,com. The article, titled “Handmade Business in 31 days” covers a few great points business owners may sometimes neglect. Specifically, the author poses a few key factors we need to know to accurately price handmade items (or services for that matter):
What is the cost per material item? {calculated down to the exact amount of material you use}
How much time does it take to make a finished item? {account for each step of the process}
What is the rate of pay to make a finished item? {include all positions/process steps; will you pay per hour worked or per finished task/piece}
What kind of profit* % must you make to remain a sustainable business?
What kind of overhead costs do you have? {your salary, accounting costs, newsletter subscriber fees, site hosting fees, basic office supplies, travel costs, site design fees, giveaways/donations, rent/utilities + more}
I have highlighted the last bullet point, overhead, as this expense is often neglected by many small business owners. Overhead accounts for many of the day to day expenses our business incurs directly or indirectly. For example, home business owners running online stores at marketplaces such as Etsy.com or ebay have to update their pictures, post listings, share content on social media, write blogs, etc. Most ‘typical’ businesses typically charge this activity to overhead. It is my experience, gathered through networking with other vendors, business owners, and artisans, that truly small home-based business owners often neglect to include this expense into their pricing model.
An article titled “How To Price Product Overhead” written by Michael Baton Kapput discusses some steps for pricing overhead adequately. While Maggie’s article specifically aims at home businesses, Michael’s article discusses your typical brick and mortar businesses. But please make no mistake about it, both articles share information vital and relatable in most businesses.
The following sample calculation should help you grasp the concept of cost-plus pricing:
| Cost of materials | $50.00 |
| + Cost of labor | 30.00 |
|
+ Overhead
|
40.00
|
| = Total cost | $120.00 |
| + Desired profit (20% on sales) | 30.00 |
| = Required sale price | $150.00 |
Source: Entrepreneur.com, Pricing a Product
Failing to account for overhead costs leads to misidentifying the true costs of doing business. Failing to understand one’s true expenses can lead to a miscounting of profits. As such, a business venture may prove to be non-sustainable and unprofitable.
I invite you to read Maggie’s article as it will provide you insightful information and formulas you can incorporate into your own pricing strategy. Additionally, check out my Pricing How-To Series for some more tools and tips.
I’d love to hear your comments and tips. Please comment below or contact me through twitter. I’d love to hear from you!