Have you ever wondered the following:
-What should I charge for my product?
-Is my product price competitive?
-How can I make money with the things I love?
-How do I make my hobby profitable?
If yes, then this article will be just for you! Let's get into the four easy steps to determine your pricing.
Step 1: Determine Your Costs
Before you can price your products, you have to understand all the costs associated with buying and selling them, as well as other costs associated with running your business. This will give you an idea of the expenses that your sales have to cover—in other words, how much money your product sales need to generate.
In general, retail costs fall under two categories–cost of goods sold (COGS) and fixed costs.
The first thing you need to find when pricing your products is the cost of goods sold. COGS comprises all the costs associated with the manufacturing of a product or the buying and selling of already-made products. For a retail business, COGS are your variable costs.
If you buy products from trade shows or online, your COGS are straightforward. They are simply the amount you paid for your product, including its purchase price and all shipping fees. If you manufacture products, your COGS include a few more variables: labor costs, production time, material costs, and overhead expenses.
Also known as indirect costs, fixed costs are expenses not directly associated with the product that stay the same no matter how much you sell. It is important to have a handle on your fixed costs, as these are typically a large portion of your business expenses.
Examples of fixed costs include:
Step 2: Set Your Prices Using a Pricing Strategy
Once you have a grasp on your outgoing expenses, it is time to get into the weeds and start actually pricing your products. You will typically begin with a pricing strategy. Pricing strategies create a uniform approach to pricing each of your products and can help ensure that your prices are fair, consistent, and profitable.
When selecting a pricing strategy, you will want to take into account a few factors that might affect demand and pricing for your specific situation.
Industry standards (ensuring that your prices are competitive for your particular space)
Legal regulations (are there certain prices or ranges you must adhere to?)
Net and gross margins
Local purchasing power
Brand positioning (luxury, bargain, etc.)
For example, a store that sells T-shirts in a middle-class neighborhood might price their tees at $25 based on their pricing strategy. Whereas, a similar store that sells the same T-shirts in a wealthy area might add a couple of dollars to their prices, and sell them at $35. Because of the different locational factors affecting these stores, both stores will likely be able to sell their shirts with similar success. Not only that, but because the two stores’ fixed costs are likely different, they will probably result in similar net profits.
Step 3: Calculate Your Gross & Net Profit Margin
Once you have set your prices, it’s time to determine the next variables: your profit margins—gross and net.
Gross Profit Margin
Your gross profit margin is the amount by which the selling price of an item exceeds its COGS, expressed as a percent. It is a great gauge to see if your prices fall in a reasonable range and will give you a better idea of your pricing’s consistency as wholesale or manufacturing costs change.
Gross Profit Margin = (price – COGS)/price
Taking an example, at a common boutique, we would buy tank tops for $7 and then sell them for $14. The gross profit margin of these tanks was:
Gross Profit Margin = ($14 – $7)/$14 Gross Profit Margin = $7/$14 Gross Profit Margin = 0.5 (50%)
Net Profit Margin Calculator
Net Profit Margin = (total sales revenue – (COGS + fixed costs))/total sales revenue
Taking an example, let’s say my boutique has sales revenue of $36,000 for the month. Each month, fixed costs are $13,000 and the COGS for the items sold was $19,000.
Net Profit Margin = ($36,000 – ($19,000 + $13,000))/$36,000 Net Profit Margin = ($36,000 – $32,000)/$36,000 Net Profit Margin = $4,000/$36,000 Net Profit Margin = 0.11 (11%)
Step 4: Monitor & Adjust
The steps covered above offer sound guidance on how to price a product. But, once set, you have to ensure your pricing covers expenses and leaves you some profit to fuel growth. You will need to monitor your results going forward and adjust as necessary.
If, after running numbers, you find you’re operating at a loss, you may simply need to raise prices, particularly on your hottest sellers, or work to lower costs. Or you may delve deeper into pricing strategies, such as anchor pricing (displaying a higher initial price next to your current price to make your product appear less expensive) or loss-leader pricing (selling some items for less or even at a loss to get customers into your store).
Your pricing strategies will evolve over time as your work to maximize success.