Deciding how much to charge for your creative products can seem like algebra, calculus and black magic all in one. However there are a few simple steps to take that make sure you don't lose money on your sales. Once you have these basics right, you have a solid foundation on which to build emotion into your prices.
First, make sure you understand the difference between a markup and a margin. They are NOT the same!
A 50% retail markup on a $100 wholesale item, means a $150 retail price. Whereas a 50% retail margin on a $100 wholesale item, means a $200 retail price. Why the difference?
Here's the math:
A 50% markup on a $100 wholesale item, means a $150 retail price because: $100 x (1 + 50%) = $150.
A 50% margin on a $100 wholesale item, means a $200 retail price because: $100 / (1 - 50%) = $200.
And even more math:
A 70% markup on a $100 wholesale item, means a $170 retail price because: $100 x (1 + 70%) = $170.
A 70% margin on a $100 wholesale item, means a $333 retail price because: $100 / (1 - 70%) = $333.
This means a 50% margin is the same as a 100% markup - see here:
A 100% markup: $100 x (1 + 100%) = $200.
A 50% margin: $100 / (1 - 50%) = $200.
Each term works fine, you just have to make sure you and your customers/retailers are using the same lingo!
How do you price your products?
There are 3 key components to this:
1. Your cost price. This is the sum of all the cash costs that go into making each product. This is relatively easy to work out.
2. Your wholesale price. This is your cost price + the amount you want to earn for your idea and your time spent on your product. This 'creative fee' is the toughest part to work out. But more about that soon.
3. Your retail price. This is your wholesale price + the retail margin. This is typically quite easy to work out too - see more below.
Calculating your cost price
This part is easy, which is convenient because it's the most important. That's because it's easy to measure the cold hard cash you spend on making your product.
When you make an example 'thingy', here are the components of your cost price (assuming 1 flatpack / self assembly product):
Making cost $18
Materials cost $7 S
shipping cost $5
Extra parts cost $2
Self assembly instructions cost $1
Packaging cost $1
Misc $1
Your cost price $35
Whatever you do, do not sell to anyone under this price! The exception of course is if you're doing it consciously and are willing to pay the cost for a good reason (EG - giving a sample at cost to help promote your product or giving a gift to a friend).
But what if you want to earn a little bit of a profit on top of this?
Calculating your wholesale price
Setting your creative fee (or wholesale margin) is where a whole lot of emotion can come into it. You need to ask yourself: Is my brand strong enough to demand a large creative fee? Or, am I just starting out with this product and I want to get some early runs on the board?
If it's the latter you should be looking to earn at least a 10% wholesale margin. Up to 30% is generally acceptable. And while 40% is getting up there a little, anything beyond that you'd save for your subsequent products once you've built your reputation a bit more. A 50% margin is great, and a 70% margin is super!
So given my cost price (above) is $35 and I decide to earn a 30% wholesale margin, this means my wholesale price is:
Your cost price $35
Your creative fee (30%) $15
Your wholesale price $50
Here's the math again:
[$35 / (1 - 30%)] - $35 = $15.
This means that whenever you or anyone else sells your product you will always earn a profit of $15.
You may be now thinking about all the hours you spent making the product - $15 may not seem like heaps to starts with, so you'll need to either sell 500 asap to cover your time, or... add a retail margin to your product and selling direct at a higher price.
Calculating your retail price
While there is some emotion involved here, a really good starting point is a 50% retail margin (aka, a 100% markup on your wholesale price).
This margin is decided by the % almost any retail shop will be happy to sell your stuff. Some strong stores might demand more, particularly if they feel you have set your wholesale price too high (by over inflating your creative fee). But if you have a hot selling item, you might be able to convince retailers to take something less than 50% - which is essentially the same as increasing your creative fee and hence your wholesale price. But that's the territory for strong brands. Or cheeky producers. Or both.
The best thing about setting your retail price at a 50% retail margin means that when a retailer comes knocking and asks for your wholesale price is the simplicity - you can say ''I'll go 50:50 with you' or 'you can buy from me at half price' to any retailer. The retailer then gets a great deal that is hard to argue with. And you are secure because you know that even though you will not be selling at your retail price, you will still be earning your creative fee ($15) over and above your costs for every product the retailer buys (and/or sells).
The really great thing about this 50% retail margin is that it's not just retailers who get to sell at this price - you can sell direct at retail price and collect both the retail margin and the wholesale margin / creative fee (a total of $65 in this example). Look at your profits!
Here's how it works out:
Your wholesale price $50
Your retail fee (50%) $50
Your retail price $100
Here's how I got the retail fee:
[$50 / (1 - 50%)] - $50 = $50.
This means that whenever you sell your product direct at retail you will collect a profit of $65 (your creative fee + your retail fee). You'll therefore recoup your labour costs much quickers.
To put it more simply, here's how to set your wholesale and retail prices:
1. Calculate your cost price = all cash costs.
2. Calculate your wholesale price = your cost price + your creative fee
3. Calculate your retail price = your wholesale price + your retail margin
Making cost $18
materials cost $7
shipping cost $5
Extra parts cost $2
Self assembly instructions cost $1
Packaging cost $1
Misc $1
Your cost price $35
Your creative fee (30%) $15
Your wholesale price $50
Your retail fee (50%) $50
Your retail price $100
Now that we've cleared all that up, you should know that this isn't the only way to price your products! Maybe your costs are much lower and the value of the goods much higher - your figures will be different. This is however a pretty great starting point for your new sales hobby.
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