by Sara Tams, sarah + abraham
It seems like it’s been a while since we last talked about product pricing here at OMHG. Setting prices is something that I get asked about a lot by friends who are starting up small businesses. This is my advice…
First, take a good look at the cost of the supplies that go into a product. Make sure you don’t leave anything out. If you order supplies online, be sure to include the costs you pay for shipping and taxes when calculating the cost of supplies per order.
Next, estimate the time that it takes you to complete an order from start to finish and multiply that by an hourly rate that you’d be happy to earn or that you would need to pay someone to fill orders for you (be sure to include payroll taxes and payroll processing fees if you’ll be paying an employee or if you might in the future). For example, my payroll taxes and ADP fees add up to about 21% of the hourly rate that I pay my part-time employee.
Once you’ve determined the cost of supplies and labor, you’ll need to add in an amount for profit. I think most people generally double their costs for a 50% profit margin. This step is important for a couple of reasons. First, you’re going to have overhead costs that will come out of this profit margin (ex. computer equipment, office supplies, tax preparation fees, etc.) Second, if you don’t have a healthy profit margin, you’ll never be able to offer special discounts to boost sales when needed, or if you do, you’ll be losing money on those orders.
Next, you’ll want to determine what your costs of selling will be, for example, Etsy fees and/or PayPal fees. These are usually a fixed percentage and easy to calculate. This will help you determine what your actual profit will be after you’ve sold the item.
Finally, you’ll want to take a look at how the price you’ve come up with compares with the prices of similar products being sold by your competitors and what the customers in your target demographic will expect to pay for the product you’re offering. If your price is much lower than your competitors’ prices, customers may get the impression that your product is inferior in some way. If your price is much higher, you may need to take a closer look at the cost of your supplies, how efficient your order fulfillment process is, or the options that you’re offering.
DO NOT simply lower your price to match your competitors’ prices without finding ways to lower your costs. If you sell your products at too low a price you won’t earn enough income to sustain your business.
As an example, let’s take a look at what the pricing might be for a set of note cards:
Card stock/ink ($0.70) + Envelopes ($1.95) + Cello Sleeve ($0.05) + Labor ($5.00) = $7.70
If you set the price at $19.50, the PayPal fee will be $1.20, and your profit will be $10.85 (56%).
If you’re having a slow month and you decide to offer a 25% discount to boost sales, the discounted price will be $14.63, and you’ll still have a profit of $6.21 (42%).
As for shipping, when I started selling on Etsy I packaged and weighed all of the products that I offered and calculated what the shipping costs would be, and that’s what I charged. Over time I was able to calculate an average shipping cost per order, so now I charge a flat shipping rate ($4.95 per order) that covers my postage costs, packaging materials, and occasional trips to the post office or UPS.
This method of pricing has sometimes resulted in product prices that seem way too high to me, but the products have sold really well. Or sometimes I wonder if the price is too low, but I have a healthy profit margin and the product is selling well, so I leave it. It’s not an exact science – the true test of your pricing will be how your customers respond to it and whether your business provides income that you’re happy with.
If you have any differing thoughts on pricing strategy, if you’d like to share anything that I’ve left out, or if you have any questions, please leave a comment below!