How To...PRICE Your Product For PROFIT

Craft Business Basics 3 - Price
Written by: Bookcave

This article is the third in a series of four articles that will guide you on how you can start your own crafts business using the four Ps of Marketing -Product, Place, Price and Promotion. What are the things you need to consider when pricing your product to ensure that your product is priced well enough to sell and well enough for you and all involved to earn well?

Pricing, as you might have experienced, is something many people struggle with. If you've already created your product, you'll know what I mean. When I first had to price my products, I checked out some marketing textbooks. They were unfortunately of little use to me, other than telling me there were different ways of pricing the products.

What are the 2 challenges of pricing?

1) Pricing at a level that attracts the buyers
2) Pricing at a level that maximizes profits while remaining attractive to the buyers

In certain businesses, the cost-plus method of pricing works very well, meaning you calculate your cost and add a certain percentage of profits. However, in the crafts business, this method, while being able to give you reasonable income, may not always be the best.

For example, the Harrod's bear and Paddington's bear don't cost much more to produce than a nameless toy bear, but they sell for so much more. If you were to simply apply the cost-plus method, can you imagine how much you'd have lost?

The difference here is the perceived value of the item. If you can make something look expensive or create something that people want, you can and should charge much higher than the cost. In pricing, you will have to look at your packaging and promotion so don't be pressured to price low simply because your material costs were low. However, if what you have is not unique then it may not be wise to put a high price tag on your product. Your customers may be willing to pay the price at the point of purchase but if they see a similar product selling much cheaper elsewhere, you may lose your credibility and the potential of repeat purchases from them.

If your craft item is not entirely new or you're just making a popular item to sell, it's easy to check the market price by visiting a few stores or checking the internet. An original product is trickier because it might involve some testing before you get the right price. Start by asking a few friends, especially those who share your interest in crafts. A better way would be to make a prototype and then take it to your friends and the gift and/or crafts stores and ask them how much they would be willing to pay for it or how much it can sell for. You should be able to get a pretty good idea.

Whether you want to use the cost-plus method or price at the market price, you'll need to have a very good idea of your cost. Failure to do so may result in you losing money instead of profiting from your crafts.

Here's a simple checklist to help you work out your cost.

1) Material cost

Make sure you list down everything, even things you are able to get for free now because you may have to pay for them later and that will affect your pricing. Furthermore, even free things need time and time is money.

2) Labour cost

If you're making them yourself, you need to ask yourself how much you're worth per hour then work from there. Suppose you make ten of an item in an hour and you want to pay yourself $20 per hour. The labour cost of each item would be $2.

Remember to include packaging time and even the time you need to travel to the post office.

3) Marketing cost

Depending on the sales channels you're using, the cost here will vary. If you're selling on the internet, you'll need to factor in your webhosting, domain name, design fees etc. If you're selling via catalogs or mail-orders, you must factor in your printing and shipping cost as well.

Also, if your product requires you to explain or clarify things on the phone, remember you need to factor in your phone bills and more importantly, the time you'll need to spend on the phone.

4) Your Profit

This is an area which many freelancers or work-from-home business people miss. It's alright to just earn your income based on your per hour worth but that would be a bad way of running a business. We need to remember we're running a business here and we need to treat a business as a business. This profit amount will make up for lower sales volume, increase cashflow for purchase of more materials and also fund your expansion. If we don't factor this in, we'll forever be stuck with the same pay. Even employees get raises right?

After you have included your material and labour cost, you should mark up another 20% to 30% or more as your profit margin. However, this only represents the minimum amount that you'll accept for your product. The next part will help you determine the cost you'll sell to different parties.

5) Distribution Channel Markup

For most product-based businesses, a product typically flows through the distribution channel in this fashion.

Manufacturer -> Distributor/Wholesaler -> Retailer

In between them, there may also be agents and if the products are sold to different states or different countries, there may be other local agents/distributors and the chain will get longer and longer.

What this means for you as you're pricing your product is you will need to ensure that you keep the retail price competitive and that the various parties get their fair share of profits at the same time.

Typically wholesalers will accept a lower markup than retailers because they work with higher volumes and because they need to ensure that the retailers have enough to earn. If you're just starting out, you can be your own distributor and go directly to the retailers. This allows you to earn more or give a greater markup to your retailers but because you or your staff will need to go to the stores, it will require greater effort on your part.

Retailers will as for a minimum of 20% to 30% markup for most products, depending on the products. I may be spoiler here but many products are marked up hundreds or thousands of percent. In my own store, I only retail products that I have at least 30% to 40% (usually more for craft products) unless the product is so popular that I can sell a lot more to justify the lower markup. With a healthy margin, I have some room to do promotions or clearance sales so even if the product doesn't do too well initially, I can do something about it without losing money.

It is very important to keep yourself focussed on your core competency and earn from that. Some people get greedy and try to do everything themselves and earn from every stage of the distribution channel. It may sound attractive but don't forget that to do everything, you will need to do a lot more work and you only have 24 hours a day.

To become a wholesaler requires a lot of running around from store to store. Retailing requires significant capital to startup. If you spend time on these, you will not have time to create your products. We all work with limited time so you will need to choose your business focus wisely. Ultimately, if you learn the power of leveraging then you will be able to create a company that controls the whole process. However, our focus here is about starting a home-based crafts business so that is out of the consideration for now.

The whole idea is to do very well in what you focus on and let the experts in the other areas help you succeed in the other areas. If you find that you are good in product distribution or retailing instead of craft-making, you might want to focus on those areas and source your products from others.

If we are able to implement the win-win thinking in our business, we should be able to at least do ok. At the end of the day, business is about making money. If your suppliers or distributors or retailers can earn well from your products because they move fast and they have high markup, you can rest assured they will put in that extra effort to promote your products. Some people try to save a few percent here and there and cut down on others' profits. While this might sound logical and prudent, it might work against you in the long-run because your distributors and retailers will gravitate towards whatever is making them the most money. If you are in doubt, err in favour of the distributors/retailers without compromising your minimum amount (see part 3 of this checklist) and you won't go wrong.

5) Check against the market

Lastly, you should always check your pricing against the market instead of just plucking a figure from the air. If it's an existing product, check your price against your competitors to see if your price is competitive. You don't have to be lower. In fact, try not to be lower because low price often indicates low quality as well. Don't compete on price. Compete on quality instead. You just have to ensure you're not so way off the market price that people would not even consider buying. Once you've gone through this thought process, I'm sure you'll be able to come up with a good price.

With the internet, it has become much easier to do price research. Just go to Ebay, Yahoo, Amazon, Froogle and other price-comparison sites and you will be able to get a good feel of the prices around. However, if you are going to sell in retail stores, do go and take a walk to check the prices because there can be a significant gap between the prices at brick-and-mortar retail stores and internet stores.

The last thing to note for pricing is that price is dynamic. The market is changing all the time and so does the price, especially for trend items. Evergreen items can afford to be priced the same for long periods of time because of a slower but steady demand. Trend items because of the demand can often start out with a very high price but as demand dwindles the prices will go down as well.

Did you find this article interesting and/or useful to you?