Although price usually depends on what the customer will pay (and is also part of your marketing strategy), you must consider it in the context of cost also. There’s little point charging the maximum price the market will bear, if it’s below what it costs you to make the product!
To cost your product, make sure you take into account:
- Direct costs: these costs increase in direct proportion to the number of units you produce – for example, if each item has a clasp, then producing 10 units requires 10 clasps, while producing 100 requires 100 clasps
- Overheads (indirect costs): these costs very often have no direct connection to the number of units you produce – for example, the rent on your studio, or your telephone bill – but must be paid for out of sales revenues nonetheless
- Your own salary: it’s easy to forget to include a salary for yourself – but it’s essential
Now you can work out a cost per unit – hopefully, sufficiently below the price you charge to allow yourself a decent profit. That profit is essential, to allow you to re-invest in new equipment, materials or training for the future.
You also need to calculate your break-even point. This is the number of units you need to sell in a period (month or year) so that your sales revenues cover all your costs. At this point, you make no profit, but no losses either – hence, breakeven.
Once you have a cost for your new product, you should check it against any other products you currently make (or plan to make). Many products are sold as a range – and so their prices must relate to one another. A tea-cup might be good value to a customer at €7 – but they might re-consider a purchase of a set of tea-cups and saucers if the sugarbowl is priced at €27! Perhaps the cost of making the sugarbowl requires a €27 retail price-tag – but it upsets the balance of the pricing across the range.
Your options are:
- To change the pricing of the other items in the range – if you priced the tea-cups at €10, would that affect sales? And could your share of the extra €3 retail price offset a lower price for the sugarbowl – say €20, bringing it more in line with the other items in the range?
- To reduce the cost of making the sugarbowl – re-check your calculations; then look at every element of cost to see whether it could be reduced (or better still, eliminated) via cheaper materials, more efficient production, etc.
At some stage, hopefully, you will face the dilemma of too much demand for your products and not enough time to make them in sufficient quantities to meet that demand. Then you will need to prioritise production.
To help you do this, identify which products give you the best overall cash return: calculate this by subtracting the cost of manufacture from your selling price. Then rank your products, starting with the product that gives you the highest cash return. And if time is a critical constraint, you need to go a step further: divide the cash return from each product (sales less costs) by the amount of time it takes to make it – that will give you a time-based return. This will allow you to focus production on the products that give you the best return on your precious time input and thus help you to improve your profit margins.
Click through the links below in Next Steps for worksheets and articles to help you cost and price your products.