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How do I cost my products?

How do I cost my products?

Although price usually depends on what the customer will pay (and thus 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:

Now you can work out a cost per unit – hopefully, sufficiently below the price you charge to allow you a decent profit. And 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:

Prioristise Production
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. 

Next Steps


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