Stop under pricing your design products!! April 9
Pricing your creative product can be a bit of a black art – part emotion, part math.
The stronger your brand, the stronger the emotion, the higher the price might be (based on nothing but emotion).
But let’s look at some basics to ensure you’re not under pricing your stuff. Once you have these basics right, you have a solid foundation on which to build emotion into your prices.
[NOTE: You can scroll to the bottom of this post to get the quick summary].
What is the difference between a ‘markup’ and a ‘margin’?
A 50% markup is not the same as a 50% margin. Why?
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?
The difference is perhaps best explained with a few examples:
—> 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.
Another example:
—> 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 also means a 50% margin is the same as a 100% markup – IE:
—> A 100% markup: $100 x (1 + 100%) = $200.
—> A 50% margin: $100 / (1 – 50%) = $200.
Got it? Good.
There is no right term to use, it all depends on you and your context. Read on for some examples …
How do you price your products?
For a creative person, there are 3 key components to this:
- Your cost price
- Your wholesale price
- Your retail price
Your cost price = the sum of all the cash costs that go into making each product. This is relatively easy to work out.
Your wholesale price = 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.
Your retail price = your wholesale price + the retail margin. This is typically quite easy to work out too – see more below.
Calculating your cost price
The most important thing you can probably do is get this (really) right. And luckily, it’s the most cut and dry to figure out. That’s because it’s easy to measure the cold hard cash you spend on making your product (there’s no emotion here).
So when you make an example thingy with Ponoko, here are the components of your cost price (assuming 1 flatpack / self assembly product):
Ponoko making cost |
$18 |
Ponoko materials cost |
$7 |
Ponoko shipping cost |
$5 |
Extra parts cost |
$2 |
Self assembly instructions cost |
$1 |
Packaging cost |
$1 |
Misc |
$1 |
Your cost price |
$35 |
So now you know the total cost to you. Whatever you do, do not sell to anyone under this price UNLESS 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. 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 |
How did I get the $15 creative fee? Like this:
[$35 / (1 – 30%)] – $35 = $15.
This means that whenever you or anyone else sells your product you will always earn a profit of $15. Great!
Now you might be asking “but what about the 100 hours I put into this product – $15 just don’t cut it!” Well, you need to hope you sell enough at $15 profit to cover your 100 hours. And if you assume you should get paid (say) $75 per hour this means you need to sell 500 of the suckers to recoup that original time investment.
But there is a faster way – by adding a retail margin to your product and selling direct at a higher price …
Calculating your retail price
While there is some emotion to this part too, a really good starting point is a 50% retail margin (aka, a 100% markup on your wholesale price).
This margin is educated 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 big balls. Or both.
Importantly, setting your retail price at a 50% retail margin means that when a retailer comes knocking and asks for your wholesale price – you can simply say “You can earn a 100% markup (aka 50% margin) on my products” or “I’ll go 50:50 with you” or “You can buy from me at half price”. They all mean the same thing. The retailer is getting 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).
And the really great thing about this 50% retail margin is that you can sell direct at this retail price and collect both the retail margin and the wholesale margin / creative fee (a total of $65 in this example).
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 at retail you will collect a profit of $65 (your creative fee + your retail fee). And to recoup your 100 hours @ $75 per hour you’ll need to sell 116 of them (which is easier than selling 500 of them direct!).
Phew!
Quick summary
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 (a good place to start is at a 10% – 30% wholesale margin).
3) Calculate your retail price = your wholesale price + your retail margin (a good place to start is at 50%).
Ponoko making cost |
$18 |
Ponoko materials cost |
$7 |
Ponoko 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 |
Sweet.
Now there’s MANY different ways to do this and just as many exceptions.
For example – an item may have a cost price of $0.50 and typically retail for $10. In this case, assuming your retail fee is $5 (ie, a 50% retail margin), then your creative fee is $4.50 (ie, a whooping 90% wholesale margin!!!).
So please feel free to share your experiences below …
April 9th, 2009 at 4:24 am
Alternatively, you can price the things as you use to under the free account but join Ponoko Prime 🙂
Jon
http://WoodMarvels.com – Create Unique Memories
April 9th, 2009 at 9:31 am
There’s also something to be said for researching the current market prices of similar objects. This not only helps you set a price that will sell, but will also help you understand how much of a market is available for your product how worth selling it is.
So, if your cost for an item is $25, and you see similar items selling for $100 retail, then a $50 wholesale cost gives you a nice profit of $25.
But, if your research sees that a similar item sells retail for only $25, then you have some decisions to make. If you sell your item for $25, you will make nothing. After thinking about your product hard enough, you might be able to justify a markup because it is different enough from your researched example and has more artistic merit. But if you are just making a run of the mill bottle opener that is only functional and not different from what is already on the market, you might want to spend your time creating and marketing something different.
My mom is visiting me for Easter, and we just took a trip to the dollar store. It’s quite depressing to see items there, that cannot be produced on Ponoko or Shapeways for anywhere close to the prices they are selling for. So, research hard, and make your items *uniquely* yours! And even more importantly make sure you market the fact that it is *uniquely* yours 🙂
-Whystler
April 9th, 2009 at 12:21 pm
Great post! I always try to encourage artists to value their work. One $50 sale vs. two $25 sales, your profit is so much greater in the first equation!
April 9th, 2009 at 1:15 pm
I’ll add to this on the retail price if you are selling through shops
The price you sell online needs to match the retail price in the shop.
if it’s less than what someone can buy in shops, shops will just not stock your product.
April 10th, 2009 at 4:38 pm
Great article on pricing – clear and easy to follow. I’m currently trying to price footwear I’ve designed and followed a system like Whystler’s – looking at current retail prices for similar items and then find a manufacturer who can give me a good price so I can achieve the best profit margins.
I’ve figured out how many I need to sell wholesale and online to break even, and online sales give the greatest profits for smaller quantities to sell, but wholesale gives you the cash in bulk upfront, which will help give you some upfront cashflow.
Pricing is always a bit of an emotional struggle for designers!
May 9th, 2009 at 5:43 am
you didn’t charge for the time you spend putting all the parts in bags and boxes. Can take a while if you’ve got 20 or 30 odd components in a kit. And you’ve still got to go to the post office.
May 17th, 2009 at 8:29 pm
Jim – I’ve included that cost in the “Creative Fee” component. The reason I do not call it a “Wholesale Margin” is because creative people can sometimes have a tough time to measure the exact amount of time per creation. So all costs prior to the “Creative Fee” are hard cash costs that are easy to measure. The creative fee is therefore = wholesale margin + creator’s time (all of which is quite a gray area and beyond the scope of this blog post 😉