Keep your expectations realistic to secure the highest returns
Without a careful, methodical approach, it can be difficult for makers (and indeed small businesses) to find the right balance when it comes to pricing their products. Let’s take a look at the considerations and contributing factors, so that this critical part of running a maker business can be controlled to work in your favor.
If you’re making as a hobby, then profits may not be such a priority – but a business cannot be sustainable if it does not turn a profit.
Setting a price for your products
In the creative marketplace, there are 3 key components to consider:
- Your cost price
- Your wholesale price
- Your retail price
This is the simplest breakdown, where the cost price refers to the sum of all the cash costs that go into making each product; the wholesale price is the cost price plus the amount you want to earn for your idea and your time (this can be seen as a ‘creative fee’, but we’ll get to that later); and the retail price is made up of your wholesale price plus the retail margin.
When seen in this way, a general guideline can be followed with the ratio of 1:2:4 where $1 of cost will have a $2 wholesale price and a $4 retail price.
Looking at it from the other direction can also help, as the focus on starting with the final selling price has a stronger connection to the reality of your target market – ie, the price of competing products. There is no point working out a price based on your own production costs, only to find that you are no longer competitive in the marketplace once your product reaches retailers.
Therefore, the simple equation looks like this:
Profitable Retail Price = 2x Wholesale price = 2x Total Production Cost.
How do you calculate your Creative Fee?
The tricky part, particularly when you are just starting out, is how to account for your creative spark and your design/assembly/packaging/marketing/etc time. How long do you spend assembling each product? What about all those trips to the post office? Every moment you spend doing ‘work’ should be accounted for, and given an appropriately proportioned value to insert into your calculations.
There is a handy Ponoko walkthrough on how to calculate these figures that can really help to prevent you from falling into the common trap of under-pricing your products.
Tough negotiations with retailers
Selling direct from your
bedroom home office is one thing, but when retailers put the squeeze on you for tighter and tighter margins, the figures you carefully worked to when just starting out can suddenly leave you operating at a loss!
The Ponoko Cost Saving Guide uses a set of laser cut coasters to simulate the full process from initial design through to high turnover retail product. It makes for interesting reading, with a guided navigation through all the considerations that contribute to product pricing.
Minimum Order Size
Most Profitable Order Size
Minimum Wholesale Order Size
Tough Retailer Negotiations
Knowing where your boundaries are in terms of lowest acceptable price and also highest realistic goals before you engage in large volume orders can make the difference between whether you actually realise a profit or not.
Making a Profit
Profit is very important, if you are seeing your making as a business venture.
There is no rule that you have to make a profit! It is totally ok to be making for the joy of making, but consider that without profits from your efforts, it can be very difficult to continue your passion for making things for others. When you make a profit, you are also creating new possibilities for yourself… so without a profit, you are not going to be running a business for very long.
Once dollars are involved, rules become very important. In Chris Anderson’s 10 Rules For Maker Businesses, profit heads the list, and with good reason. Reading through these articles will give you many tools and insights that can help to set and maintain realistic goals for your maker business.
“…if you don’t get the price right at the start, you won’t be able to keep making” – Chris Anderson
Let us know in the comments below what your personal experience has been in balancing the tricky task of how to achieve the best pricing for your retail products.