Wednesday, May 1, 2013

Info: How to Price Your Wares Correctly


It's crazy how often the topic of pricing comes up in conversation around here.

It might be triggered by our frustrations with a comment on a blog about how such-and-such beautiful, bespoke, handmade item is 'too expensive'. We might be throwing around business ideas & offering advice to friend who wants to start a small business. Or we might be discussing a new venture for our own business, trying to figure out if a product is actually viable to produce and sell at a reasonable price.

The thing is, pricing yourself correctly is HARD. there're so many things working against you when you're a small, local business trying to sell your wares. Like the fact that 99% of the products in your marketplace are manufactured overseas with poor ethical & environmental standards and sold at a price that you'll never be able to match. And the fact that in your own community there are people who will operate at a loss on a hobby basis because they don't depend on the income from the business. And because people as a whole have a mindset that cheaper is better and haven't been educated about the 'real cost' of their purchase.

Let's break it down:

Cost price: Your cost price is the cost of your time (or someone else's) plus the cost of your materials.
Time cost: If you're doing the work yourself you need to pay yourself an hourly rate. We calculated our rate based on what we'd have to pay someone else to do the job for us. Because if we got bigger, that's what we'd have to do. Make it a realistic figure.
Material costs: These are your direct material costs, not equipment or setup. 
Wholesale price: Your wholesale price is your cost price, doubled. Why double it? Because you need to cover all your overheads! Your rent, electricity, equipment, & etc. If you were paying someone else for their labor then you'd be making nothing for yourself if you didn't mark up the price. Double might not work for everyone. Everyone's overheads are different. If your material cost are very high then double might be extreme. It's important to remember that high material costs come with high investment and risk, which you should be covering yourself for.

Retail price: Your retail price is your wholesale price, doubled. Again, why doubled? Because retailers will typically need to mark your goods up by 100%. That sounds extreme, but a retailer also has all of their overheads to cover, plus they have to factor in losses from goods that don't sell. If your market standard markup 50%,  then you can work to that.

The important thing to note is, you need to sell at the retail price (or close to it) in your online shop and at markets. Even if you don't wholesale yet. For three reasons:

1) Because when the time comes to start wholesaling your goods, you can't be undercutting your wholesale customers.

2) Because there are additional overheads involved in playing the role of retailer yourself - packaging costs, shop fees, time to photograph & list items, market stall fees etc etc.

3) Because you're potentially doing the rest of the handmade industry a disservice if you don't.

That last point is a crucial one. And a tough topic. On the one hand, it's important to acknowledge that not everyone can launch into their small business selling at a 'proper' retail price. And one could argue that it's those stallholders with more affordable handmade items that help keep our handmade marketplace a thriving and dynamic one. But on the flip side, other businesses who have set their prices at a sustainable level aren't able to compete. 

We hope this post has shed some light for both customers and other business owners alike. We figure if we're going to sell fabric for RM96/m and t-shirts for RM45 then it's important for you to understand where those figures came from. And we hope you'll think about this post when you next think of someone's wares as being 'too expensive', or when you find you next 'bargain' in the stores.

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