Creating a Price That’s Right

With graduation and sports camp season over, our big push for the rest of the summer is getting some nature art products ready to market to retailers. To prepare for this, we watched Megan Auman’s CreativeLive class “Sell Your Products to Retailers.”

Like every class on CreativeLive, this class was an excellent. If you have any product you’re selling, whether or not you’re wanting to go retail, we highly recommend listening to what Megan has to say.

One of the most eye-opening segments of her class was about setting a price point. Up until now, we’ve been following the traditional materials x3 or x4 method that many enterperneurs start with. But for many reasons this pricing system wasn’t making sense. Some prices seemed too high in comparison with others, which were probably too low. And when it came right down to it, like nearly everyone in Megan’s class, we weren’t bringing in enough to pay ourselves a living wage–let alone make a profit. So one of the first things we’re going to tackle is re-examining our prices using Megan’s method.

There are four components to consider when setting prices this way: materials, labor, overhead, and profit. Add those all together, and you have your wholesale price. Multiply that number by at least two, and you have your retail price.

Let’s look at each of these elements individually.

DSC_58781. Materials 

These are any expendable goods used in your product. That’s the number we were multiplying by three or four. But as Megan said, “Your product is worth way more than the sum of materials.” So now we’ll just plug in the actual cost of materials into this new equation and move on.

DSC_58852. Labor If you’re creating the products you sell, you need to pay yourself a living wage. As obvious as that seems, that’s where many of us are failing. When figuring out your living wage, keep in mind that only about half your work time will be billable hours, so set a wage that’s double of what you really need to make per hour. Also, keep in mind that unlike most corporate jobs, you’re not getting benefits on top of your hourly wage, so you’re going to need to cover things like insurance and vacation time. Megan, who says she lives in a low cost-of-living area, pays herself $60 an hour. One thing that’s nice about this amount is that it breaks down to $1 per minute. So if a product takes you 12 minutes to make, you tack on $12 to the cost of your product.

DSC_58433. Overhead This is probably going to be the most difficult thing for us to figure out the first time we price something using this new method. For overhead, you add up all your non-material business expenses from the past year (don’t forget your housing expenses if you work from home) and figure out what additional expenses you want to plan for the next year. Take that total amount and divide that by 12 to figure out your monthly overhead. Then figure out how many hours a month you spend creating products. Divide your monthly overhead by the number of hours you’ll be creating in order to come up with your “hourly burn.” Then for each product include the appropriate amount of hourly burn to include in the cost, depending on how long your product takes to make. (For example, if your product takes half-an-hour to make, you would include half of your “hourly burn” in the cost.

DSC_58754. Profit This is the area where we leave the hard calculations. Up until this point, we’ve plugged in numbers to make sure we aren’t losing money. Here, rather than coming up with an amount that should be our profit, we’re going switch over to value-based pricing and determine the value of our product. One exercise Megan had us do in order to help determine our value was to conduct a Google search to see the highest priced item we could find in our general category. A very quick search for the term for “nature wall art” resulted in a piece being sold for $2,700. That’s not to say that we’re going to sell our work for $2,700 (at least not yet!), but I think that was to show us that there are people who are willing to pay that much for pieces in the same category ours. Megan’s suggestion is to not choose a price that’s middle of the road but to go for something higher than the middle, keeping in mind the mental price barriers that stores like to stay under ($25, $50, $100, $150, $200 etc.). Once you have the price for one item, line up your other items and select prices that make sense in relation to each other.

Although it’s going to be a lot of work to switch over to this type of pricing, I feel a lot better about it than what we’ve been doing. So what do you think? If you’re in business, what pricing model have you been using? Do you think you could switch over to this model?

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One thought on “Creating a Price That’s Right

  1. Pingback: Creating a Price That’s Right | Futcher Fotos : Pricing News

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