Developing Your Pricing Formula

Pricing is an on-going task of researching and tweaking to develop your final calculations.  Appropriate pricing is probably the most important and (often) overlooked component for selling your products.

A simple pricing formula is the following:Developing your pricing formula

 Cost of Good X 2 = Wholesale Cost
Wholesale cost X 2-2.5 = Retail Cost

Very simple formula, but does not take into account the many variables to consider when developing your pricing formula.

Some situations and options to consider when pricing your products:

  1. Stores will, at least, DOUBLE (or more) your wholesale price to arrive at their selling price.  This does not mean you cut your current retail prices (from shows and fairs) in half!!  Pricing in such a way is backwards!!  Start from your costs and work forward.
  2. If you ever want to grow your business, you must include marketing costs into your pricing formula.  Sales reps generally require 15% of the wholesale price for their commission which means whether you or a sales rep is selling your line, you need to add that cost into your wholesale price.
  3. Your wholesale price must include all your direct cost of good — including the cost of labor — even if you do all the labor!  Adding labor costs is critical — even if you are doing the labor yourself.  In addition, you want to work towards hiring someone to make your products rather than yourself and you will need to pay them.
  4. Your retail price for your items online or at shows and fairs should never be below the pricing at your retail outlets.  Remember, you are not competing with your retailers — you want to support them by selling at the same price point or maybe even higher.  In the case where you might want to undersell your stores, you need to market it as a “special show sale”.
  5. Your pricing needs to be what the market will bear.  In other words, if you are pricing above what the market is use to paying on a similar item, you will need to position your products differently or look for ways to decrease your costs to compete effectively.
  6. Another way to deal with pricing issues is to develop two lines:  One for retailing and one for wholesaling.  Using this method, you will not be competing with your retail outlets.

The first step in developing your pricing formula is to sharpen your pencil and get your costs figured out.  From there, you can do your market research and see where your best option is on appropriate pricing.

For more information, check out my guide on “How to Price Your Products”

 

 

 

2 comments for “Developing Your Pricing Formula

  1. April 18, 2014 at 3:28 am

    I am in the process of re-working my prices, and have received the opposite advice: start with how much money you want to make; figure out what you can produce, and price accordingly. In my case this is going to push prices up, which is going to make finding the right pair of eyeballs – the person who both wants what I make, and has the means to purchase it – more difficult. Finding those stores which reach the right consumers is part of the job.
    You can read about my efforts to arrive at a pricing formula here:
    http://finemessblog.blogspot.com/2014/04/pots-by-pound.html

  2. April 25, 2014 at 1:42 pm

    Thanks Lori, for your comments. Rather than write a lengthy answer here, I have written a post on your comments. You can find it here: http://sellingtogiftshops.com/2014/04/22/pricing-based-lifestyle-business/

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