Stop under pricing your design products!!
Stop under pricing your design products!!
Ever wonder just how the price tag on your favorite goods gets its number? It can be daunting to try to price your own products and you need to make sure you not only price for branding, but to ensure that you don't lose any money that all costs involved in your product's creation are taken care of.
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/branding into your prices.
Firstly - 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?
For example:
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.
And another:
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 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.
Remember, there is no right term to use, it all depends on you and your context.
How do you price your products?
For a creative person, there are 3 key components to this:
1. Your cost price. This is the sum of all the cash costs that go into making each product. This is relatively easy to work out.
2. Your wholesale price. This is 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.
3. Your retail price. This is your wholesale price + the retail margin. This is typically quite easy to work out too - see more below.
Calculating your cost price
This is pretty straightforward how much does it cost you to make one of your product?
As an example, 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
Therefore your cost price$35
First rule of business - 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). No sense in undercutting yourself!
But what if you want to earn a little bit of a profit on top of this?
Calculating your wholesale price
When deciding your creative fee, you need to consider some things. 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 you're just starting out, you should be aim for 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!
Using the example above ($35 cost price) and aiming for 30% margin:
Your cost price$35
Your creative fee (30%)$15
Your wholesale price$50
Creative fee calculated like this:
[$35 / (1 - 30%)] - $35 = $15.
This means any sale = $15 profit to you. Win!
You'll also have labour costs to take into account you need to pay yourself for your time. Well, to start with 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.
You can however speed this up by adding a retail margin to your product and selling direct at a higher price.
Calculating your retail price
A really good starting point is a 50% retail margin (aka, a 100% markup on your wholesale price). This margin is determined by the % almost any retail shop will be happy to sell your stuff. Some bigger stores might demand more, particularly if they feel you have set your wholesale price too high (by over inflating your creative fee feel free to reevaluate at this stage!). 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. It's all about demand.
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'. The retailer will see that they're 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).
The best thing about setting a good retail margin is that you too 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 direct at retail you will collect a profit of $65 (your creative fee + your retail fee). You'll find your labor costs are covered much quicker!
Here's how to set your wholesale and retail prices in simpler steps:
1. Calculate your cost price = all cash costs.
2. Calculate your wholesale price = your cost price + your creative fee
3. Calculate your retail price = your wholesale price + your retail margin
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
Now you can try this with your own products! They may not fit this model exactly but it's a great place to start. Good luck!
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