One of the toughest, but most important, decisions you’ll make as a young entrepreneur is how much to charge for your product or service. Set the price too high, and no one will be able to afford it. Set the price too low, and you won’t be able to cover your overhead costs or make a profit. How do you know what price will work best?
Here are a few tips on calculating what to charge for maximum benefit – for you and your customers.
STEP 1: FIGURE OUT YOUR “VARIABLE COSTS”
First of all, what’s a “variable cost?”
In the simplest terms, variable costs are the parts of your budget that change depending on how much you produce. The more products you make, the higher your variable costs. The fewer you make, the lower your variable costs. How much do you spend on the materials you need? What about packaging and shipping?
Knowing your variable costs helps you figure out how much money you spend to make, package, and ship each product. And don’t forget to put some value on your time, too!
Once you know the variable cost per product, you have your absolute minimum for pricing. This amount is how much you need to charge just to break even.
STEP 2: WHAT’S YOUR TARGET PROFIT?
Jokes aside, you can’t really charge $100 per bar of handcrafted, homemade soap. Sorry.
Profit margin means how much of the price of the product will be pure profit. It’s typically done as a percentage. The average profit margin is around 10%. Anything above that number is considered a high-profit margin. Anything below it’s a low-profit margin.
Let’s say your variable cost to make, sell, package, and ship a bar of soap is $2. A profit margin of 10% would be 20 cents. This means you need to charge $2.20 per bar of soap to make your 10% profit margin per bar.
STEP 3: LOOK AT THE MARKET FOR YOUR PRODUCT OR SERVICE
Are homemade soaps popular right now? Homemade soaps are considered a luxury product. Do you see a lot of people buying luxury products these days? Or is everyone clipping coupons and buying whatever’s on sale at the supermarket that week?
It’s hard to sell something people don’t want. The higher you price your product in a market that’s just not ready for it, the fewer products you’ll sell. The same goes for services. If you live on a street where most parents are empty-nesters whose kids are grown, they probably don’t need a babysitter.
Smart entrepreneurs don’t sell things no one wants or needs. If most people around you seem like they don’t have the budget for fancy, bespoke soaps, then this might not be the right enterprise for you to undertake. Consider something else, something timelier and more appropriate.
STEP 4: CHECK OUT YOUR COMPETITORS
However, a quick search on Etsy shows that there is, indeed, quite a market out there for handmade, well-crafted soaps. You’ll see, too, that the range of prices per bar of soap goes from $3 per bar all the way up to nearly $9 per bar. Where do you fit in?
First, remember step 1 and cover your variable costs at the bare minimum. Next, click on a few of the sellers’ shops. How much soap are they selling per dollar? How does the packaging compare to yours? What other types of products do they offer (such as gift sets or hand creams)?
Knowing what your competitors are up to allows you to price your product in a somewhat standard way. Once again, avoid the temptation to go too high or too low. Too high means your customers – people who want to buy beautiful homemade soaps – will shop at someone else’s store instead of yours. Too low, and you won’t be able to afford to keep making soaps!
STEP 5: WHAT MAKES YOUR PRODUCT UNIQUE?
There are dozens, if not hundreds, of soap brands on the market right now. Even more, if you consider everyone making handcrafted soaps to sell on sites like Etsy. Focusing on what makes your soap unique should be part of your pricing strategy. Consider:
- Are you a woman- or minority-owned business? People will pay extra to support those.
- Do you grow the flowers you press into your soaps? Are they 100% organic?
- Have you won a young entrepreneur competition with this product?
- Are your soaps made from a family recipe passed down for generations?
Whatever makes your soap unique will be your primary selling point. It’s also a way to up the asking price a little bit. Mass-produced soaps from global corporations can be priced cheaply because they are inexpensive to make in large quantities. There’s nothing particularly special about them.
But your soap is special. Share that unique quality with your customers so they feel like they’re spending money on a high-quality product made by a caring individual.
STEP 6: ADJUST AS NECESSARY
It’s ok to change the price of your product. If sales are slow, then the price is too high. If you can’t keep up with demand or find yourself spending more money to make products than you’re taking in, then the price is too low.
USE A PRODUCT PRICING CALCULATOR
When in doubt, use a calculator designed for this purpose. Shopify has this profit margin calculator. All you have to do is input your variable costs and your profit margin.
This calculator lets you input more data to come up with an absolute baseline price as well as a markup percentage.
Figuring out how to value your time and effort can be tricky. A fellow crafter came up with this easy-to-use calculator that includes how many hours it took you to create your product.
At the end of the (business) day, figuring out how much to charge for your products and services may seem overwhelming and complicated. Try to remember that your prices are not set in stone. It’s normal to learn as you go along. Avoid being too greedy and avoid being too meek. There’s a happy medium out there that you’ll find, where you’ll make a profit and have happy customers!
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