Lets get down to business. The goal of most businesses is to make a profit. Non-profits and service organizations are no different. They raise funds, increase revenue, reduce costs, all in an effort to get maximize profits and fund the dream. Sadly, failing to position a product or service appropriately is one big reason businesses fail.
This article is the first of a series of articles geared towards providing you easy steps to determine the right price for your product or service.
1) Know your costs
Although having a passion for your craft is a great attribute to have, if you’re in the business to make a profit you need to ensure you get paid for your passion and bring in enough money to cover your expenses. This is something often referred to as the break even analysis.
In short, if it costs you $100 to make, sale and advertise an item, you need to sell that item for $100 or more. Selling the item or service for less money than it takes you to make it is a recipe for voodoo economics.
Simple concept right? Right.
The first step to setting a price is knowing what is the minimum price you can charge. This is why all expenses relating to the product need to be taken into account.
Some expenses to consider include variable and fixed costs. Don’t worry, we aren’t going to get too technical here. Simply put, take one of businesses, WoodyThings, as an example. As a woodworker I have to take into account how much material (lumber, screws, bolts, glue, cloth, paint) I need to produce each item I am making. This is my material cost.
Next is labor. How long does it take me to create, assemble, and display (or take pictures/post unto the website) each item? Lets say 1 hour in this example.
This is where you have some research to do. What is the hourly rate you will pay yourself? There are numerous ways to figure it out. Labor rates for your profession are often based on your location, profession, and expertise. As an amateur woodworker or carpenter the rate can begin at $12 per hour, while a seasoned professional may demand $100 per hour. A quick search on the ‘Google machine’ can help you locate your state Department of Labor (DoL). The DoL will have (free) primary information, stats, and data broken down by profession.
So now you know what others are getting paid per hour (lets say $15), and you know what the material costs are (lets say $20 per item), this gives you a subtotal of $35 per unit. Take into consideration other costs such as equipment rental, electricity, etc. If you have no other expenses, your break even point is $35, so anything above that price is a profit. Congrats!
Related Content: Turning Your Hobby Into a Full Time Job, in 8 simple steps
So how much above $35 do you charge?
This is my advice. Unless you are creating a product or service that is unique and no-one else has it, decide on a percentage and compare it to the market. For example, lets say you want to make 50% profit. $35 x 1.50% = $52.50. Go ahead, check the math. Its right. Thank goodness for calculators lol.
My next advice is to conduct a little market research (fancy term for ‘shop around’) and see how much your competitors are charging for the same or very comparable product. If the competitors are charging well above your range, you may seek to up your price. If they are charging less, you may seek to differentiate your product to justify demanding a higher price… assuming your target market it willing to pay the price.
Which brings me to my second suggestion: Conduct a Survey. You can survey your target market (the people you want to sell to) and after explaining the benefits of your product, ask how much would they be willing to pay for such an item. Once again, this is just a survey. How does it compare to your competitors? You may be surprised to learn that many times your product can stand to make an even bigger profit by increasing the price/or undercutting your competitors with superior product.
Thank you for reading. Stay tuned as I bring you part 2 of this series!
Please feel free to share your thoughts, comments and/or suggestions. Click on the links below and leave a comment here or on social media. I’d love to hear your .02 cents.