How are your sales going this year? Most small business owners are able to identify their basic sales numbers, but do you know what your net profit is so far this year?
Here’s what I see too many producers do: They calculate (roughly) costs on supplies for, let’s say, a batch of soap. They may or may not add in packaging and cost of shipping for those supplies, and they set their pricing based only on these rough calculations. Honestly, as a coach I’ve worked with small business owners who don’t even do that accurately.
You may have started out as a hobbyist, but if you’re exchanging dollars for products it’s no longer a hobby. You are not a soap-maker; you are a business owner. So take off the hobbyist hat and don your ready-to-cash-in-on-profits entrepreneur’s hat. Begin by getting your wholesale and retail pricing in line with reality. Here’s what you need to consider: 1. Systems
Begin by setting up an accounting system that will do much of the work for you. QuickBooks is my recommendation; the basic versions are very affordable. A successful business can pull up a report in an instant to determine whether or not they are on track. 2. Cost of Goods Sold
Now, calculate the cost of goods sold (COGS) for one product at a time. Let’s say you’re producing a batch of soap. This process is simple if you use an entire box or bottle of an ingredient, but you must determine the cost of partial usage as well. For instance, you may have a 10 lb. drum of Crafters Choice™ Honey Apple Fragrance Oil, at a cost of $193.95 plus shipping, bringing the total cost up to $250 (I am totally making that up). To keep the math simple, let’s say that you use 1 lb. of the product for your 50 lb. batch of soap, that brings the raw materials cost on this single ingredient to $25.00.
Once you have broken down the costs on your ingredients for a single batch of soap, divide it by the number of bars (or pounds) that it produces and you’ve got your cost of goods for raw materials only. Don’t stop there. 3. Packaging and Shipping
If you pay $100.00 for a box of a thousand branded sleeves, add ten cents to every bar of soap—plus the cost of any stickers, ribbons, etc. If you ship to wholesale accounts you also have the cost of handling, packaging, and shipping to calculate. 4. Human Capital
As you grow, you will bring on employees to produce the product (or outsource it). If you neglect to consider those costs now, your business will fail, so here we go.
Do you want employees working for minimum wage or do you want a culture in which everyone is happy, well-qualified, and reliable? Personally, I would begin with a baseline wage of $15-$20 per hour, depending on where you live. But wait, there’s more. It costs time and money to do payroll, and, as you grow you’ll incur the cost of benefits. This will bring that hourly rate up by 10-25%.
How many hours does it take for said employee to finish this batch of soap, from beginning to end? If it takes two hours, at an all-in hourly rate of $25.00, you’re at $50.00 per batch. Again, divide that by the number of bars produced and add that to your cost-per-bar calculation. 5. Operations
Overwhelmed yet? Sorry, but there’s more to consider: operations and facility overhead. You may have an argument here: I use my home, there are no costs.
Here’s the thing: you’re using space and utilities, you should have liability insurance, and most importantly—if you grow into the business you hope to, you won’t produce products out of your home forever. I would suggest that you add about 10% to cover these expenses. When you are in a facility you’ll need to recalculate.
6. Marketing and Sales
What are the costs associated with maintaining your website, producing business cards and signage, as well as the time you spend at networking events and in social media? Don’t forget travel, mileage, trade association memberships, booth fees, donations and advertising. Also, factor in processing fees for credit card transactions.
I would suggest you begin tracking the time that you invest in marketing and apply that same twenty-dollar-plus figure per hour. These costs will add about 5-10% to your per unit cost, depending on the number sold.
Now we’re done with calculations on COGS and overhead! How do you price this product? I will illustrate it with a total per unit cost of $1.79. Double that to $3.58 per bar for your rock bottom wholesale price, but don’t use that price for standing wholesale accounts. Leave room to offer incentives and special pricing for new accounts and special situations. Bump your wholesale price up to $3.99 per bar, keystone would make it $7.98 retail. Still, you may not want to use that price. 7. Branding
Branding factors into your final pricing. Who is your market? Are you a luxury brand, a mid-priced brand or a bargain brand? I won’t tell you how to place a value on your brand, but I will suggest that you avoid the temptation to go in lower than your competition. Again, you can certainly offer incentives and sale prices when the occasion calls for it. Quick Tips
- Create enough storage space to order bulk for better pricing
- Suppliers sometimes run out of things. Have backup suppliers in your system
- Order well ahead of time to avoid express shipping costs
- Do an annual budget, allowing for price increases on supplies, as well as improvement and updates to your website and other marketing materials
- Update your pricing regularly to reflect increased expenses
- Pay yourself! The entrepreneurs who neglect to do this burn out fast!