Lela Barker is the owner of Lucky Break Consulting. She joined us in the Aeolidia Facebook group for a Q&A about Product Pricing. Creative product-based businesses, come join us! We do these live typed chats once a month.
Lela launched Lucky Break to support her friends, colleagues, and the maker community. She fosters emerging creative brands by infusing their passion with the experience, critical thinking, and strategic tools needed to evolve the passion into a sustainable business.
Grab her 38 page PDF about pricing, and ALL of your questions about the subject will be put to rest. I’m serious, she covers it all, in an easy-to-understand and motivational way:
We’ve tidied up the Facebook back and forth into something readable so we won’t lose this great info, and you can see Lela’s thoughts on product pricing for small business here. All quoted text below is from Lela, and all bold text is from our Facebook community.
I know keystone pricing is standard, but do retailers and sales reps want a larger margin than 50%?
That’s a great question! Reps in the paper + gift industry (which is likely the category most of us here are in) will expect to earn a 15% commission on each sale. I don’t necessarily vote for mentally assigning it as a dip into your profit. Instead, I prefer to build that commission into the pricing structure from the very beginning.
If you know that reps are on your radar, plan for that and build the margin in. It will make for richer profits on each retail sale (hooray!) and will mean you’re still clearing respectable profits on your wholesale sales.
[When planning for sales reps from the start], it’s not your standard wholesale price + 15% for those accounts. It’s your wholesale price, which includes an accommodation for that 15% commission. It may sound like splitting hairs, but it’s an important distinction. I hope that’s clear!
Wholesale buyers will expect to keystone your pricing at a minimum… that means your wholesale price x 2 = their retail price. And they’ll want their retail price to be pretty on par with your retail price for that same product.
Really wanna rock their socks off? Give a x 2.2 margin. So…
Your wholesale price is $10
Your retail price for that product is $22, rather than $20
Think of it this way: shelf space is like real estate. If retailers can earn 55% on your product and they can earn 50% on your competitor’s product, then if they’re confident that both you + your competitor will do well in the store, why would they choose your competitor?
Corporate accounts (think big retailers like Anthropologie, Urban Outfitters,Target, etc.) will likely want preferential pricing, so less than your standard wholesale. But that’s based on their volume… they’re ordering more so they want better pricing based on that purchasing power.
I wrote a blog recently about when to offer volume discounts. It might prove helpful:
The Magical Mystery of Volume Discounts
I’m curious about how to announce a price increase. I currently sell digitally printed art prints, but will be switching over to screenprinting for those. It will be an increase from $12 (which I actually feel was too low anyway, and I’m glad to be increasing) to $20 since the screenprinting process is much higher cost & more labor intensive. How can I go about telling both retail & wholesale customers about the switch?
That’s a significant price adjustment (no shame in that!), but significant jumps necessitate a communication of the increased value. Make certain to communicate to your customers (wholesale and retail) that you’re using a new process. Blog or create a video to explore the intricacies of this new process, why you chose it and what it means for the customer.
I vote for giving wholesale buyers a heads up before a price increase. Ideally:
- Give them 30 days written notice… Try dispatching a newsletter to a wholesale-exclusive mailing list to streamline the notification process.
- Call it a price adjustment rather than a price increase. Avoid “loaded” language at all costs. See also: unfortunately, regret to inform you, costs are through the roof, I had to, we had no choice, I hope you understand, etc.
- Marry it with positive news about the brand: recent press, a new product launch, quicker turnaround times, more buyer-friendly wholesale policies, a promotion, a new website or product photographs, etc. Show them that you’re a brand-on-the-move and that you’re consistently “leveling up.”
- Frame everything in the positive and be careful not to project your anxieties into the communication.
- Make certain that you convey that you’re grateful for their support + you’re available if they need anything.
If you have key accounts that are of particular importance, give them a ring to follow up. I’m less sensitive about price adjustment announcements to retail consumers. Lovely to give them a 7-10 days heads up but they’re less dependent on you as a brand.
Just remember: this is all good news. Frame it in the positive and position it as a win. Good luck!
What if there is no value increase? What if the price increase is just because you weren’t charging the right amount to begin with?
If there’s no increase in value, then things are a bit trickier. In the long run, you must be profitable in order to be sustainable. So if you know that the pricing structure you’ve been working with isn’t serving you well, then I fully support abandoning it – with or without an increase in value.
You should be aware that a sudden increase in price without an commensurate increase in value will likely mean the defection of a certain percentage of your customer base. How much? I’m not sure. Those who love you and love your product will likely stay loyal, but those who are shopping based exclusively on price will likely defect to other brands. And that’s perfectly alright. Wish them well and let them go. You’ll need to rebuild a new base and that’s totally possible. In fact, it’s preferable to staying tethered to a base of customers who can’t support you.
These growing pains are tough, but worth it. Play the long game!
I’m struggling with the pricing of my pet beds that I’m about to release. What is the best formula, in your opinion, for setting wholesale and retail prices? I’ve tried the 2x cost (materials & labor) for wholesale and 2x wholesale = retail, but it gets pretty pricey then.
Thanks for being here! That’s a great question and I’m not a big fan of set pricing formulas (4x raw materials or 3x our labor etc.) I vote for getting down and dirty with the math.
Here’s my strategy for calculating your product costs:
Raw materials + labor + overhead = product costs, which are your base figure for pricing exercises.
Raw materials: Everything needed to create the finished product, including things which are consumed in the creation process and may not be part of the finished product. For example: if you’re a furniture maker: that’s the wood, staples, nails, stain, everything. See that sandpaper? Used in the process, but not part of the finished product. You must account for that. For apothecary product makers, that might be hair nets, gloves, paper towels, etc. For apparel + accessory designers, it might be scrap fabric, etc. Make sure it’s allllll in there.
Labor: All the energy needed to create a product. Not the energy needed to sell it, but definitely the energy needed to create it. I recommend that you stratify labor and assign appropriate labor rates. For example, if you make soap, then there are lots of tasks involved: measuring and mixing the oils (actually making the soap), lining the mold, cutting the soap, wrapping the soap, doing the dishes, etc. There’s likely one labor rate attached to the dishwashing task and a higher rate attached to the actual creation of the product. Assign labor rates based on what you’d have to pay someone else to do that exact task.
Overhead: All the regular bills you have to pay even if you don’t sell a thing. Think: mortgage or rent (add it in there, even if you don’t pay it), utilities, insurance, etc. These things are recurring and they need to be accounted for. There are various strategies for calculating and accounting for overhead. The simplest? Add up all your monthly overhead expenses, then divide by how many products you can create per month.
$1200 in monthly overhead expenses/ 150 products you can create in a month = $8 per product in overhead
raw materials + labor + overhead = product costs
product costs + profit margin = wholesale price
wholesale price x 2 or 2.2 = retail price
Handmade products are expensive, no doubt. If the price you ultimately arrive at for those pet beds is intimidating you, gut check it. Are you your ideal customer? If not, then it doesn’t matter if you would or wouldn’t pay it, so long as they will. And if you’re uncertain that they will, how can you communicate the value of what you’re doing in a way that resonates with them? I hope that’s helpful.
I’m pricing my DIY craft kits at double my cost for the supplies. However, I’m still buying most of my supplies retail, as my quantities aren’t yet large enough to qualify for wholesale supply minimums. When I am able to hit those minimum orders my cost will drop significantly. Should I price my kits retail at my current cost or future cost? They’re a bit high now, I feel, but absolutely not out of range of other kits (and in some cases less!).
Are you adding in your labor? I really encourage you to include that in your costs, even if you’re not yet collecting a paycheck. Build those labor rates into the price from the very beginning- that’s imperative. If you’re bootstrapping and fail to add the labor into your pricing exercises, then as the brand grows, you’ll be backed into a corner.
When you do hire help, you’ll have to either a) Accept significantly lower profits (potentially erasing profits altogether) since you suddenly have labor that must be paid or b) you’ll need to suddenly and significantly raise your prices to cover that new labor piece. Significant price hikes really require a repositioning in the marketplace, and repositionings are a hell of a lot of work.
I vote for pricing well now, based on your current figures, so long as those figures don’t price you out of the market. If you can build an audience at those price points, then your profit margins will be especially delicious as you tap those economies of scale and your raw material costs drop.
Thanks! Yeah, NO, I’m not currently factoring in labor. I feel like I’m just trying to get a foothold in the market and keep my prices in line with others – as well as make wholesale sales. If my prices go any higher wholesale I’m not sure anyone will buy. So margins are tight with kits… makes me rethink the whole line, to be honest. I appreciate your input!
The economies of scale are a beautiful thing. Tap them as soon as possible. Pick one raw material or kit component and increase your purchase rate of it to get better pricing. Next month? Pick another. That’s bootstrapping at its finest, but it works. I bootstrapped a $500 investment into a seven-figure apothecary brand in 4 years doing exactly that. Good luck!
I would like to increase my prices, as my product has become significantly better (better materials, branding, packaging, and thus more expensive to produce) but I’m afraid of losing a lot of my customers who are used to a lower price. How can I do this gracefully? Right now the price is $38 and I would like to be in the $58-$60 range. It’s a bit of a jump, but I want to be set apart from similar products.
An increase of that scale is really more of a repositioning of your product in the marketplace. No shame in that game and many of the brands I work with enter the market low, realize they need to significantly raise prices and go through a brand repositioning in the first few years of business.
Rebranding is about changing the business name or the visual aesthetics. Repositioning is about altering the context of your product within the marketplace, which may or may not include a visual makeover and/ or new name.
When you raise prices on that scale, you will inevitably lose some customers. Make peace with that now and prepare for it. The goal is to clearly communicate the value of your work and ensure it’s properly priced moving forward. You will likely see an immediate drop in customers but you’ll be rebuilding a base of customers that can support you. Play the long game… it’s worth it. Promise. Good luck!
Do you think the profit added in to get to wholesale cost has to be greater than the actual product cost?
That really depends on the product category and your revenue goals. This number comes as a shock to many of the brands I work with, but a successful creative brand can bank on 10-15% of their annual sales in profit. And that’s if you’re running a lean business. So $400,000 in revenue = $40,000-60,000 in PROFIT after all expenses are paid at the end of the year. You can reinvest all or some of that profit back into the business to fuel growth or withdraw all or some of that profit as a reward for your work.
If that number is discouraging, then consider this: If you price correctly, you’ve covered your labor as part of product costs. So if you’re doing all of your own production creation, then you were paid a reasonable wage for that work, and your profits at the end of your business year are compensation for being an owner. If you scale your company and lift out of the role of product creation (by hiring people to create for you), then those people will collect the wages you’ve built into your product costs and you’ll collect the profits as the owner at the end of the year. But by hiring help and doing more brand development/ strategic growth steering, then your business will grow, increasing your “owner’s take” of the profit.
Free help finding the perfect price for your product
Price with confidence, boost your bank account, and build your brand! Lela has graciously offered to share her extremely thorough pricing guide with you for free. I can’t overstate how hugely helpful this guide is. It’s 38 pages long, puts all the guides I’ve ever written to shame, and is infused with Lela’s no-nonsense, actionable advice. You will really understand the reasons behind the strategy and be able to make your own confident decision about how to price in a way that will help you move your business forward.
Lela offers more advice about product pricing on her website, and can help you out with some of your other burning business questions too. Check her out at Lucky Break Consulting, and get on her mailing list!