4. How to Price Your Product
There are two steps to calculating the price of your product as follows:-
Setting Your Per Product Cost (Variable Cost)
Take a look at a bundle of your raw materials. How much does that bundle cost, and how many products can you create from it? That will give you a rough idea of the cost of product sold per item.
Hence, you should not forget the time you spend on your business. To price your time, set an hourly rate you want to earn from your business, and then divide that by how many products you can make in that time.
To set a base price, add up all the cost of your time as a variable product cost.
Here’s a sample list of costs for each product.
|Cost of goods sold
|Total per-product cost
In this example, your total variable cost (per product cost) is $15.50. In this way, you can set the variable cost for every product.
Decide a Profit Margin
Once you have a final number of variable costs, it is time to set profit into your price.
Let’s say you want to earn a 20% profit margin on your products on top of your variable costs. When you choose this percentage, always keep in mind the following two important points
You have not concluded your fixed cost yet, so you will have to decide the cost beyond your variable costs.
You need to consider the overall market and make sure that your price with this margin falls within the overall “acceptable” price for your market.
If you set double the price of all of your competitors, then it becomes hard for you to find sales depending on your product category
Then start to calculate a price, take your total variable costs, and divide them by 1 minus your desired profit margin in decimal format
For a 20% profit margin, that will be 0.2, so you divide your variable costs by 0.8
The formula will be:-
Target Price = (Variable cost) / (1 – your desired profit margin in decimal format)
In this example, Target Price = 15.50 / (1 – 0.2) = 15.50 / 0.8 = 19
gives you a base price of $19.37 for your product, which you can round up to $20.00.