When you begin a business or even a handmade business, you may be tempted to charge what others are charging for their products. What you may not know is that their cost may be completely different from what your costs are?
What does that mean?
When you make a product, you have certain costs that go into that product. Materials, labor, overhead, marketing, and mark-up. Let’s say for example that I make an embroidered beanie cap for newborns. If I make the hat from beginning to end, my material may look something like this:
Beanie Materials
- Fabric
- Thread (sewing)
- Embroidery thread
Now, someone else may make the same product, but their material cost looks like this:
Beanie Material competitor
- Beanie
- Embroidery Thread
Because I make my own beanies, I must add in extra labor costs. They do not. Even if we have the same mark-up percentage in the end and the same marketing costs, we still may not have the same price that we charge our customers. Therefore, using their price to sell my product will cause my business to eventually go under. You cannot sustain a business and try to keep up with the competition by just lowering your costs. It isn’t effective in the long run. Who is to say that their beanies are cheap while mine are of a higher quality. I used better materials. Theirs were cheaply made. Eventually their beanies fall apart and mine are still intact. The customer goes to purchase another one, but they decide to spend more money because those at that price are not well made. If I have the same price, they are going to by-pass mine (even though mine are quality made) and purchase from someone who maintained their price point without buckling.
If you keep your price honest, customers will purchase.
A good formula to use for creating your sales price is below:
| Costs | ||||||
| Materials | + Overhead | + Labor | + Marketing | x Mark Up | = Sales Price | Profit |
| Cost of all materials that go into the production of the product | The cost to run your business divided by the number of products sold | How long it takes you to make a product multiplied by your hourly pay rate | Cost of packaging or hang tags associated with your product | Percentage you are marking up your item | What you will sell your product for | Sales Price – Costs = Profit |
Example from the beanie
| Materials | Overhead | Labor | Marketing | Mark up | Sales Price | Profit |
| Fabric Thread Embroidery Thread | Phone Internet Electricity Rent | $15/hr | Hang Tag Plastic Sleeve | 55% | $11.24 but round up | $11.25 – $7.25 = |
| $1.00 | $1.20 | $5.00 | $0.05 | $3.99 | $11.25 | $4.00 |
Your mark up ultimately sets your sales price. Your mark up can even set your wholesale price, but that is a topic for a different day. Just know that how you ultimately set your mark up is going to affect your price. A good thing to remember is that wholesale mark up is generally 30 to 50% while retail mark up is 55 to 65%.
