Business Tip: How to Price for Profit

You have decided to start selling the items you make. The next step is to figure out how much to charge to make sure that you are making a profit.

What all goes into figuring out the price you should sell your items at?

The main information you need is your costs associated with making your product. You don't want to sell your item for less than your supplies cost so it is important to make sure you have factored in all costs.

Cost Examples

The base cost of your item is your material cost. This includes all the materials that will be part of or used to get us to the finished product. If you are making a glass with a vinyl design on it then your material costs would include:

Glass ($1.25)
Vinyl ($.25)
Transfer Tape ($.25)

Material Cost= $1.75

Your next cost would be your time or labor. Since this isn't a set price, then you would want to think about an hourly rate you think your time is worth. Once you have your hourly rate, then you figure out how much time or labor it took to complete this project. Don't forget about the time to get the design ready to cut, weeding and transfer taping time, and application time. If the total time spent is 15 minutes and your rate is $20 per hour, than your labor costs would be $5.

Other product costs to factor in include packaging, promotional materials, shipping costs (if not paid by the buyer), and transaction processing fees.

Fixed Costs

Depending on the size of your business, you also may have a variety of fixed costs to factor in and you want to make sure that these costs are covered as well when figuring out your final product.

Fixed costs would include any costs that you have as a business regardless of what you sell. Examples would be rent, equipment costs, utilities, payroll, subscriptions, etc.

The idea would be to figure out your break-even point which is how many items you need to sell to cover all of your expenses but with no additional profit. Once you know this, then you know how many items you need to sell to start making a profit.

Profit Margin

Now that you know your costs, you can figure out your profit margin. Your profit margin is the additional amount you would make on top of your product costs. This margin needs to be enough to cover your fix costs if you want to do more than break even on your items. You also want to make sure your total product price is acceptable for your market, in other words, that it is an amount your customers will be willing to pay.

To figure out your profit margin, take your total variable costs and divide them by 1 minus your desired profit margin expressed as a decimal. For a 40% profit margin, that’s 0.4, so you’d divide your variable costs by 0.6.

So if your total product costs are:

Material Cost: $1.75
Labor: $5
Packaging & Promotional Materials: $1
Shipping (paid by Buyer): $5
Processing Fees (3% of transaction, usually): $0.50 (depends on final price)

Total Cost: $8.25

With a 40% Profit Margin, Price would be

$8.25/(1-0.4)

$8.25/0.6= $13.75 or round to $14

If we went with $14 for the product price then $5.75 would be out profit before our fixed costs. 

If our monthly fixed costs were $200 per month and this was the only product we sold, we would need to sell 35 glasses (35x$5.75=$201.25) in a month to break even. Anything we sold past 35 glasses would start resulting in a profit.

Keep in mind, if you made multiple glasses at the same time, your labor costs may be less because you may be able to batch your processes and be more efficient to get things done faster or more products completed in the same amount of time.

This is where you can make more profit as you scale your business up or offer bulk pricing for larger orders since you can decrease your costs in most cases with larger orders.

Just make sure the math works out so that you are covering your costs and ideally making a profit!