Am I Pricing My Work Right?
Knowing how to price your products can be overwhelming, especially when you’re first getting started. Pricing too high can hinder sales; pricing too low can be a barrier to growth and profitability, and can send customers mixed signals about the quality of your work.
It also doesn’t help that that the internet is full of well-meaning but misguided advice on the topic. Many makers are familiar with this often-shared formula:
Cost x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price
While this approach isn’t necessarily wrong, it shouldn’t be taken as gospel. Determining your price by plugging your costs into a standardized formula like this is what’s known as Cost-Based Pricing. This approach does have some benefits. It’s easy to calculate, and it keeps your margins predictable across product lines. It also ensures that you’re selling with some degree of profitability, although in most cases your profitability is not maximized with this approach.
Imagine for a minute that you have a product that is selling well. Sales are so strong that you are able to begin purchasing the materials needed to make your product at a volume discount. Now that your costs are down, do you
(A) automatically recalculate your price using the above formula, or
(B) do you take a strategic look at whether lowering your price vs. keeping it the same will maximize profitability?
If you choose option B, then you were deciding on Value Based Pricing. Value Based Pricing sets prices based on consumer demand and the perceived value of the goods being sold. When executed properly, value based pricing can increase overall sales and customer satisfaction. It can also allow you to offer a broader range of products by giving you flexibility around your margins.
This approach is not without its down sides. First, it’s more difficult to master. It requires market research and regular experimentation with prices. Amazon changes the price of a new product an average of 12 times before determining its optimal price, so chances are it will take you a few tries as well. Second, value based pricing adds a layer of complication to analyzing your performance and profitability. Say you just had a record-breaking day for sales at an arts market and want to know how profitable your day was. If you were using the simple cost-based pricing formula above, you could quickly know that your costs were 25% of your retail price, so the other 75% would be profit. But if you were using value based pricing you would likely have a range of costs for your products, so you would need to either estimate your profitability based on a rough average cost of goods, or go deeper into a breakdown of what specific items you sold that day and add up the exact costs of each.
Sounds too hard? It’s not. With the right guidelines in place even the smallest business can make the switch from cost-based to value-based pricing. I’ll be sharing some steps to get started here in the next article:
What’s pricing strategy? Types of strategy?