How to Calculate Your Product Cost
I now want to jump to the pricing examples and talk about how you need to be determining your your costs s and you need to be determining your wholesale price and then also how these things need to correlate when you're selling both retail and wholesale because that's, very important, as we started to mention earlier, so knowing your numbers to determine your wholesale pricing, I always encourage people to review their numbers from two directions. So I called us the top down and the bottom methods, so bottom up is what we're going to talk about first, and that means figuring out your production costs, and when I say production costs that's your the cost, what it costs you to produce one item in your product lines. So if you sell multiple different product categories, you're going to need to work these numbers for each of those items, but basically it's the bare bones it's kind of your break even spot of how much? How much does it cost for me to produce this? And if I sell it for anythi...
ng below that, I'm going to lose money, so top down means knowing your market value so that's where doing your homework, learning your industry standards, seeing what others in your industry are selling. Similar products for on again, keeping in mind the quality, the level of products you, if you're selling a luxury item, make sure you're looking at other luxury brands to compare your pricing and see what the market would I would, they're so knowing your production costs and comparing them to the market rates will really help you decide if you're ready for wholesale, because it gives you a range, it gives you a really nice range of, ok, this is what I'm spending, and this is kind of where the market is, so if if you can fall in line with the market, that is key. So how do we calculate these production costs? How do we, how do we do this? From the bottom up, we have to look at our materials, so that includes everything that you need to produce that product. So in an example of making purses, that would be your leather or your fabric, that you were using any zippers, embellishment or hardware that went onto it class things like that, things that go into actually making your product that would also actually include your packaging as well. If you have hang tags, or any sort of things that you use for your pricing, or even the tags inside of a purse, you know that has your logo a brand so think about everything that it takes like every little little thing that takes to go into creating that product your labor this is where if you're the only one making your product I still want you to factor in labor costs because at some point you may need to outsource that so come up with to find out what the typical hourly rate would be for your industry to produce the products that you're producing so if you're outsourcing your your products you can kind of a better sense of that because you know what you're already paying but if you're doing it yourself you still want a factor in what the cost would be so that you're prepared to make that jump later should you need to hire overhead that's rent utilities anything that it takes to run your business that we need to factor in there this one's a variable cost and asses labor but so these are a little bit harder to determine in this case you know, just go ahead and estimate to the best of your ability maybe just add in a standard buffer tio each product people do this a couple of different ways on growth so I want you to add a buffer for growth when you're factoring in your production costs one simple example of this which we will talk about more in depth during our hiring a seals were of course is the sales rep commission. A sales commission can be fifteen to twenty percent of your price. Your wholesale price. So kind of keep that in mind and build that into production costs so that you know you're not having to adjust that pricing later.