Pricing Your Products for Profit
Hello everyone say we are on lesson six pricing your products for profit so today's goal is we're going to set value based prices for your products so that you can maximize your profits so in the last lesson we identified where your ideal customers shopping and what they're willing to pay for your products so we started to establish that value based priceline and chances are if you guys were good and did your homework from the last lesson you found that there is in fact a much higher threshold for your prices then you probably thought there was right we wanted to find that upper end let's take a look at where we are we're in session one set the foundation for your sustainable business and we are on lesson six pricing your products for profit so the reality and you know you guys have already heard me say this but it's super important is that pricing will make or break your business it is essential to get right when it comes to making a living selling what you make so in order to make a ...
living selling what you make every product in your line needs teo be profitable at the wholesale price point right that's really key if you don't think you're gonna wholesale what do you do with anthropology calls what do you do if some really great opportunity comes up that requires you to be profitable at the wholesale price point so we need that, but then it also needs to have a retail price that reflects the value to your ideal customer, so I'll let you guys in a little secret here, customers have no idea how much it costs to make things right. They have no clue they don't walk into a store and think like you buy that necklace because it's like twelve dollars over cost that seems like a good bargain, right? Because I don't know what cost it, they have no idea, so we want to set retail price is that reflect the value to the customer and reflect what it is that they value about it. Truthfully, they don't value your time sadly, right? We'll make a little sad face there, it's okay, but the good news is that if we know what our customer values, we can actually set prices that are even higher then just basing them off of our time and our costs alone. The other thing that's really important is that there is no room in your product line for a loss leader a loss leader is something where you say, well, it's ok, if I don't make a profit on that because it gets people into something else, there is no room for that when you're making your own products, right? Because here's, what happens? You don't know hopefully, by the end of this boot camp, you will, but you don't know which things people are going to respond tio you don't know, and you could never predict what might say go viral online, forget featured in a magazine or suddenly massively blow up. And if that thing is your loss leader, suddenly you are working your butt off to lose money. He wants to do that, not me, right? So we want to take out products that aren't profitable, right? So if you cannot sell something for a price and make a profit on it, it goes out of your line doesn't mean you can't make it. You make it for fun, you could make it as a gift, whatever that is, but you cannot keep it in your line of something that you sell. So what I want to talk about today is this idea of cost plus versus value based pricing. Now these air two different pricing models and the way that I want you guys to look at your prices is actually sort of combine the two to really find the ideal profitable price for your products, so cost plus pricing insures that you achieve your end be number now, way back a lesson, too, we set that. Monthly break even number right, this is the number that your business has to reach every month in order to be sustainable right? In order to pay the business pay you right so cost plus pricing insures that were at least hitting this number, but it always leaves money on the table. If always us figure out our costs and then mark up a little for profit, chances are there are customers. There might even be a lot of customers who would have paid a lot more for that product, so when we just look at your costs were always leaving money on the table. Value based pricing reflects the way customers actually think about price, right? It reflects the way that they walk into a store and judge value or the way that they look at things online. It reflects what the customer wants. It makes it really powerful. It also makes it easier to achieve your make a living number, right? If you can take something that had been selling for twenty dollars with a pretty small profit margin and suddenly fell it for fifty dollars, you should sell a lot less. That thing right helps you hit that making living number without killing yourself to get everything made. Now we have to start with cost plus because what I found is that most makers aren't hitting the right markets to find the right value based pricing we talked about that in the last couple of lessons right making sure we're in the right markets the markets that can support our pricing but we always want to run that cost plus scenario just to make sure that we're profitable but I want to show you guys that potential of how much money you could leave on the table if you were just doing cost plus this is one of my necklaces it's a newer design called the eleanor necklace but it sells really well so based on cost plus pricing I figured out that my materials are a little under four dollars labor at fifteen this is a pretty fast necklace to make do not think that I pay myself fifteen dollars an hour we did that lesson right we know what our our hourly rate it rate is overhead about twelve dollars and then just for the purposes of this exercise thing I added about twenty five percent profit right? Because that's always the question people want to ask is what percentage of profit it's actually the wrong question as you'll see so I just added that in there and they got me a wholesale price of thirty eight they got me a retail price of a four which probably if some of you are pricing that's what you would have come out even lower right I estimated pretty high to begin with oh shit what the actual prices so using value based pricing the retail price is one hundred and forty five and the wholesale price is eighty five let's just compare that that was the old result, right? Right? So basically doubled. Truthfully, I could probably even slide this up a little bit more if I wanted teo was actually designing to hit a certain price point, but now look at how much profit I'm getting for that peace when I sell it at a wholesale, getting almost thirty five dollars, right? Just a lot less of this necklace and I didn't that other scenario, but it's still absolutely reflects the value to the customer because I know when they buy this necklace they're going to wear it every day it's going to be easy, they're going toss it on it's going to go with everything in their wardrobe it's gonna look great, they don't even have to think about it and absolutely worth one hundred forty five dollars, to my customer, right? And so that's, the whole idea is this reflects the value to the right customer and it gives you the highest profit margin possible. So that's, how we're going to dio in this lesson is what you're going to set some prices for your eye's products, right? We wantto work through this, I see a lot of cringing, so I'm gonna pick on quite a few of you as we go here. So when we're doing our pricing, we always want to start with cost plus to ensure profitability, we have to make sure that every piece is profitable. So if you remember back our costs plus pricing formula is materials plus labor plus overhead overhead is all the other expenses going to running your business? Plus profit gets us to our wholesale price and then our wholesale price times at least to get us to that retail price. All of these things have to go into your price in order to make a living selling what you make their non negotiable. You can't be like, well, okay, if I don't really get paid not okay, right, it's okay, my prices don't really cover the cost of my studio space because I was working my kitchen table, right? Do you really wanna work on your kitchen table forever? It's really hard on a marriage? I could tell you right? So seo saved some kind would be nice, right? So non negotiable all of these things. And then if you remember back to our lesson three labours our production time times their hourly rate. So we set that hourly rate based on your target income and the marmont supplying it time how long it takes us to make a peace, then our overhead if you want a really simple way to calculate overhead one of the ways that you could do it is you could take your monthly business break even number subtract your materials because those get paid for right materials already covered so we have to cover everything else you spend money on so your monthly business break even number minus your materials divided by the number of pieces you've produced in a month if you have a huge price range and your products you're gonna have to fudge this a little differently but if you are just selling kind of within a fairly tight range this is at least a good ball park to get you for overhead the idea that you're thinking about it and you're putting it in there right step one we want to use that formula to calculate profitability but then we want to set our final retail price based on the market research you did in less than five based on looking for that high end of the marketplace and then step three of our pricing scenario it's going to make sure that the number you came up with in step two is higher than the number you came up with in step one right that's our profit so this is so much easier to understand if we worked through it so we're going to get some hot seats going on I'm gonna pick on catherine first because we talked about your pricing a little bit before right come on up here and to make this scenario a little bit easier, we're going to focus on just one piece right? Because it makes it a little bit easier to deal with. Okay, so thank you so let's talk about one of your statement necklaces and actually tell us who you are and what you do so that everyone can find you and I know what we're talking about I'm catherine you confine me at letizia calif dot com awesome all right let's talk about one of your statement necklaces and that's a good place to start so you know what your material cost is you pick one of you just go with the black whether the holocaust was about five dollars so you're about five dollars in materials and do you know what your labor cost is? How long did it take you to make that? Um if I do it in a batch it takes about thirty awesome and all batch is always the way to go, right? So thirty minutes and what's your lavery somebody fine. Okay, so that is what is like thirty seven, thirty seven, fifty for your labor and then do you have an idea of overhead just to kind of talk that out? Do you run this number and I haven't done the calculations yet, but I have the monthly business breaking okay, so what's your monthly business breaking in I'm seventy five hundred and how much of that you spent in materials? Approximately um about three to four hundred okay, so we'll just subtract out and how many pieces are you make kid? You think you could make a month or absolutely two hundred so you need another thirty five dollars or thirty five fifteen overhead so and again he's mine you might fudge these is you decide okay? You know, either getting production help some up in my production or there's lots of different scenarios that were just kind of gonna start with our bare bones right here so we had all that up and we're not adding profit yet because we're going to deal with that in our value based pricing piece so you're in seventy eight dollars before we even added a profit and that's what our wholesale level? What do you currently pricing that that, uh sixty you're praising him at sixty retail. Okay, so we have a little bit of work to do here for you. So have you done any of those market calms? Have you looked for some other options just roughly online? Okay. And what have you found? Um huge. Right? Okay, anywhere from like one hundred to nine hundred most of them are around the three or four hundred range interesting so they're in the three to four hundred range and you are right, okay, so that's a good sign because it means that there is definitely room in the market to move yourself up. So if we take now, are you planning on doing just a straight two times mark up for wholesale? Are you going to do a little higher and higher, like two point two? Yeah, because I'm planning on focusing on boutiques and they usually want a little butter exactly. So let's just say for argument's sake, where do you feel like a good value base price to be if you're seeing a lot in three to four hundred, uh maybe call sevilla three hundred okay, all right and let's just say and I know sixty is a big jump in whenever we're talking about so let's, just try out it's a two eighty four at two eighty, and we divide it by two point two that makes a wholesale price of about one twenty five, so we're a two, eighty retail and we're at one twenty five approximately wholesale, so that that feels like it could give us a profit margin on top of covering all this because you weren't even covering us before, right? So now we could cover all of this make a profit and it's still puts you you're not even at the high end of the range, if you wanted to, you could try and go higher. I think this is a good place to start for you somewhere in there just because that's a pretty big job from where you're at but that changes a lot, right? Awesome. And then what you could do is you can think about you've got the earrings, those are gonna come up in relation. Everything is going to come up perfect. How you feel about that? Great good, perfect, great high. Thank you. Who else wants to talk through their pricing? All right, come on up here. Now you have a lot of different types of thing. I do. But you mentioned to me earlier that you want to talk about your pricing because you were afraid something was too hot. Yes. So what do you want to talk about in terms of? I'm not sure that this is okay. Price trade. Okay, let's, talk about that bracelet. So what are your material costs? It's. Probably about four dollars. Okay, about four dollars, of materials. Yeah. What's your labor what's what's your labor time. It kind of depends because when I get photos sometimes after work on him a lot sometimes have to work on him a little. Yeah, right. So you have that kind of interesting problem and that you're doing custom so there's, always a little bit of variable what I would recommend is steering towards thie I have to work on them a lot because you don't want a price for the ones that happened quick because if you end up with a lot of the ones that take longer and you're not gonna be making money so the ones that take more on the higher on time how long we talking about let's start to finish like a knauer an hour, two hours altogether two hours altogether all right and what? You're laboring thirty dollars okay, so we're sixty dollars in labour and where you at with overhead? I'm not really sure what my overhead number because I work from home right? And so I guess I was posting and stuff like that maybe I spend a couple hundred bucks a month, right? But you also want to think about again where you got your business to go so overhead can also take that into account right? So just because you work from home if you have bigger goals for your business more money that your business needs to bring in for example, if you want both yourself and your husband do not have to work your job. Yes then even though you work from home the business better pay for that space, right? Right, right so where do you what do you think a good maybe estimate would be? How many pieces are you making a month approximately I know you fluctuate in terms of season but really in an ideal production month um an ideal production month was is a lot more than I'm making probably two pieces a month so ok see, we probably want to get that hot so what do you really think like in terms of your time? How many pieces could you actually make him off and not go crazy and actually sleep and you know all that good stuff twenty twenty okay, so how what do you think of business break even month a little higher? Probably when you're currently estimating it I don't know I wrote it down, but I have about five hundred yeah, so and again you guys can always adjust these numbers is just a good place to start, but twenty five at least gets you some money and their per piece for overhead thatyou want calculating before, right? So we add all that up right now you're eighty nine dollars without profit what are you currently selling those for one hundred fifty dollars? Not too high at all. So let's talk about your value based pricing, right? So you're currently suing them for one hundred fifty no one else is doing exactly what you do know, right? So that makes looking at comped a little bit trickier, but what it also means is that a there's more potential because they can't go shop a competitors er if they want it exactly that so they fall in love with exactly that. They better get it from you, right? Right. That's a good sign. They absolutely should get it from you. Yes, but what are some other things that they might be spending their money on? And the other question for you? Because you're talking about a gift product is what's that gift price point that they're trying to stay in, right? Um, well, you had mentioned the campuses, right? Um, other custom photo gives that are not jewelry, um and it's for a special occasion. So I think that one hundred fifty to two hundred dollars, probably their budget. Okay, that's probably because they're buying for family it's not like you're lying your coworkers christmassy after you're buying for someone who's really close to you is really special. Now, I think in your case, one of the things that we can talk about is the difference between that bracelet and a necklace that just has one image. So what are you charging for that ninety? Okay, so what I would probably say is that you could skew up so that that piece, but kind of a single piece excuse a little closer to that, maybe one fifty threshold of what they're thinking to spend I know you've got the piece that's on a simpler right, right. So what was the one that doesn't have the beaded chains? Fifty okay, so I think that could come up to say ninety okay, that could come up to one fifty and I think the bracelet has got to be closer to the two hundred range. Okay? Oh, okay, yeah. Because even if they don't take you, you know, it might not take you double to make but there's a perceived value like that right to fifty because there's so many more images in there? I think so and really then focus on maximum profit off of the ones that are easier to may and bring that price up. You probably sell us bracelets, but you'll have to make us bracelets to make the same amount of money, right? Yes. So that's what you can do this kind of shit that up and you are could potentially be I'm not wholesaling, but at the same time one of your challenges is getting the work in front of people, right? So if you can create a really interesting way to get a display in stores where people that see it at the store and the store works with you to get the custom order that's a really great way to expose people to your product, in which case you want to make sure that your profitable so if you're in eighty nine that's at two fifty, I would say you could do a straight split so that you know, the one twenty five one, twenty five psi would have to be yet two fifty on that right make money if you put it in a store and there are definitely stores who specialize in custom things so it could be an option for you to get your products out there. So that's why I always say we want to make sure we're profitable it wholesale that was a problem I have because I don't really like wholesale I don't know is an option, but I just thought like I should contact photographers right? To see if they would want a partner something like that, right? Absolutely and that's the thing is, you know, in the online world there's a lot of affiliate commission, right? You may not be doing thing that's wholesale, but you may be still doing something right where you're someone else is getting half of that money, so we want to make sure your problem all right? Okay, couldn't she got a pink? You partner with some of these, like, really great online printers like, uh, I don't know like, but you know that you're available like I don't know through move cards or I don't know one of those it's probably totally different markets in that I think actually because you're dealing with people who are buying for gifts, getting it in the right high end gift shop is probably a strong back and then I think right partnering with photographers who are documenting special events I think it's probably time I know but it's always worth looking into for sure are like wedding photography yes, I think wedding photographers people who are doing baby's newborns all that stuff there's a lot of opportunity for you we want to get that price high enough that you can split it with someone and still make profits right great and add a link so they got married but then they had a kid you wanna come up and let's talk about I know you've got a lot of products as well, but I want to talk about those scarves yes uh because I know that scarf making is a pretty labor intensive process, right? We're just in the process of instead of doing a batch of four scars were going teo twenty scars and so I'm goingto have the numbers for the twenty scars because that's where we're going toe apartment and actually going so so we're running these numbers you've already divided them out so we're back to talking about one scarf even though you're making them bigger, bigger batches always yeah so what's your material cost uh twenty okay and that's pretty good quality materials right? Yes, I touched them there there's some nice materials yeah all right and then what's your labor how long does it take to make a car? Uh takes three hours and we're pain sixty so is one hundred any of it that seems so high it's not necessarily okay, you know what? I came here to what you're charging your price is right and what about the overhead number and the overhead is fifteen okay, fifteen all right, so what does that get us too? Two fifteen what do you currently selling them for? Um two ninety two ninety and that's the retail price on your website are you selling two stores? No, we decided to go to retail. Okay, uh that said your scar was really beautiful and I could see a lot of stores wanting to carry them right. So bye pricing the way you're currently pricing you're missing out on the opportunity. So did you do your market calms? You look to see what the range is is there's not a lot of hand woman scars but there's a website called preserve where it's all about heritage and things that have been passed down and they their products range into the thousands that's what we're kind of in comparing it to is that okay if you were okay for the right generations right and I also did a quick little search on human marcus's website and you're definitely they're looking at scarves the average price there seenu out four hundred dollars and that wasn't even for things that were handle them right? It was just for kind of regular you're buying it at neiman marcus scarf right? So based on this number where do you think a value based retail price should actually be and you probably they opened the four hundred four hundred yeah so I mean if you were doing this, what I would do is make sure that your least giving yourself a little bit of margin if you want a wholesale yeah so I would say you're probably looking at the high for hundreds for eighty four ninety something like that and we were doing a wholesale but it hadn't worked out right and so that's why I want to retell that we're holding the retail price was for eighty five right? And I think that ultimately you I don't want teo I think that forty five price makes more sense and I think ultimately you don't want to price yourself out of the opportunity to do wholesale if the line explodes and you is there to get that traction, you're better off keeping it that forty five and then working to find the right customers who were going to value that price uh because they're gorgeous scarves they're beautiful they're lovely there's no reason that you can't get that price for them if you put them in the right situation. Yeah, kind of exactly the right market. Awesome. Great. So yeah, we're taking you back to where you were before. Perfect. All right, thank you. Okay, great. So hopefully that gives you guys an idea of how to work through this with your own product, right? So we want to do our costs, but then set our final price based on the value doing our research, looking at the right market, getting all that in than our last step is that we want to make sure that all of your prices make sense in relationship to each other, because the other issue that happens when you just you cost plus is that some things end up being lower or higher than they actually should based on perceived value, because they may take you a little bit last time or a little bit more time, right? Kind of like her necklace versus rice. Exactly. So one of the things that I always recommend that people dio is that you take your products and you lay them out on a table least expensive to most expensive does anything seem out of place? Is there anything that you're like? Oh, you know what? I could probably that looks like visually it should be up here in the more expensive range, right see if there's anything you could move up because that's another piece that then you can boost that profit margin on okay? And we also have a bonus lesson for you guys I'm taken from my wholesale course sell your products retailers for any of you haven't seen that that goes a little bit more deeply into the idea of pricing a range of products because the other good thing is that these calculations that we just did at the beginning you need to do them for every piece as you move on in your business, you can probably get away with doing them less because you khun set prices for new piece is based on the perceived value as compared to everything else in your line, so when I'm designing a new collection, I'm not going to run the numbers for everything I'm going to run the numbers for a couple of things just to make sure I'm in the right range and then price everything else that makes sense based on my existing products, right? So good news is that you've got to do a lot of math in the beginning, but if you have enough value built in, it gets a little easier as time goes on, right? All right, so let's talk about the next lesson in the next lesson we're going to evaluate your where your brand needs work in order to support your new prices because chances are if you're raising your price of the lot we may need to do a little worked up the perceived value of your brand as well right because the big jump between someone buying a sixty dollar necklace and a two eighty dollars necklace right we want to make sure we've got the brand to support that so that's what we're gonna be talking about in the next lesson but first let's look at your homework so I want you to go through all of your products and set your new wholesale and retail prices I know we've been doing one here one there based on some of the things but now it's time you got to do um all right make sure there are no loss leaders make sure everything's profitable get it all in there then I want you to go ahead and update your prices publicly or set a target date for your price increase so you have two options you can rip the band aid off which especially if you're neal when you don't have a big audience and you don't have any stores just do it just raising tonight you'll feel better you'll panic and then you'll feel better all right but if you already have stores you already have customers you can set a target date because it can actually help stimulate sales a little bit now right hey guys we're raising our prices don't tell them why don't you like I was under charging like we're raising our prices protection, a lot of prestige in that, right? We're raising our prices on such and such a date. Do you have your eye on something? You might wanna grab it now or let your stores no hey, january first, we're doing a price increase will honor all the old wholesale prices until that, right? So you have two options from the band aid off or give people a little heads up, and if you are doing the second one, you're extra credit is to share your upcoming price increase with your current audience as a way to stimulate those sales. And, of course, use hashtag make love, so so we can see what you guys are up to. All right, that's it, and I'll see you in the next lesson.