Pricing Doesn't Have to Be Scary
We're going to dive right into pricing because really effective pricing is going to be the foundation of your wholesale business, so if you don't have your price is right, if you're not profitable of the wholesale price point, you khun cell to stores all day long, and you're not going to make anybody, which is a problem, because I want you guys all to make, ah lot of money. So the first question that I'm going to ask you guys, and I know, especially for some of you online, I already know what the answer is, is, are you profitable at the wholesale price point? So, that's, what we're going to determine in this session is we're going to go through, and we're going to make sure that at your wholesale price point at the price that you're selling two stores, you are profitable. If you guys want to follow along in our workbook, we're going, we're on page eight and their summer really key mass that we're gonna get into that is all broken down in that workbooks, so make sure that you guys have ...
that at the ready because it's gonna make crunching those numbers just a little bit easier for you guys, so as I promised, pricing doesn't have to be scary, I know not everyone loves math can be really overwhelming on hold your hand we're gonna walk through it and then that's gonna help you guys as we move forward and then we're gonna talk about a little bit later about value based pricing and why getting the math one hundred percent right isn't super critical but we've got to start with the math so before we dive in I want to give you guys just a couple more definitions so anytime we're talking about the wholesale price it's anytime you sell to anyone who is going to mark up the product to sell to the retail customer so in this case it's typically stores retailers might also be selling to an online website who's then gonna market up but anytime you're selling to someone who is then going to sell to the customer that's gonna be our wholesale price then the retail price is any time you sell directly to the retail customer and this is where we get into that msrp e that we talked about our manufacturers that's you guys remember your manufacturer's not scary manufacturing fancy word for making so manufacturer's suggested retail price so now that we've got a couple of those terms right out of the way and we'll talk about pricing consistency a little later so you're going to set an m s r p but there's gonna be a little bit of fluctuation in that especially depending on your industry but for now let's actually just focus on your wholesale price so it's really important that you guys understand that you are not cutting your retail price in half and I bet a lot of you, particularly those of you online, but I think probably even some of you here started out you were guilty, is that you thought about? I mean, I set my retail price and then I'm gonna cut it in half and that's my wholesale price, that is the wrong way to think about pricing. What you're actually doing is that you are marking up from the wholesale price. So we're starting with the wholesale price and we're moving up from there and that's what's going to make sure that we are profitable, so we're actually going to start off right with a share, because I want to know where everyone that I have a guess? Uh, but so how many of you have been pricing so that your profitable at the wholesale price? Okay? So I know in your case, because I took a look at your line sheet that you guys are not marking up a full two times, so in that wholesale price where you're not marking up the whole way, are you still not really profitable? Your profitable it's just not quite right or we're profitable, but it's like such a small margin, okay, we have small margins, okay, um and I think we just not sell setting in at the true retail price um one of the questions I was having well thoughts I was having was well, it's really worth like sixteen, ninety nine but you know, it's hand plant in volcanic soil so it's a really rich coffee and low acid so I was just thinking well, first to get into the market let's just reduced the price but it's really not worth forty nine but that that's where I met yeah, so that's a great one and I'm actually gonna I just want to address that right off the bat because I think it's so important is that you don't want to reduce your price to get into the market because anytime you're selling at a lower price than where you actually want to be your testing essentially the wrong market okay? So it's really important that if you think this is where I wanna be, start there and it's better to kind of build that slowly than get into all these places and then say, hey, ps I lied about that it's really? Sixteen ninety nine so we want to get you to that point where you are selling at that price that you know you need to be at instead of trying to look infiltrate the market with a lower price because that's never really going to give you the information you need okay I think at our retail price, we're making a little bit of a profit. Um we did the doubling the wholesale, okay, are the I'm sorry? The cost it makes to make okay, which is definitely not the wholesale yeah are just gonna fall right? We'll fix that for you small part. Okay? And they had a scary discovery yesterday I spent three hours doing math law was delayed for my plane and I realized that my best seller for a wholesale I'm barely breaking even that's not good at all. Now fix that happened e I am getting there. I'm really close. I'm still undercutting myself. Yeah, I would echo everybody it is profitable, but not where I want what you want. It's vega, what about online echoing as well? You know, our secret tree house the same we tried to keep pricing down because we don't want anybody be to be able to pick up their favorite character except I'm not sure what they actually do even if they only have one dollar. So they're saying is about is about the pricing is about keeping the pricing realistic, etcetera, but a lot of echoing what are ladies here as well? Yeah, and we'll talk about when we get to kind of our value based pricing scenario we'll talk about some of that affordability that's a mess that's a big meth people really resonated with shayla part because I think everybody drinks coffee thing what people are saying, you know, they talk about you know how they can understand the value proposition, right? Good, that means we'll pick on you a lot later, all right? So let's dive into a little bit of that math so first things first any time that you've got your wholesale price, we're going going to at least double that to get to a retail price. So that is really important for retailers, and part of the reason that's really important is because you have to think about all the overhead that a store has so it's not like when you sell to a store and they double it that they're making millions off of that they're lucky if maybe they're making let's toss out a number like an eight percent profit margin. It's pretty slim for retailer you know they're paying for the cost to ship the product to the store they're paying for the rent or the purchase of the price they're paying their sales staff they're paying insurance. They actually have to factor in the cost that you need a store full of inventory before you could make money so there's always that so don't feel like oh my god, stories are just like walking away with all this money they're not retail is a tough business and so we want to make sure their sources are successful, so that means that your store is going to want to be able to mark up at least times two but depending on your industry, there might be more so you maybe have heard these terms before so keystone and you're certainly going to hear them if you're at a trade show, so keystone means that you are marking up two times from your wholesale price to your retail price and yes, these are definitely in your glossary, so keystone is two point five key and a half is or keystone is too sorry kay and a half is two point five and triple key you may have heard that that's three times wholesale, so you might also see some other ones too, like a two point two or two point three ten to be fairly common. So in my products, my m s r p is approximately a two point d'oh, so I will fudge those numbers a little bit because I don't like funky numbers like if I multiply by two times two point two when I get like one hundred fifty seven fifty I'm actually gonna make one hundred sixty I was going to go right up to the the number I want so you might get any kind of one of those so one of the things that you're gonna have to dio is do a little bit of digging and kind of find out what's typical in your industry so in my industry I see anywhere between a keystone which is that two times to a two point five markup I split the difference a two point two because typically my stores who mark up that two point five tend to be in places where things are more expensive like my san francisco stores they're gonna mark up two point five most things tend to be a little more expensive here so that's fine I'm not going to jump to that level I'm gonna jump to that two point two so those of you for making jewellery your stores are gonna like you a lot better if you're like a two point two two point three rather than that straight to for I think all of you guys you can probably get away with that two times markup. So greeting cards, anything in that kind of gift industry, even a lot of accessories they're going to use a two times mark up I'm not totally sure with you, anna. I would say you're probably just doubling but maybe do a little bit of digging and see what people want to be where you get to that triple key that three times margot is where you get into that really kind of high end luxury market so someplace like a barney's they're goingto triple key everything just because they can so that's where you're going to see that difference but ugh what kind of one of feel people out just kind of asked some of your peers hey what do you guys know what's marking up in your industry but usually jewelers is if you're not in that kind of low accessory price point to point two two point three is pretty safe and for a lot of you I would say start with that two times mark up and you can always move it up from there so we're actually talk about two different pricing models now and this is what actually takes pricing from being scary to being less scary is because we're going to deal with these two models so we're going to talk about cost plus and value based pricing so cost plus is exactly what it seems you take your costs you figure out what all those are plus your profit and that's going to get us to a wholesale price which we then mark up to our retail price so in cost plus it's really easy to calculate probability we know this is how much it cost to make this is how much I'm selling it for this is my profit but numbers air really really easy and it insures that you're charging enough for your products especially when you're starting out costs plus is super important because it make sure that you're making a profit and particularly for this audience for our makers this is a really essential first step because what I found is that most people aren't putting all the cost into their profits so we need to run these numbers it's really, really critical but ultimately this leaves money on the table if we're just doing cost plus we're not really getting the full value out of our products and that's because customers don't actually think like that when you walk into a store you're not thinking about cost you're not thinking about that cost plus like oh I'm going to buy these genes cause you know they're like twenty five percent profit margin above costs that's a great deal nobody thinks like that right because honestly you don't no you don't know what it costs to make those jeans and the average person doesn't know what it costs to make your product so after we kind of run our cost plus we're going to dive into value based pricing the struggle with aboutyou based pricing is it's a little it's fuzzy it's going to feel fuzzy you're gonna be like well I don't know what the value is how do we set a price to that it's gonna be really confusing so we're gonna kind of deal without fuzziness and it can also go horribly wrong if you are looking at the wrong markets so if we just started with value based pricing a lot of you would go out you find some people who are selling you say I'm gonna do that and chances are especially if you're looking in certain places those people aren't profitable either so this is why we have to start by crunching those numbers we have to make sure that we're okay first, but what happens with a value based pricing is that this allows for the highest profit margins based on perceived customer value it lets us take those profit margins and really slide them up and more importantly it reflects the way that consumers think about price it reflects the way that your audience walks into a store and they say oh, you know what? Like I love that necklace I'm totally gonna wear it all the time it's really no problem with me starting two hundred dollars on it because if I wear it every day that's like nothing that's how consumers think about price and so ultimately that's how we want to set your final retail price so I want to give you guys a really clear example of cost plus versus about you based and so you can see just how much money it leaves on the table so this is going to be our example as we're going to walk through our pricing so this is my melissa necklace it's one of my newest necklace is actually wearing the steel version right now we're going to talk about the bronze version when I made the slide so this is a cost plus breakdown my material costs are four dollars and seventy cents and trust me we're going to break all this down for your products too but I want to give you guys an idea so I material costs or four seventy my labor costs are about twelve dollars overhead is nine dollars and then and cost plus we would pick up profit margin and add up so let's just say I decided that I wanted to add a twenty five percent profit margin to this so I added six forty three and profit they got to that number I rounded up a little bit so that would make my wholesale price thirty five and my retail price seventy nine that's it that two point two markup so if I were doing cost plus this is where I would stay I don't I use value based pricing. What I do is I sit down and I think about what my customers gonna pay, how it works in the rest of my line this is my actual wholesale and retail price for this retail one eighty five wholesale eighty five I'm sitting here thinking that would be so much more near the other like a couple of bucks right? So honestly at one eighty five this necklace is still really good deal yeah and now suddenly I've got almost sixty dollars, in profit at my wholesale price now I don't you guys to think first of all that I'm ripping anyone else because I'm not because as we all know as makers his business owners there's a lot of time that we spend that we can't really account for in this cost plus thing so it's not like I'm laughing and like toss and hundreds into the bank every time but more importantly than that and this is where value based becomes really important I know that my customers are gonna pay that because I know how awesome this necklaces and I want to play with it but I know the sound guys they're gonna kill me so I know how fantastic this necklaces to where I know that it's easy it's lightweight it's gonna literally look good with everything I know when I walk down the street I'm going to get compliments I gave one to my sister she's every day she's like so many compliments in this necklace I know how fantastic this is going to make my customers feel so one eighty five seems like a really reasonable price for something that's going to make you feel freaking fantastic every time you wear it and that's why I value based pricing is all about but then fantastically it also gives you such a better profit margin than if we just did cost plus so this is really what it means less math, more profit, right, less math. We all want what we all want, less math and more money, right? Everybody okay, so that's what it means, but unfortunately, we're going to start with a little bit of math because we have to make sure you guys were profitable. It's really, really important. The good news is that you don't have to do this math forever, like I could have pulled that melissa necklace out, and I wouldn't have had to do the math. In fact, I only really did the full math because I was coming here to talk to you guys. Otherwise, I probably just wanted to be a really short materials ballpark, so we're gonna start with the math, but I promise you, once you get this nailed down, you don't have to do it very often anymore becomes this non issue based on value, so I sort of show you when I'm doing, you know, pricing, this is what my setup looks like. I'm not a big excel spread, she that's just so boring to me. I want to toss everything on the table, grab a pen, grab a pencil, pencils or better you could erase him, grab a pencil, grab my calculator, and by that I mean my smartphone. And get out there and do the numbers so that's what? I want you guys to dio as we're working through this, so if you printed out the workbook you'll actually see on page nine that we've got this little pull out box here so I want everyone right now to think of one product just one where you make it really easy one product your best seller is a good one it's it's useful, but any product will d'oh we're actually gonna run the numbers for this product, so this is really gonna help you pen and paper sit down. We're going to do the math so let's dive into our basic cost plus pricing equations. So this is the equation that I use in that I teach we'll talk about why there's some other things that aren't so great, so materials plus labor plus overhead plus profit is our wholesale price and our wholesale price times at least two is our retail price most the time is what I find is if we're lucky most makers air maybe getting materials and labour sort of most people are skipping those other two, so we're going to break all of these down and make sure that all of these air covered because we want you to not only be covering all your costs at the wholesale price, we want you to be making a profit