How to Price Your Products for Profit

How to Price Your Products for Profit

Our previous post discussed pricing strategies to consider.  If you missed it, you can find it here.

 In this article, we will take you through the next step – pricing your products.  Let’s walk you through the formula.  While this example is for soap, the formula will work for any product.

 Formula

Materials + Labor + Expenses + Profit = Wholesale x2 = Retail

  • Materials (COGS) – Make sure to cover all your material fees.
  • Labor – How much would you hire someone else to do the work?
  • Expenses – Determine the costs of rent and utilities, fees online, office supplies, advertising, etc.

 Materials (COGS)

Your cost of goods lists your materials that you purchase for use in a product.  Below is a description of how to determine the material costs for a bar of soap.  Since soap is made in batches, we find the COGS for the entire batch and then divide it by the number of bars we got out of the batch.
Bar of soap (materials):
Materials for a 5lb batch that will make 15 soaps

Oils $8.74
Lye & Water $1.30
Additives $7.03
Packaging $5.27

Total $22.34

Divide by 15 bars to get the price of each bar

$22.34 ÷ 15 = $1.49

Labor

You need to pay for the labor to make the soap, whether you are paying yourself to make the soap or paying an employee.

Bar of soap (labor):

$10 per hour x .75 = $7.50

Divide by 15 bars to get the price of each bar

$7.50 ÷ 15 = $.50

Expenses

Let’s face it.  You spend a lot more money to run your business beyond the cost of the materials.  There are advertising costs, printing your business cards and flyers, water and electricity to make the soap and power your office, fees for your website and the internet, insurance, fees for attending a craft show, and more.  All of this needs to be included in your product.  Take your yearly expenses (not materials to make the soap) and divide by 12 months.  If you are a new business, research a little and estimate what you may spend each month.  Think of all aspects of running the business.

Bar of soap (expenses per month):

Rent $65
Utilities $15
Internet fees $10
Misc. $10

Total $100

Divide by number of soaps we would like to see per month (2 per day x 30 days)

$100 ÷ 60 = $1.67

Next you need to figure out how much you can reasonably sell on average each month. Sometimes this is just a goal. How much do you want to sell per month (maybe two items per day)? Divide the expenses by your monthly sales goal.  Here is an example.  We have $100 in monthly costs and we sell or will sell an average of 2 soaps a day per month (30 days).

$100 monthly costs ÷ 60 items = $1.67

 Profit

Profit – This is something you will just have to come up with on your own without a formula. Sometimes, you can work the rest of the formula out without the profit to get an idea of the price the bar may end up being and then add in a reasonable profit. Perhaps $.25 – $1.00 per item if moderately priced? This is entirely up to you. For this example, we felt $.25 was probably a good profit for each bar of soap.

Bar of soap (profit):

Profit per bar $.25

 Final costs:

Materials + Labor + Expenses + Profit = Wholesale x2 = Retail
$1.49 + $.50 + $1.67 + $.25 = $3.91 ($4) X 2 = $8

Wholesale = $4
Retail = $8

 Applying Pricing Strategies

As you can see, this price wouldn’t work for penetration pricing as you wouldn’t be able to compete unless you bought in bulk, streamlined production, and lowered profit per bar.

Moderate would work. Many handmade soapmakers sell their soaps at $6-9 per bar depending on ingredients, location, etc.

Premium pricing would require you to increase your profit. Premium soaps would sell for $10-15+ per bar, but your brand, photos, packaging, etc. would all need to warrant this price.


Try the pricing formula and see where you land. Share what you have found and by all means ask questions.

In the next article, we’ll explain what to do when your prices seem too high.