A Quick Guide to Pricing the Products in Your Inventory
People start businesses for various reasons. One of the most popular reasons is to invent and sell a particular product that the inventor believes in. When that product is finally ready to go, though, the inventory and business owner face a new challenge: product pricing.
Pricing the products in your inventory isn’t easy. Follow the quick guide we provide below so you can offer your products at a fair price that allows you to make a profit.
Calculate Production Variables
The first step of calculating the price of your products is knowing how much it costs to make them. These costs are called variable costs since they can change from product to product. Most of these production variables come from the cost of purchasing raw materials, production time, labor, promotional materials, and shipping costs.
Add these variables together to learn how much it costs to produce your item. Examine the following table to see the process firsthand:
Raw Materials: $5.00
1 Minimum Wage Employee/1 Hour: $7.25
Promotional Materials: $3.00
Variable Total: $18.25
This means you must charge at least $18.25 to cover the variable production costs.
Research Acceptable Price Ranges
Now that you know your bare minimum for covering variable costs, you can research what other companies are selling similar products for. They may sell the same product for cheaper than your bare minimum because they have found a way to cut variable costs. Alternatively, they may sell the same product for more money based on the quality of their product and their ideal customer. Base your intended product price on the possible range you identify as you research.
Calculate Target Price
Once you know your bare minimum price and the acceptable price range of your product, you can consider how much of a profit margin you want. This calculation follows a formula: variable production cost divided by one minus your desired profit margin as a decimal.
For example, if you want a 20 percent profit margin on your product costing $18.25 to produce, then you will divide 18.25 by .8, since one minus .2 equals .8. Therefore, your target price in this example is $22.81. You can round up to $23.00 if you want.
Adjust Price as Necessary To Cover Fixed Costs
The target price you calculated above may or may not work for your business. You will need to see whether it falls in the acceptable price range and if it costs enough to help you afford fixed costs such as business insurance. You may need to adjust the price to help cover these fixed costs while still attracting customers.
This quick guide for pricing the products in your inventory takes you through the calculations you need to sell your products well. Another way to help sell your products is to put the price and other information on embossed hang tags. Special hang tags catch the customer’s eye and help your product stand out so your business can thrive.