What Every Small Biz Should Know About Pricing Their Product
Where do you want to sell? Are you planning on selling Wholesale or Retail?
This is where small businesses get screwed up. Most Small Biz owners who sell on Etsy or their own domain think you take the cost of the product, double it and that’s what it sells for. They even may call that their “Retail” price.
They may even go to other retail sites of “competitors” and think they’re “over- priced.”
They may well be, but, let’s look at the larger picture of Retail Reality. If you want to grow your Biz beyond Etsy and your own Domain.com, then you’ll have to think about that from the start.
Let’s say your product cost you $2.36, plus your general overhead of 15% (.354) =$2.72 cost. So, you sell it on your site for around $5.50.
Wow- you’ve made 100% mark up. In retail math- that’s really a 50% mark up (because your cost makes up 50% of the “retail price”).
Okay, you want to sell wholesale to retailers. Great, you sell it to them for $5.50. Still making your “fabulous mark-up.” All is right with the world..no?
No. The retailer has to make money too. They sell it for $11.50 or even $14.00 or more depending on what the market will bear and the type of shop they are.
$11.50! $14.00! What’s up with that?! Now your product is priced the same as those so-called “over-priced” competitors have on their sites
It’s called retail mark-up. Doubling the cost is called Keystone. Keystone-plus is anything beyond that. And, guess what? They don’t want to see you underselling them by 50% or more online.
The most common thing to do is to Keystone your prices on your website from your sell cost, which will now be $11.50. Now do you see why your “competitors” have such “high” prices.
They aren’t trying to rip anyone off or to make a killing on the internet. More likely, their website serves as a marketing tool and they do most of their business wholesale.
These days buyers and even retailers expect you to have an online storefront. They’ll expect to have competition, but they’ll not tolerate your underselling them unfairly.
If you ever intend to sell your product to retailers, you’ll have to take this into consideration when pricing your product online. You’re allowed to have sales and special offers, however, this is actually best done through special discount codes given out in Newsletters.
By now, I’m sure you are realizing why you need to think about where you want to sell. If you start off selling twice your cost and have a great online business you can expect more than grumbles when you have to adjust your pricing when you start to sell wholesale.
I know, you’re asking yourself about the keystone-plus retailers. Don’t worry about them. It’s common practice to have a MSRP (manufacturers suggested retail price) on your order sheets. If retailers want to mark-up the prices more than you recommend, that’s their decision. By listing the MSRP on the order form, they’re getting clear notification of retail prices they may be seeing at other retailers.
If you want to mark your online prices up a bit more to allow for some higher retail mark-ups, it’s your Biz, do what you think is best.
Here’s the major PLUS to selling wholesale. VOLUME. You’ll have a minimum order of around $150 or more ( whatever you decide- $150 is probably the lowest.) You’ll have product minimums too! 6 or 12 bottles or jars of each scent etc.
Of course, there are pros and cons to both sides of being a wholesaler or selling your own products retail. It’s up to you to decide your business model. Either way, you’re probably in business to turn a profit and the best way to do that is with the knowledge of how pricing works.
And, oh, if you happen to get a sales rep, they’ll expect about 15% of the wholesale price and sometimes a base fee per month for the showroom shelf space. This really impacts your bottom line, so you’ll need to be sure your pricing is correct and allows for all these factors.
Did this article help you? Do you have any questions about product pricing?
6 Responses to “What Every Small Biz Should Know About Pricing Their Product”
Leave a Reply
J. Kirkwood | Chief Executive Beauty
With over 20 years in the creative field of design, trend forecast, consulting, merchandising and branding with multi- million/billion dollar corporations, I'm here to share my insights with you. I don't know it all...but what I do know will certainly benefit you and Your Beauty Biz!
Great post Jennifer! When most people start out, they have no idea of the reality that, even though the products may be the same, selling them wholesale and selling them retail requires them to run two separate business models simultaneously. This article will help a lot of people avoid many problems if they follow your advice. Thanks for sharing!
This is a great article. Pricing is always such mystery to people who are just starting out. Thanks for sharing the information.
Thank you so much for this article…finally…someone who gets it. I have tried to explain this in simplest terms to some of my fellow indies…hopefully others will read this for their businesses success.
The other case in point to this argument is overhead since it can be more than 15% in many cases, depending on employee count, rent, insurance, packaging, design fees (web and packaging), office supplies, computer and software upgrades, postage and handling, phones, accounting and legal fees, trademark and patent fees, raw material costs, labor, lab fees and product testing, marketing and advertising costs, printing (brochures or catalogs) etc, etc. Start-up fees can really set you back to launch a line successfully. Each business can either have similar costs or less or more depending on what they provide in products and services.
It is so much more involved than just putting product into a jar and selling it on the internet, and so many miss the mark on this. Thank you for explaining this in great detail.
Thank you all for your comments.
Pricing is such a delicate issue. Fellow business owners are so hesitant to discuss how they price their product- kind of like Religion and Politics
For new Biz owners, I think they don’t want to sound like they don’t know what they’re doing.
The truth is, pricing is an issue at all levels of retail, big and small. I will try to write more about this in coming posts.
Katherin, you are correct, 15% is not always the correct overhead amount – I was just using it as a general example. It depends on how you price your product. I have costs that I add into every product and then add overhead.
You cannot always expect to add all your overhead into the first half of the equation before you at least double it to arrive at your Wholesale Price.
You also cannot expect to make a true 50% Profit Margin from all product. There is the Gross Profit Margin – profit after cost of goods and there is the Gross-Gross Profit margin – true profit after ALL overhead and expenses are taken out. This includes bottom line expenses like advertisements, machinery, Legal Fees, etc. This is usually done at the end of the year.
There are costs that have to be written off and cannot be recouped until you grow a bit and volume pricing of supplies and larger wholesale orders start to kick in.
Most large start-up costs have to be considered an investment and written off or deferred.
When I hear a Small Biz was launched for $500..I laugh (most of the time) and think, yes, mine too. That was the first check I wrote…there were a lot more checks after that!
Very well put! There are so many artisans just starting out online who want to do wholesale but their price structure just won’t allow it. Their ‘retail’ prices are already a wholesale price!
Thanks for an informative article.
Thanks Crochetgal for putting it so succinctly! It took me a page to make my point