Under-charging: 15 Expenses That Should Affect Your Pricing
What’s your model for pricing your products? Are you just charging for materials with a little left over for profit? Even if you’re considering the expense of materials and labor to produce the finished goods, are you considering all the other costs involved with making your business run? Your pricing has to cover the product itself, plus operational expenses, plus leave you with some profit.
Here are some of the expenses you should consider when you set your pricing:
1. Manufacturing materials (include the raw materials and any costs associated with them including sourcing, shipping, vendor management, etc.)
2. Labor to make the finished product
3. Packaging the goods (don’t forget expenses like mailers and other shipping supplies, hang tags, time to actually pack goods before they leave your headquarters)
4. Product Development (consider the time and expense involved in product design, prototyping, samples, market research)
5. Web hosting and domain
6. Internet service, phone and fax service
7. Advertising and marketing
8. Sales (Will you be doing your own sales, if so you need to pay for your labor. If you are hiring a rep, you need to pay commission plus other expenses.)
9. Customer service (How many hours in the week will be spent answering customer email and calls, processing returns, etc? The bigger your business gets the more time this will take. That labor must be paid for.)
10. Administration (How many hours in a given week will be spent on record keeping, vendor relations, invoicing, talking to your lawyer because a crazy person is suing you for having a blue logo and they own the color blue?)
11. Taxes
12. Staff (this should include employee wages and benefits, unemployment tax, retainers for contractors, paying your accountant and bookkeeper, paying your PR firm, etc.)
13. Rent (as you get bigger, your business will probably need a space to call its own)
14. Events (think retail events, trade shows, etc. You have to pay booth fees plus all those travel expenses like hotel, airfare, gas, rental car, meals, etc.)
15. Transaction fees (this includes what you’re paying for handling credit cards, accepting Paypal, etc.)
If those expenses make your head spin, they should. My online shop spent over $50,000 last year, true story! We’re still a super-small business. We’ll be spending considerably more this year. If your plan is to truly grow your business into a profitable enterprise, you have to set a pricing model that will allow for that to happen. Don’t be afraid to raise your prices. If you’ve got a product people love, they will pay a little more for it. Be judicious with your business spending, but also realize that expenses with running a business are unavoidable and necessary for growth.
Lastly, keep in mind the wholesale aspect of your business. If you plan to sell your products to stores, you need to give them a 50% discount, plus leave some margin for profit.
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Thank you Meredith, this is a very helpful article.
I’m curious to know your opinion about using POD (print on demand) sites like Zazzle and CafePress for starting a business.
They eliminate several of these costs like manufacturing materials, labor for finished product, packaging and customer service. The trade-off is that it’s harder to develop a brand, since the packaging comes with their identity, the thank you and update messages comes in their name etc.. Also, they take care of the quality control, not you.
What do you think about this model?
Comment by Lucia — April 28, 2011 @ 2:11 pm
Yeah, Lucia, you about summed it up. They do deal with manufacture, shipping, customer service, etc. The trade off is pretty significant though. You have little control of your products, no access to customer data, no control of your product presentation, no branding, etc. It’s an extremely limiting platform. Plus, you do still need to do the marketing work to drive sales, and my feeling is if you’re going to do the marketing part, why do it for another company’s benefit? I feel the same way about things like Etsy and Artfire. Marketing is one of the hardest parts of making a business successful, I wouldn’t be inclined to do that work for anyone’s benefit but my own.
That said, I think sites like Zazzle/Cafe Press (and even Etsy/Artfire) are okay if you are a hobbyist or you want to test market some designs before switching to a model that you have more control with. I don’t think they are any good for building a large, profitable, sustainable business. The drawbacks are too many and the costs with Zazzle/Cafe Press are too high (I could get a premium blank tee for around $5 and print art on it for a few bucks tops, depending on quantity of prints and number of colors. Sell it for $25 and make 15-18 on it. Cafe press will only pay you about 2.50/shirt. That’s a huge difference in margin.) You could never do wholesale with the kind of pricing those POD sites have. You’d have a tough time really building a brand. I guess it comes down to what you want to achieve. You want great rewards, you take on great risk and expense. If you’re okay with minimal rewards, you can certainly minimize risk/expenses.
Comment by Meredith — April 28, 2011 @ 2:51 pm