Probably the most common form of pricing for small businesses is gross margin pricing. This is where the price of the product is determined by adding a % to the cost to produce an item plus overhead costs. In his article "The Demise of Gross Margin Pricing" Tom Pryor gives a description of when it will and won’t work.  Here are three criteria he gives for determining if it is appropriate for you.

• A company has a small number of products
• It has a limited number of customers
• Overhead costs were relatively small and totally
  unrelated to the products sold or customers served

"When these three conditions exist," says Tom, "gross margin pricing works well".

Ok, so what’s an example of it then?  The formula looks something like this:

Cost to manufacture product / 1 - (% of over head cost + % of profit)

 That’s nice, but what does it really mean?  Here’s some numbers to make it a bit more real.

• Let’s say that you have a product that costs you $10 to make.  This is your cost to manufacture your product.
• Next, let’s assume that you have an overhead cost of 30% of your revenue sales.  These are costs like what you pay to rent booth space, or hotel costs, gas, office supplies, etc.  Things you pay for that aren’t directly related to making your product.
• Last, let’s assume you want to make 7% profit.  Now you have what you need to figure a price.

  10/ 1-(.3 + .07) = $15.87 (approximately)

Now you have a sale price you can work with.  Of course, the trick is to get a good idea of your overhead costs.  This isn’t easy to do if you’re just starting out.  You should sit down and try to figure out all of what your expenses will really be.  This is where a lot of people fall short.  Many people will figure the cost of materials, but not things like gas to drive to the show, money for hotel, meals, rental space, office supplies and lots of other little things people pay for but don’t include.

Once you have an idea of what your costs are going to run you, you then need to try and consider how many items you will be selling over the year.  This too is going to be a challenge.  How do you know how many you’re going to sell?  You may have to start with a bit of a guess.  You may have to start with a number and adjust that number after you’ve done some shows.  Once you start getting some data, then your projections will get better.

If there are other products similar to yours, then you can use that as a guage as to what you should be pricing your product for.  You certainly will need to be competitive.  If you can’t sell yours as cheap, then you will need to find ways to make your item or sale more valuable to the customer.

You can also ask other crafters what their expenses run.  How they are figuring their overhead expense.  There are a lot of helpful people that will share their knowlege.

Once you get some numbers, you will be able to try them and make adjustments as needed.

How you price your products can either make or break your business.  So it’s an understatement to say it’s important.  Coming up with what to charge for your product can sometimes be a challenging task.  It may be that you’ve come up with a unique product.  There may not be a lot of similar products to compare it to.  Maybe it’s just a new product idea, or you’re inexperienced with pricing.  So how do you figure out what to charge? 

There are a number of approaches you can take to accomplish your goal.  Which one you choose greatly depends on the goal you’re trying to reach.  So when you think about it, our real discussion is about goals and what you want to end up with as a result of your product price.

What I will cover in these posts isn’t unique by any stretch of the imagination.  I came across a this summary of product pricing and thought it was pretty good.  I hope to go into more detail over the next several posts on this subject, but it’s a good way to get your feet wet and familiar with the terms.

Before I really dive into the different strategies you can take with your pricing let me say something about costs.  No matter what approach you take with your pricing, the ultimate goal is to have money left over after you pay your bills.  You need to be as acurate as possible when it comes to calculating your costs.  Guesstimating just won’t cut it.  You need to know you’re going to come out on the right end of the stick.

It’s true that in some cases you may have to estimate, but get as close as you can.  Being way high will result in high prices and fewer sales.  Too low and you’re giving away the farm.  So one of your first exerciese needs to be figuring out your costs.  This includes all the costs.  Many people will do a good job of figuring supply costs, but forget to include things like gas for the car, phone bill, fees and things like that.  The fixed costs of the business.

The better your understanding of your costs, the more confident you will be about pricing.