One of the first challenges with any business is determining your pricing structure, and many businesses go under because they are not charging enough. If your marketing strategy is to be a low cost leader (think Walmart) this may work for you as the volume of sales will drive your revenue. But when starting a business, we're often think about any sales, not yet volume of sales.
The first step in determining pricing is to be knowledgeable of your costs. Be sure you have a clear knowledge of cost per unit when calculating your product costs.
For example, assume I make a necklace comprised of three simple pieces. Piece A is available in units of 10 for $1. Piece B is available in units of 12 for $1. Piece C is available in single units for $1. Your units costs are:
Piece A = $1/10 = $0.10
Piece B = $1/12 = $0.08
Piece C = $1/1 = $1.00
Now, assume the necklace needs 7 units of Piece A, 5 units of Piece B, and 3 units of Piece C. Your products costs are:
Piece A = $0.10 x 7 = $0.70
Piece B = $0.08 x 5 = $0.40
Piece C = $1.00 x 3 = $3.00
Total cost = $4.10
But don't forget about labor and overhead costs. Yes! You need to pay yourself! This example is going to assume $10 per hour labor, although I know your time is valued at much more than this! Assume it takes 15 minutes to make one necklace. Total labor cost for one necklace is:
Labor = $10.00/4 = $2.50
Add product costs = $4.10
Total cost so far = $6.60
Then the dreaded overhead costs: rent, marketing, insurance, utilities, machinery. For easy math, let's assume these costs equal $10.00 per day. Total overhead cost to make one necklace per day is:
Overhead = $10.00
Add labor costs = $2.50
Add product costs = $4.10
Total cost so far = $16.60
Your wholesale price should be at least twice your costs. Therefore:
Wholesale price = $16.60 x 2 = $33.20
Whoa!!!!! That's what I'm selling my necklace for as retail!!!! It is so easy to fall into this trap, because we know what a similar product may sell for in similar online shops, and even in our local department store. The online competitor may sell for $25.00 and the local department store for $15.00. But, you say, mine is hand crafted with better quality items. Cost is not always a deciding factor with the customer, sometimes quality is. But you still need to be competitive. That's where selling wholesale can help you break even and become profitable.
Let's use the same example. You know you can make a single necklace in 15 minutes, but because of working in larger quantities, you can make 6 necklaces in one hour. Now, your costs looks like this:
Product costs = $4.10 x 6 = $24.60
Labor costs = $10.00
Overhead costs = $10.00
Total costs = $44.60
Per unit cost = $44.60/6 = $7.43
Wholesale price = $7.43 x 2 = $14.86
Now you're competitive! The necklace can be sold for retail price of wholesale x 2 = $29.72, which I would round up to $30.00.
This is truly a contrived example, but it demonstrates what I like to call Economies of Time. We're familiar with Economies of Scale, in which buying larger quantities drives down the cost per unit. With Economies of Time, doing repetitive tasks successively can help you to build speed, allowing your to accomplish more per units of time.
But I also use this example intentionally, as it's the model on which I base my pricing. I sell my candles wholesale for $10 each, and cases of 12 for $120. Pretty simple math. But it takes just as long to make 12 candles as it does to make 1. (Think preparing a batch of cookies then putting only one into the oven). I use Economies of Time to provide a 10% savings to the buyer if each case is one fragrance only. I'm willing to pass my savings in time on to the buyer and sell one fragrance case for only $108.00.
Now, as someone just beginning to gain wholesale orders, I realize it will take some time for a buyer to want to buy an entire case of one fragrance. But I believe they will see this as an incentive as as they become more comfortable and intrigued with my product!
What also goes unsaid in this example, is the extra costs of supply inventory for unmade product. Using my batch of cookies example, when I only bake one cookie, I have not only excess flour, sugar, and butter (supply inventory) but excess unbaked cookie dough (product inventory). This carries a cost as well as the excess flour, sugar and butter are opened and will only be used when I make another batch (sunk costs), and I can't sell the dough until I bake again (inventory).
This week I encourage you to think about you can maximize your time by producing in larger quantities. Even in the example above, each necklace will be slightly different due to the natural variance in hand crafted items. But if our goal is to make money from our craft, we need to analyze the costs associated with our business.
I welcome your thoughts, feedback, and questions. Until then, happy sales!
Dorene
Showing posts with label pricing. Show all posts
Showing posts with label pricing. Show all posts
Wednesday, November 28, 2012
Sunday, July 22, 2012
Consignment Selling Lessons Learned, Part 2
As we discussed in last week's post on Consignment Selling Lessons Learned, Part 1, selling your products in consignment shops is often an artisan's first foray into the retail world. Following are more lessons I've learned:
5.) Product placement gives you the opportunity to see what will sell on a larger scale. Many of you may sell on Etsy, Artfire, or a similar venue in which you most likely sell one product at a time. In doing so, it can be difficult to get a feel for what customers really want to buy. Selling on a larger scale also teaches you how to "mass produce" your product. As an artisan of home fragrance, one of the selling points on my Etsy shop is that each candle is made to order, so it's easy for me to work in small batches. Even creating six similar items for one store teaches some good production lessons on planning for economies of scale from supply inventory to packaging. Mass production lessons apply even if you aim for each item to be a unique creation.
6.) Watch your inventory. This was huge for me. At one time I considered myself fortunate to have my products in four stores. Yes, all consignment. This was a great opportunity for me, especially since all four stores were in separate geographic locations and my "reach" was growing. However, when I decided not to renew my contract in one store and when another store decided to close for the season, not only were my opportunities halved, but I was faced with bringing my inventory home. Over six cases of product. I hadn't realized just how much money I had spent stocking these stores. Nor did I realize what six cases of product would mean back in my home. I'm still selling it off. My practice now is to provide no more than two cases of product unless/until my product really moves.
7.) Talk to the owner/manager about your product. Just because there is more risk on the artisan rather than the owner in stocking the store doesn't mean the owner isn't interested in your product. Your wares would not be in the store if the owner did not think they could sell. In talking to the owner/manager, you can get a better perspective of what sells in the store. Rather than simply dropping off product, I've actually asked the owner what fragrances and product would work. And I've been surprised. I can't seem to sell one item of Herb Garden on Etsy, yet it's flying off the shelf in one store - and it would not be had I not asked the owner what she might like. In talking with another owner, I was able to secure a better booth location, ability to use their displays and to place signage in their windows.
8.) Any store (regardless of retail type) give your product credibility. Once I landed my first store, it became much easier to approach other stores and to talk about my ability to provide a product solution. The stores that carry my product are in various geographic locations and are none the wiser that all venues are consignment. And it's taught me to talk their language. I can now discuss wholesale costs, payment terms, and minimum orders with an authority I gained from all the combined lessons I've learned.
So if you're considering selling retail but don't know where to start, check out some area consignment shops. Hopefully you'll learn some good business skills, make some sales, and gain the confidence and creativity to grow your business in new ways!
Happy sales!
Dorene
5.) Product placement gives you the opportunity to see what will sell on a larger scale. Many of you may sell on Etsy, Artfire, or a similar venue in which you most likely sell one product at a time. In doing so, it can be difficult to get a feel for what customers really want to buy. Selling on a larger scale also teaches you how to "mass produce" your product. As an artisan of home fragrance, one of the selling points on my Etsy shop is that each candle is made to order, so it's easy for me to work in small batches. Even creating six similar items for one store teaches some good production lessons on planning for economies of scale from supply inventory to packaging. Mass production lessons apply even if you aim for each item to be a unique creation.
6.) Watch your inventory. This was huge for me. At one time I considered myself fortunate to have my products in four stores. Yes, all consignment. This was a great opportunity for me, especially since all four stores were in separate geographic locations and my "reach" was growing. However, when I decided not to renew my contract in one store and when another store decided to close for the season, not only were my opportunities halved, but I was faced with bringing my inventory home. Over six cases of product. I hadn't realized just how much money I had spent stocking these stores. Nor did I realize what six cases of product would mean back in my home. I'm still selling it off. My practice now is to provide no more than two cases of product unless/until my product really moves.
7.) Talk to the owner/manager about your product. Just because there is more risk on the artisan rather than the owner in stocking the store doesn't mean the owner isn't interested in your product. Your wares would not be in the store if the owner did not think they could sell. In talking to the owner/manager, you can get a better perspective of what sells in the store. Rather than simply dropping off product, I've actually asked the owner what fragrances and product would work. And I've been surprised. I can't seem to sell one item of Herb Garden on Etsy, yet it's flying off the shelf in one store - and it would not be had I not asked the owner what she might like. In talking with another owner, I was able to secure a better booth location, ability to use their displays and to place signage in their windows.
8.) Any store (regardless of retail type) give your product credibility. Once I landed my first store, it became much easier to approach other stores and to talk about my ability to provide a product solution. The stores that carry my product are in various geographic locations and are none the wiser that all venues are consignment. And it's taught me to talk their language. I can now discuss wholesale costs, payment terms, and minimum orders with an authority I gained from all the combined lessons I've learned.
So if you're considering selling retail but don't know where to start, check out some area consignment shops. Hopefully you'll learn some good business skills, make some sales, and gain the confidence and creativity to grow your business in new ways!
Happy sales!
Dorene
Tuesday, July 17, 2012
Consignment Selling Lessons Learned, Part 1
You have a product you know is quality....friends help you and buy a few...you have a few online sales...and then what? The business side of your brain knows you need volume sales in order to make a profit, and the realist side of you wonders how in the world you're going to make that happen....when, lo and behold, a retail opportunity presents itself to you.
To the "outside" world, it's retail. To the business owner, it's....gulp....consignment.
Many products actually make their way to market via the consignment path. There's nothing wrong with that. However, just as with any business practice and venture, there are best practices. While I certainly am not in a position to give you best practices with regard to consignment selling, I can certainly share a few lessons I've learned over the past year my products have been in consignment stores:
1.) Visit the store. Does it bring in the type of customer who would buy your product? Does your price point fit with the other products? Visiting the store is my first decision making factor. Before you commit to a consignment arrangement, take some time to visit the store, to see the other products being sold, and to watch the customer base. Is the owner in it for the long haul? Will your product "fit" with others being sold? Do the customers coming through the door fit your existing customer base? Don't be afraid to say no at this point - for the good (on this point) the burden is on you.
2.) Understand the pricing model. Not every consignment contract is alike. I've been in five stores, all with a variety of contracts from straight booth rent, to straight commission. In one store, it's my responsibility to pay sales tax; in another it was an expectation to contribute to the marketing budget. Each contract arrangement is unique to the store but should still provide an overall profit. Which leads to price....
3.) Your prices don't have to be the same in every store, but they should be in the same range. Since every store will have it's unique contract arrangement, you made need to adjust your prices accordingly in order to retain the profit margin. In my case of candles, I don't have the volume of a large national chain in which my sales would justify a $14.95 price point for the same product in Kohl's, Walmart, or Target. However, if a customer is shopping my product from store to store, the range of $16.50 to $18.00 for the same item feels reasonable.
4.) Don't expect the venue to do the selling for you. Some consignment ventures are established on strong business models, but not all. Not all consignment ventures have a strong marketing budget. While I don't pay to advertise my products in a retail environment, I do use social and electronic media to promote what's new in each store or to support their social media marketing efforts. Because they did not buy your product to resell, you are the one taking the risk and should bear a portion of the burden for the sale.
That's a lot for one post! I'll follow up on the rest of the lessons I've learned from consignment selling in a later post. I welcome you to post your feedback and experiences below.
Until then,
Dorene
To the "outside" world, it's retail. To the business owner, it's....gulp....consignment.
Many products actually make their way to market via the consignment path. There's nothing wrong with that. However, just as with any business practice and venture, there are best practices. While I certainly am not in a position to give you best practices with regard to consignment selling, I can certainly share a few lessons I've learned over the past year my products have been in consignment stores:
1.) Visit the store. Does it bring in the type of customer who would buy your product? Does your price point fit with the other products? Visiting the store is my first decision making factor. Before you commit to a consignment arrangement, take some time to visit the store, to see the other products being sold, and to watch the customer base. Is the owner in it for the long haul? Will your product "fit" with others being sold? Do the customers coming through the door fit your existing customer base? Don't be afraid to say no at this point - for the good (on this point) the burden is on you.
2.) Understand the pricing model. Not every consignment contract is alike. I've been in five stores, all with a variety of contracts from straight booth rent, to straight commission. In one store, it's my responsibility to pay sales tax; in another it was an expectation to contribute to the marketing budget. Each contract arrangement is unique to the store but should still provide an overall profit. Which leads to price....
3.) Your prices don't have to be the same in every store, but they should be in the same range. Since every store will have it's unique contract arrangement, you made need to adjust your prices accordingly in order to retain the profit margin. In my case of candles, I don't have the volume of a large national chain in which my sales would justify a $14.95 price point for the same product in Kohl's, Walmart, or Target. However, if a customer is shopping my product from store to store, the range of $16.50 to $18.00 for the same item feels reasonable.
4.) Don't expect the venue to do the selling for you. Some consignment ventures are established on strong business models, but not all. Not all consignment ventures have a strong marketing budget. While I don't pay to advertise my products in a retail environment, I do use social and electronic media to promote what's new in each store or to support their social media marketing efforts. Because they did not buy your product to resell, you are the one taking the risk and should bear a portion of the burden for the sale.
That's a lot for one post! I'll follow up on the rest of the lessons I've learned from consignment selling in a later post. I welcome you to post your feedback and experiences below.
Until then,
Dorene
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