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The Price Is Right... Or Is It?
Okay, so you’re ready for your product to hit stores but… you still need a price.
There are a few things to consider before diving in and placing a dollar amount to your product. To be profitable, you need to determine your manufacturing cost, the wholesale price and retail price.
First things first, there are a variety of ways to determine your pricing strategy, from the Keystone Method, Value-Based Pricing, to Competitive Pricing and more. In this article, we focus on the KeyStone Method, but ultimately you have to decide what's best for your business.
Take note of how much this product costs you to produce. The 'cost' can be viewed as an expense—money that will have to come out of your pocket.
This is called the Manufacturing Cost, the amount it costs you to make your product. This includes the total dollar amount of material, labour, and overhead (such as shipping and receiving) required to piece your goods together to sell.
Identifying your manufacturing cost will help you to decide on a wholesale price that assures your merchandise is profitable.
Now, 'price' can be viewed as your potential revenue—this is money that is going in your pocket. But there are two different prices to consider: wholesale price and retail price.
Wholesale price is the amount you expect to sell your product to retailers (e.g. SFU Spirit Shop). To profit from the retailer, typically the producer (you) would set the wholesale price to be higher than your manufacturing cost. This mark-up is often called the Keystone Markup and is often twice the manufacturing cost.
A ceramic mug costs you $3* to produce. With the Keystone Markup, your wholesale price to the SFU Spirit Shop would be $6.
Still with us? Now when the retailer sells your product to customers, they will sell it at Retail Price—so they too can profit from sales. They will also apply a Keystone Markup, meaning they will add 50% on top of what they paid for your product. Often you can offer a Suggested Retail Price to retailers, to ensure your price remains competitive in the market.
If it costs the SFU Spirit Shop $6 to purchase your ceramic mug, to make a reasonable profit, they will likely sell it for $12.
A common practice in pricing is to never undercut your retailer. Meaning, the price you list on your website/store shouldn't be less than what your retailers are marketing. Why would customers buy from retail stores when prices on your site are much lower? This would make retailers less likely to purchase from you again.
Now, this isn't a one-size-fits-all strategy. You have to evaluate your market and determine if this pricing method works for you. Good luck!
*Don’t forget to calculate your cost of labour - this is a very common mistake!