How to price your products as a Small Business?

This is a very simple “Pricing a Product” worksheet. When you start a new business or add a new product to your store you have to figure out the costs associated with producing your products. 

In the past small business owners could just look at their cost of materials and triple it. The assumption was that 1/3 of the cost was materials, 1/3 of the cost is personnel, and 1/3 of the cost is overhead. Unfortunately, this model is no longer accurate because of the rising cost of business. There is an increased cost of living which translates into an increased cost for personnel. There is an increase in fixed costs a business has to deal with (electric, gas, rent/ lease/mortgage). There is an increase in the costs of all tools and equipment (probably caused by inflation/recession etc).

Another method that is sometimes used is to look at the market and price your item the same as similar items. This method assumes your fellow makers are local and have the same basics business expenses you do. The problem with this method is that we are now in a global market, and you’re competing with businesses that have a much lower cost for personnel and overhead and fixed costs. Some may even have lower materials costs.

Using either of those methods today will mean that you are constantly struggling to make ends meet. You may be able to keep the doors open and the lights on, but if you want your small business to be your full-time gig you’ll need another method for pricing your products.

The method we use is to do the paperwork and figure out all our costs. Here’s an example using the same imaginary sticker company from the startup worksheet.

We figure out our startup costs. (Here’s a short article on the basices of that: how-do-start-up-costs-work-for-small-business ) Take the amount from the other form, in this case, we are going with 49 cents per item produced.

We calculate our overhead costs. Overhead costs are the rent or lease for our studio space and basic utility bills (electric, gas, water). This is our monthly fixed costs. We estimate how many products we will make in a month and divide that into our fixed costs. In this example, it is 34 cents per item produced.

Then we figure out our packaging, office supplies, and shipping materials per product. The shipping fees that are charged automatically by the e-commerce software does not include the cost of packaging and shipping materials. You have to add this to the product price. In this case, we estimate 75 cents per item produced.

Then we figure out all the material (consumables) that are used up creating the product. In the case of stickers, our most basic consumables are sticker paper and ink. Those are estimated to be 13 cents and 34 cents, for a price of 47 cents per item produced.

Then we figure out how many items can be made in an hour, and how much our employee cost is for that hour. That will calculate your personnel cost per item produced. Remember even if it’s just you, it’s a cost that needs to be accounted for, especially if you want the business to grow and be a full-time gig. In this example, our employee cost is estimated at $1.00 per item produced.

Then we add those all together and the estimated wholesale minimum price is $3.05 per sticker sheet.

This wholesale price does not include your payment processor or bank fees that may be incurred to accept the payment for the wholesale order.

Next, we have to figure out your retail price, which must be higher than your wholesale price. Generally, the retail price would be set based on your business having a separate storefront where you sell your goods. This could be the physical building, are co-op space, a booth at a festival or fair, or an online store. Each of these options or all of them have their own expenses attached to them. The physical building would be the most expensive, and each of the other options would step down in price as the overhead costs are reduced. Again like your studio or office, your store has rent or mortgage, and utilities (electric, gas, water, sewer). A co-op space will likely have a booth cost that includes the monthly utilities in the cost. Similarly, festivals and fairs have application fees and or site or booth fees, and sometimes both. Online stores have hosting fees, and expenses, for example, an SSL certificate, and e-commerce software). Some businesses have multiple venues that they can sell their products at. Depending on what your business situation is, add up the appropriate numbers are for the month.

Then you have your variable expenses.

If you accept payment in forms other than cash, you have bank fees and payment processor fees. You need to account for these fees and build them into your retail price. The fees can get pretty complicated so please review your payment processor agreements to determine your fees. Please note that in most cases shipping fees may be included in the total that the payment processor uses to calculate it’s fee.

Then you have advertising fees, which could be physical, a few examples are newspaper, and magazines. Advertising could be listing fees with online mall-style sites, a few examples would be Etsy or eBay. Advertising could be digital listings in search sites like Google and Bing.

In our example, the processor fees totaled to 91 cents per product sold.

Next, you have to account for a small amount of profit for the business, which is used to invest in research for developing new products. This amount depends on your business, there’s no formula that I know of for it. We have estimated a new product release a week for our business.

Then you have to add these items together to get your retail price. In our example, the retail price is $9.16.

Here’s a form to get you started: Product Price Worksheet

**** Standard disclaimer. I am not an accountant. I am not a tax professional.  We are offering this very simple printable to help you get started, and to help you collect all the information you need to take to an accountant or tax professional.  Please (PLEASE, PLEASE, PLEASE) talk to a tax professional if you have tax questions, and an accountant if you have any other accounting questions. We have been winging this small business thing for several years by reading all the booklets and papers put out by the IRS and accountants.  We are not experts. ****

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