Pricing Your Merchandise 101: Basics for Retail and Wholesale
After nearly 20 years running businesses, the one thing I have seen over and over again is people pricing their products too low. When I was a young adult and thinking about starting a business, my dad told me that in order to make any money, you couldn't sell for less than 3x-4x your production cost at retail. If you sold too low, you'd be setting yourself up for troubled times.
Why? I have a very simplified example to help illustrate it.
Let's say your product cost you $5 to make. If you sell that item for $10, all you really accomplished was to pay for the one you made and pay for one to replace the one you sold. This creates a scenario where you are constantly chasing making any money. Add in investing in some new items before all or at least half of the last product run is done and you can't pull any profits out of the business.
If you are making products for fun, if you make 100 and sell 100, you have some money in your pocket, but it's not a good model for really making money to support your endeavor.
When it comes to wholesaling your merchandise, stores typically will pay what's often referred to as "keystone". They want to pay you 1/2 of it's retail price. In the above scenario, if you sold your product for $10 and a store wanted to buy them from you, they'd ask $5 (or less depending on volume). You simply have no room to do anything.
Using this same $5 item to produce, if it was priced at $15, you'd make $10 on direct sales and could sell for $7.50 wholesale. In wholesale scenarios, you will always make less than a direct sale, but it can be used to help you get your order quantities up that reduce your cost across the board and increase profits from your direct sales.
In a better situation, you'd be priced at $20 retail, allowing $10 wholesale, but I am using the 3x minimum to illustrate a point on the lowest you should be selling for.
Selling the $5 product at $15 breaks down into $5 to make it, $5 to replace it and $5 left over as money not already assigned to something. This of course can go into new product development, or into your pocket as profit. If selling for $20, that leaves $10 per sale in your pocket.
At Alchemy Merch, we produce products below wholesale and on a whole different pricing model than a retail company will use. This is why you can buy 200 gold 2 color hard enamel for $440 and sell them for $10-12 each to bring in $2000-$2400 on that initial investment and they provide really great margins.
There of course are plenty of pricing models you can use and some people will price at a premium and some will approach it from a discounters perspective, but if you are trying to make money from creating merchandise, you can't price too low or else you will keep running in circles forever.
If you have interest in reading more about profit models, there are two books I'd highly suggest.
The Art of Profitability by Adrian Slywotzky - In this book, they use a mentor/mentee style to discuss and show 20+ examples of how companies price differently and it's a very interesting read to see all of the different ways people come about creating pricing tiers and their approaches.
Profit First by by Mike Michalowicz - They take the "small plates" approach by having you break out your costs and income into various accounts that in turn show you better what you really have to work with and how to make better decisions and pull out profits. This is a great one for people that are transitioning into full time with their business or getting close to it.