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Pricing Formula

These are all the soft touchy feely stuff but influences the way we price our work that's what helps us determine whether the price that we're about to come up with is our final price or just a jumping off points all right so that the answers to those questions all the stuff that you just put in there that's the your framework for value pricing that's how you can really ask yourself is this the right price or not so in the time that we have remaining I want to do the math well not really I want to show you some equations so I have to say that all of this middie gritty pricing stuff is courtesy of my friend megan the jeweler who also runs a site called designing an mba dot com which I highly recommend everybody checking out specifically designing an mba dot com slash price has all of her like kind of best of pricing advice right on there so it's like her new little hub for pricing so I'm gonna walk you through all this if you need more information that is definitely the place to go so w...

e've got a few pricing for email is here for you today this is on ly the beginning but this is what people are used teo materials plus overhead plus labor equals base your base price materials plus overhead post labor equals base materials this is easy this is the stuff that you put in your product it's the wood it's the medal it's the clay it's the fabric those are your materials and everything you know the threat everything that holds it all together as well overhead is what it costs to run your business there's administrative costs there's rent their studio equipment there's internet access there's electricity there's all sorts of things and there's lots of different ways to factor that overhead price. Some people like to take the whole big number for the year and break it down by the number of products you sell on average in a year and include that number as the overhead in this price okay or if possible, you could also try and figure out what the overhead per product is for an individual type of product but I think the easiest way to do this is actually a kind of a generalization figure out what it costs to run your business outside of materials and use that as a big number that you divide down into pieces by the act by the number of products you sell. All right, I know that it's a mouthful but it's really it's much more simple than then you might think then this last piece of the pie is super duper important labor labor I want to know from online how many people are not factoring labor into their prices how many people are not factoring labor into their prices because people you absolutely must factor in a per hour rate into your price you must know how long your price takes and how much that costs you at your per hour labour rate. Why how would you ever hire someone to help you with production if you don't factor labor in to the price don't worry we'll get to how you get paid in just a minute yes yeah please. So do you for the labor cost do you price what you would pay someone to make it or what you want to get paid yourself per hour? Um sort of a company that actually didn't like okay, so and that's really good points and I'm going to kind of get to that next equation ok, but I would I would figure in actually somewhere in between ok ok. And because that's going to give you a little bit more padding teo but yeah so not may be not as low as you would pay a just starting out production assistant but also not necessarily as high as what you want to get paid as an expert cross person. Okay, okay. We'll get to how that measures out in just a minute. If you are the only person for now though you know I would I would factor in at the hourly rate you want okay, okay, does that make sense because you could always pay someone last it's no factor that right. Okay, so materials plus overhead plus labor equals base. This is all in your workbooks, by the way, on page twenty too, which is totally worth enrolling in the course just to get the formulas right. All right, base plus profit equals wholesale base plus profits equals wholesale. So now we've taken these three things. Added them into this equation and added profit to that. Now is not really a plus, because most of the time it's a percentage. But this was the easiest thing for me to figure it out. What is profit? Profit is what your business runs on its what you run on it's, what allows you to make investments for the future? It's, what allows you to get that new website designs it's? What allows you to put money in your savings account? Profit is how you get paid and how you re invest in your business, so that if you are paying someone else labor, because I know lots of makers who are getting to the point where they're selling mohr than they can make them selves you're bringing in a production assistant, you need to be able to pay them labor and also pay yourself so that's, where profit comes in, all right, now, that could be all sorts of different things profit is not like a hard and fast I'm not going to give you a specific percentage I'm not going to give you a specific dollar amount but I want you to make a decision empowered after this morning's talk about what you need to make in profit per item now other note on this formula wholesale this is the wholesale price people all the time asked me how they can make any money at their business how is it even possible to sell it wholesale when you give away fifty percent of the cost of a product? The thing about wholesale is you are not giving away fifty percent it's that in retail you get an extra fifty ver said you get to double the price all right? So if you are price, if your retail prices are such that fifty percent of that price doesn't feel super good to you earning you are priced incorrectly, all right? If you can't afford to sell it wholesale, you won't make this business work really glad that you are addressing that and saying it so strongly because definitely many, many maybe five or six questions have come in about wholesale pricing versus retail pricing yeah it's a really important point so important yes, so absolutely you must figure in the base do you have to pay yourself for the things that you're already spending the materials, the overhead labor that's money out of your pocket already you must cover that in the base price, then you must add in profit so that you can pay yourself, put money in your savings account, re invest in the business, and that gets you to the wholesale price. Then, simply wholesale times to a lot of the time equals retail. Now, certainly, you'll run into other retailers who wants to to want to do two and a half or two point two that's fine, they can do whatever they want, but generally speaking, in this market with these type of products, it's wholesale times two equals retail, so this is the price that when you sell goods to consumers, you need to be selling at not at this price, not somewhere in between, but at retail, because here's, the thing, if you're selling at wholesale or you're selling at something lower than retail retailers are not going to want to work with you, they don't want to be undercut by designers. Ah lot of them get nervous with the fact that you're even selling to begin with, but many are coming around to realize that, you know, it's all about bill baking, a bigger pie, and the more people that are selling this work means the more people that are shopping for this work and that's good for them, but you can't undercut them you cannot undercut them so wholesale times too must equal your retail price as well as your retailers price meghan I just want to do one tiny shadow you as your sister when you are paying someone else to do the work please pay them appropriately because I've had lots of people come and ask me what assistant should be paid like I can't can I get a free intern no no free interns not even if they're college students I don't care yeah exactly be paid yes yeah yeah and that's just it how many of us to not only think about paying someone less than is appropriate less than minimum wage which is here we go how many of that but how many of us pay our cells left than minimum wage? I know you're out there if you're not factoring in labor into your cost most likely you're paying yourself less than minimum wage here's another thing how many of you would work for minimum wage? How many of you would work for eight nine ten dollars an hour depending on where you live how many of you would work for minimum wage for somebody else? Why would you pay yourself minimum wage? What do you expect to be paid as a professional? What do you expect to be paid as an expert that's your hourly rate it better not be less than twenty dollars an hour because let me tell you, at twenty dollars an hour, you're really only making kind of craftsman minimum wage. You're not going to pay the bills on that twenty dollars an hour because you can't factor in a forty hour work week. Okay? That's it a whole lot of math, but anyhow, trust me less than twenty dollars a knauer is not going to cut it. So this needs to reflect at least a twenty dollars per hour labour rate, right? Materials plus overhead plus labor equals base base plus profit equals wholesale wholesale times two equals retail. Oh, I got the wise component important on this retail price also is just a jumping off point. So if you get to this retail price and you look at your work and you looked at the marketplace and you look at all those factors that we just talked about in terms of influencing price and this price doesn't make sense, it seems low it seems out of touch. You need to adjust it and you can adjust it as much as you need. Teo, you could double what you what you got as the retail price to make it match the market and a lot of times that's what I see people needing to dio that's where value pricing really comes into play, but I wanted to cover value pricing first, so that we were bogged down in the numbers trying to figure this out while we were talking about that. So wholesale times two equals retail, unless the retail price isn't right. Unless the retail price doesn't make sense in terms of the other influencing factors. Unless the retail price doesn't make sense for the market you want to be in, because you can use this retail number to catapult you into a new all market. All right, I want to cover this next thing, and then we'll go to questions after that because I just want to make sure I get this in quick. Okay, cool. So, uh, speaking of meghan, I have to give a hundred percent credit to her on this one. So this is megan's three tiers of price positioning. I came up with that name. Thanks, megan. Alright, megan's three tiers of price positioning are pretty simple. Gateway upsell, an aspirational all of your lines. All of your collections need to include products that fit each of these categories. The gateway necklace, her little black necklace here is the necklace that I described or is. Similar to the necklace that I described earlier is being sort of her minimum viable product for this line and it's often the product that gets people hooked I want that necklace let me tell you it's what hooked me before meghan and I were even friends before I knew megan lived thirty minutes down the road from me I found her on at sea it when she was the featured seller and I saw not this particular necklace but one very very close and I said one day one day when I am making more money I will have that necklace and then one day I bought it and she had delivered it to the house and then we were friends and I didn't pay for anything after that but I think this is the gateway necklace it's the gate wait rug all right this is how you get hooked this is how she gets you hooked that's the gateway necklace ninety two dollars it's a fairly accessible piece of statement jewelry then she's got the up sell seon by just the gateway necklace oh no I needed the earrings to go with it I shouldn't point to my ears they're not hers so I needed the up sell necklace there the up sell earrings to go with it so I ordered a pair of little black earings as well little dangly on they were about seventy these these particular ones are seventy dollars and so she hasn't just now made a ninety two dollars sale but she's made one hundred sixty two dollar sale see how that works you can't just have this you gotta have both and as an aside this is also really great for retailers as well so if you're going in wholesaling your work putting together a catalog going to trade shows when you consejo a retailer hey this is the necklace everyone wants to buy first and then they want these earrings you get a larger order from your retailer and your retailers are happier because they get to make that up sale as well ok so gateway up cell finally we get to aspirational aspirational this is the necklace that similar to the one that I'm wearing today this is a big piece there's a lot of materials here there's a lot of these little steel leave this because of the statement it makes is two hundred forty five dollars it's not a product that people are going to buy right away sometimes it is every so often and that's great but this is not an impulse purchase for most people this is oh my gosh I want that and I'm going to save money for it or I'm going to find the occasion for it and put it on my wish list I tell my husband my boyfriend my mother I must have this necklace all right it's the peace that you remember her brand by and so it sits at the top end or close to the top of her pricing scheme that's the aspirational necklace but even if you don't by this today you might buy this one today because this one you could buy for yourself even if this one needs to be bought for you by somebody else or you need to save up so that's the three tiers of pricing me just to talk about the problem of discounting really quickly the problem of discounting ho boy okay so we love to run sales because we're sale shoppers at least a lot of us are I'm a sale shopper I bought this dress on sail oh yeah I bought these boots in a bigger sale I love sales as much as the next girl right? I also love paying full price for stuff I really want here's the problem with discounting discounting to rate it has many uses you can booster sales you can celebrate your loyal customers you can offer a coupon for people signing up to your mailing list you can get rid of stuff you don't want any more those are all great reasons to have a sale here's where discounting becomes a problem when you're discounted price is really just your regular price if you're running a sale all the time or a fifty percent of the time even thirty percent of the time you're running a sale that sale price isn't but the sale price it's the regular price you've conditioned everyone to expect to pay less for your work that doesn't work when I used to work at a discount department store when I was in college and they had a point of telling all the training is that in any given time eighty percent of the store was on sale percent of the store eighty percent of the store was on sale why would you ever by the other twenty percent at full price you would never buy anything at full price you would wait till it went on sale and probably you'd wait till it went on clearance because they only also clearance to things out like nobody's business and so no one would ever pay full price for something that on lee ever pay the discounted price and unfortunately I see many maker artist designer business is running very similar pricing schemes sure I'll set my price is a in a sustainable way I'll just run a sale most of the time so people can afford it that's not sustainable and it's it's not fair to your customers it's not treating them well and it's not treating yourself well and so that is the main problem with discounting I know there are questions so I would love to answer them in the couple of minutes that we have left we just were going get teo maybe one maybe two question right and then move on so amber's mittens says, after years of being exclusively a maker manufacturer, I've decided to branch out into some service products and supplies. Do you think I should have to pricing formulas or strategies for services and mac, you fat manufacturing on dh? Then if there's an opportunity for you to talk about pricing for licensing your design? I am not an expert in pricing licensing, and I think that there's probably better better resource is then I think it's a great thing and it's something I recommend to a lot of people because it can be a great revenue stream, but it's, not something. I'm comfortable talking about the specifics on pricing, even though it's a great question, but megan would be a good purse and to talk teo or at least someone that could hook you up with cem cem resource is in terms of different pricing formulas for service based businesses versus product based businesses. Yes, you want to think about that pricing slightly differently. Pricing services is very much value pricing, especially if you're selling services at scale. So if it's, for instance, off course that you've put together or even a workshop where you're selling the same thing two thirty people who were going to fill your workshop it's very much based on value because you're going to cover your overhead extremely quickly you know, it doesn't cost a lot to run out of space, amber, I know you've got a studio's you're probably using that space s oh, yeah, your overhead is very minimal, your materials are probably going to be very minimal, so I really think I would really think hard about the soft side of the pricing because that stuffs all super applicable to service based businesses as well, who else is offering this kind of workshop? Who else is offering this kind of service? What market do I want to be in and what are all those different influencing factors and use that to come up with an appropriate price? Also, as I mentioned before, price is definitely always an ongoing conversation in your business. You're not going to come up with one price and be able to stick with it for five years or ten years. You need to be constantly recalibrating making sure that you're bringing attention to price in your business so that something that you're thinking about if you notice something out in the marketplace, if you notice something out in a boutique, you can make an adjustment if you need teo, I just want to ask you to remind people where they can get more pricing information if they were loving and found this. So useful. Yeah. So meghan almond is my pricing muse a cz well, the designer of all my missin jewelry and you confined that pricing information at designing and m b a dot com slash price. Perfect. So what are we going to do when we come back? When we come back? We're going to take all this conversation about value and turn it and flip it into a marketing conversation, and so we're going to talk about what I call values driven marketing on. So we'll talk about what that has to do with price, but also just kind of tackle this topic of marketing and how you can use that to start making more money in your business. Awesome. I love how this is a step by step by step, the building off of the things we're talking about, okay, just a couple of comments from people online. Lisa fit deyoung on facebook said really fantastic material and terror is an amazing teacher speaker thank you, I agree, and bridget lyons is on twitter saying, I love seeing tara genteelly in her genius zone talking about value and pricing.