A question that can interestingly apply to many a shopping spree. The answer could make the difference between hearing the magical chime of the register and having to watch that customer do an awkward walk-run out of the store. If your quality is on point, it could be coming down to the numbers printed on your tags.New designers on the block may be tempted to absorb most of the costs in order to lure shoppers in with absolutely low price points. Or perhaps haven’t taken into account all the extra costs that went into making the products in the first place. Costing your product correctly is incredibly important because it not only affects where your brand will be positioned in the market, but also directly affects your profits. That extra money is what helps your brand grow and keeps the lights on! Once you’ve figured out your cost price, there are several approaches that could help you price in a way that works for your product line.
*But first, what is the ‘Cost Price’? *
This is essentially your business’s basis. To figure out what your ‘break-even point’ is, you’ll need to identify what your work really costs you. Break-even in this case refers to you expenditure corresponding with your income. Once this is established, you can begin to decide on your profit margins as well as your retail and wholesale prices.
Great for: Covering your costs and expenses
This pricing method considers five key elements to make you walk away with a profit. These are your cost price, expenses in form of administration, design and overheads, profit margins, Wholesale price and your recommended retail price (RRP). Basically:
Cost Price = Production cost per unit + ((Total overheads + admin expenses) ÷ Number of units produced).
Wholesale Price = Cost price+ Profit Margin
RRP = Wholesale price x 2
Great for: Figuring out if you should produce the product in the first place
Take for example you want to make a statement necklace. With the current market in mind, as well as your consumer and brand, the recommended retail price will demonstrably be around KSh20,000. To get your cost price, you’d have to divide it by four because cost price should be a quarter of your price. So, could you make a quality statement necklace for KSh5,000? If the answer is no, you either need to edit your design or manufacturing process, or alternatively scrap the idea all together.
Great for: Offloading inventory and increasing foot traffic.
Who doesn’t love a sale? Not only are you introducing your brand to the more price-sensitive consumer, you get to release some of your old inventory to make room for new stock. Not to mention it can double as loss-leading pricing if the sale leads the consumer into buying additional products in the store that aren’t necessarily on sale too. Careful with the discount strategy though. If utilized too often, your brand will become synonymous with bargains and you’ll have to keep it up. Even worse, it can make your product/brand appear to be tawdry. If your product is more up the creative ally, this tactic may not be for you.
Great for: A brand that want to keep its pricing strategy super simple.
In a nut shell, it’s doubling your price (Or multiplying in by 2.5 at most). Take your cost price, let’s say KSh10,000. Multiply this by two to get your wholesale price. That would be KS20,000. To get your retail price, you’d multiply the wholesale price by two, making it KSh40,000. This isn’t the best formula if your product has a slow inventory turnover, high handling and shipping costs or are scarce. But if you’re easily available everywhere, go for it.
What if you don’t want a 50% mark-up? Depending on your situation, you may want your mark-up to be higher or lower than what would be your keystone price. A simple formula to help you out with this is:
Retail price = [(cost of item) ÷ (100- mark-up percentage)] x 100
Example: If creating your ring would cost you KSh1500 and you decide on a 40% markup, your retail price would be Ksh2500
[(1500) ÷ (100- 40)] x 100 = [(1500 ÷ 60)] x 100 = Ksh2500
Product Bundling Pricing
Great for: Making a low-cost item appear of a higher value
Got smaller apparel pieces such as earrings, socks or knickers? Selling multiple pieces under a single price can ultimately lead to larger volume purchases. Take for example a pair of earrings could be KSh1000 but a pack of five pair of earrings comes too Ksh1200. Guess which one the shopper will head for?
Great for: Prompting impulse buying
Studies have shown that ending your prices with an odd number increases the likelihood of a purchase. Turns out that odd numbers help to minimize the pain of spending your hard-earned money. Interestingly, researchers at MIT and the University of Chicago discovered that the number nine in particular is the most effective odd number. Hence a customer is more likely to buy a product if it’s Ksh490 as opposed to Ksh440. Like with discount pricing, this may not be suitable for a luxury or creative brand as it has the possibility of cheapening your brand perception.
When it comes to pricing, it also helps to take into consideration the market going rate, how you would cost extra features for each product or how you would cost an emergency order to compensate the shortened time-frame. Setting prices may seem like the least favourite thing to do as a designer but it’s a necessary action to ensure your brand can compete and grow in the market. As well as ensure your target customers always think your products are a price worth paying for.