Costing and Pricing

Pricing is not an exact science. How you arrive at a price for your product will be affected by many more factors than you might first think, both inside your business and amongst your target consumers and customers.

How you arrive at a final price for you product will depend on:

  • Understanding the true cost of producing your product
  • Understanding what the market will pay for the product
  • Deciding on where in the market your price will position you – as a premium, value or discount product
  • Price is a key signal to your market. Too low a price will signal that your product is lower quality, or that you are desperate for a sale. Analyse your marketplace by visiting supermarkets and other retailers, checking pricelists on the internet, and talking to distributors.

If you have spent time understanding how much it costs you to produce your product this means you will have the necessary information to ensure you can sell your product for a profit. Importantly, you will also know how much you can reduce or manipulate prices to gain a sale without selling at a loss. This information, along with knowing which of your products are the most profitable, will also help you identify opportunities where you can offer a volume discount without adversely affecting your bottom line.

Ensure you discuss the costing and pricing of your product with your accountant before going to the market.

When working out your pricing you must take into account the different channels of distribution you are considering using. You cannot use one price for all. You must work out your pricing ensuring that if you use a distributor there is enough margin so everyone can make a profit.

If you are selling direct to a retailer, the money you make must cover your time, effort, samples, freight and replacement stock.

If you are selling products via your own factory outlet or directly via your website, but also have distribution to other retail outlets, you must be careful not to undercut the retailers. This is why many factory outlets carry stock that you cannot buy elsewhere. This way there is no direct comparison between your outlet and the other retailers.

How to cost a product

Not understanding your costing processes and having reliable pricing figures puts your business at risk from:

  • underpricing leading to loss of profit
  • overpricing leading to loss of sales
  • taking on jobs that are unprofitable or end up actually costing you money
  • offering discounts that lead to loss making
  • poor cost control, including excessive overheads
  • operating below capacity
  • unprofitable products being pursued

Product Costing

To work out the true cost of your product to manufacture you need to break it down into the following components:

  • materials and packaging
  • direct labour
  • direct overheads
  • indirect overheads in running the business

You will need to identify actual costs for each of these components. To do so, you need to know:

Materials and packaging

  • the costs of raw materials and packaging to make a batch or product
  • how you account for wastage- are you including or excluding this from your calculations?

Direct labour

  •  the hours by your production workers for making the products
  • your labour hourly rate and whether this figure includes superannuation, work cover, payroll tax, employee entitlements etc?
  • labour hours per what was produced for the day, week or month
  • whether the owners are involved in the manufacturing process and whether they are paying themselves a market salary?
  • the methodology used to allocate labour costs amongst the products produced

Direct overheads

  • expenses such as depreciation on machines, gas, electricity, freight etc
  • whether these are these included in pricing your products and how?

Indirect overheads

  • costs of services and business expenses including accounting, bank fees, insurance, selling, occupancy, telephone, administration and office expenses etc.
  • whether, and how,  these expenses are taken into account when pricing your product

Want more information?

Your pricing will also be a key factor in your marketing mix – see Marketing Plans for more information.

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