Could you give me a dummies' guide to pricing products/making enough profit?

[justonemorethread]

Thank you!
I am terrible with numbers! I live in a developing country and am helping someone start their own cottage industry.

I figure that for each item she makes she should calculate the cost of the material, thread, zips etc…
But how much to add to make a good profit to make it a self sustaining business? Should she account for hours of labour?

So things that take longer to make should cost more? or just add the same percentage of profit margin to everything?

Advice gratefully received, as I really would like her to be able to keep it going after I have left.

Bumping my own thread!

I'd say she needed to account for her labour. No good making 10 items each with a 10% mark up on materials when it takes a year to make those 10 items and 200 items could have been made and sold in the same time for similar profit.

She should be aware of her market though - people may not be able to pay higher prices for more intricate items, while there could be loads of demand for cheap, quick to make items.

If she hasn't already, it would be good for her to get an idea of her cost prices. For her materials this should be relatively easy but she will need to attribute a 'labour' cost to each item too.This could be quite tricky to set but in theory she should set herself a cost for an hour of her work, work out what fraction of an hour each item takes to produce and add this to the material cost price.

For instance:

Material - £0.50
Labour - £1 (30 mins work at a rate of £2 per hour)
Total cost price: £1.50

Once she is able to do this she should have cost prices that fairly reflect the materials used and time taken to produce. This is an important place to start; firstly to work out if she has a profitable product, i.e. Will the market bear a price above the cost price (an important start!) Secondly, it also allows a base line to which you can apply your mark-up. If she did this uniformly across her range then because she started with a fair cost price, she should end up with selling prices which work well together and make sense to the customer.

Apologies if this is a bit garbled, happy to help some more if you have any other questions. Hope that helps.

thanks so much!
can't type much now but will come back later. i bought materials and have kept note of how much it all cost.
i agree reg. quick cheap things sometimes people don't appreciate how much labour goes in to some stuff. but for that i thought she could make some samples and then make to order.
market is wealthy expat community and its just a sideline business to her main job.

I account for time depending on the skill level involved. So for something anyone can make I'll charge minimum wage for my time, more complicated things can go up to three times that. If you don't charge for time you'll soon get bored of working loads for a pittance. It really annoys me when people don't charge for their time and undercut me. There's someone who is a competitor of mine who earns about a quarter of what I do. I can't and won't compete with her prices.

Make sure all cost of sales are accounted for and then go from there. Where I used to work (also serving a wealthy expat community) we used to take the landed cost of each item (so all costs involved including the transit and duty (if applicable)) and then use a coefficient of 3.00 sometimes 2.75.
We did that across the board but then allowed flexibility by pricing each item also based on what we thought it was worth.
Dont undervalue your product... If you have made a mistake lowering the price will be much easier than trying to raise it after the fact.

Run a shop we mark everything up 2.4 x so we buy for £1.00 sell for £2.40

A 2.4x mark up would not work with handmade though. What if something costs £1 in materials and you sold it for £2.40 but it took you an hour to make?

The markup needs to be after labour cost.

Not necessarily. Your profit is in your hourly rate. Once your time, materials, cost of sale (card fees etc) and an allowance for returns, lost items in post, website, equipment, electricity, rent etc are made there shouldn't need to be any further mark up.

Thanks for the input!
I'm not sure I completely get the 2.4 thing - you just time the cost of the item by 2.4? That would make the particular things she is making far too expensive for the local market.
She buys local material that everyone knows is very cheap, and the other ladies that had stalls next to her at the market obviously were not accounting for labour as their items were cheaper.

However their level of skill was much more basic and I have encouraged this lady to buy the slightly more pricey material and cotton, as that combined with the nice patterns she is able to come up, plus neat hems, well placed zips etc… all makes a difference.

So we worked out cost of each thing, she added a bit of labour depending on how complicated the item was then we added 50% profit.

It seemed to work well, she sold 5 things and recouped all the capital I had invested to buy the original materials for everything.

So now she can use some of the profit to make a few more similar items and hopefully it should grow from there…. Am I missing something?

Thanks again for all the replies!

As long as she is earning enough to warrant the time spent making the items and the cost of making them then that is all you need to worry about.
The 2.4x thing applies if you buy to resell, not if you are making things to sell.
Does she need to save any money for tax?

Thanks. No, it's all very unregulated here. It's just a monthly expat farmer's market where the smaller and relatively wealthy community goes to buy local crafts etc..
So I think they way we have done it is enough for that.
Thanks again, good luck with your businesses!

Not necessarily. Your profit is in your hourly rate.

So if two items have the same raw material cost, but one takes 5 times longer to make, you still think the selling price should be the same?

Badbunny I was pointing out that once you have taken into consideration the time taken to make an item (pay yourself a suitable hourly rate for the work involved) as well as the cost of materials and other associated costs, then you don't need to add anything else on top of that as "profit" as what you have paid yourself as a wage is. I would have been out of business years ago if I charged the same for a five hour item as a one hour item!

Hope it all goes well justone.