To follow from my last week’s biz post about imports and distribution today I want to tackle the pricing structures. Whether it’s for your services or product understanding the value, competition and market are vital to your retail price setting.
Whether you are producing , importing products or offer services, first you need to work out your costs. This includes cost of materials, labour and shipping. Whatever you have to pay for your product to be created or brought in, that’s your cost price. I normally have a spreadsheet in excel and enter each value in each field. So once you establish your cost price you need to start adding margins. Now this may differ for your particular product or service and also it depends on your market. Here’s what I’ve learnt:
1. If you are producer/maker before even establishing your retail price (selling price to public) you need to decide whether you are going to sell direct to public through your shop or online, or whether you want to sell your products through other shops or any other different channels. In the first instance you can just add your margin to the cost price. It is recommended to double the cost price and add VAT which will give you the RRP.
If you want to sell your products to other retailer you have to include their margin as well. The common practice is to double your cost price and double it all again (that’s the retailer’s margin) and then add VAT to arrive at RRP. Now if the RRP is too high and you feel that the product price would be pushed out of your market you need to find out what the standard trade discount is from RRPs. It’s really difficult to guess because each market has different margins. For example, I know that retailers in fireplace industry want around 40% discount, in interior design industry it varies from anything between 30% – 50% depending on the product type and volume. Of course in any case, if you get a bulk order you can negotiate a special trade price.
2. If you are offering services this is little bit more tricky. You can research your competition to find out how much they charge for similar services you offer to give you an idea of your pricing strategy. In the interior design field particularly, you can also set your own prices by working out how much money you want to ideally earn per year and divide that among by 12 to arrive at your monthly income. Now you have to work out how many hours you want to work per month and divide your monthly income by that number arriving at your hourly rate. Also especially if you are a designer just starting out you have to establish from the beginning what kind of clients you want to offer your services to. If you aiming for high luxury end of the market your rate per hour is going to very different from the one catering for mid or low end. What I’ve noticed in this market is that new designers start from the bottom and when they have a well established portfolio, press coverage, loyal clients and recognition they value their services at a higher rate.
3. If you are trading internationally, beware of hidden indirect costs such as exchange rates and bank charges. Always ensure that your margin is big enough to cover them and always consider the worst case scenario. When we traded in Euro and GBP I calculated everything as 1 to 1. And one time in the middle of the recession it was pretty close! It’s so easy to start loosing money when the exchange rates go crazy and banks start to sting you for any international transfer (in or out) you make. another hidden cost t consider is your accountant, if you have Ltd. Their rates vary and especially in London they can be quite high.
4. My final point is to double check that your profit margin covers all monthly, yearly expenditures such as running and maintenance of your websites, utility bills, business rates, marketing activities and salaries (if you have staff).
I hope I covered it all. If you have any comments, experiences or questions you want to ask, please shoot me one as per below.