Jump to content

Let’s talk about pricing products. part 1: costing direct materials leading to pricing


Recommended Posts

Way back when someone decided that costs x2 would be wholesale and costsx3 would be appropriate for retail.  Boy what’s that a simplistic model! More recently the formula has been update to costx4 for retail. When I see that, then put pen to paper (or excel to pixels) and really crunch the numbers that formula seems wildly out of date. 
 

Direct materials number crunching sounds pretty straightforward. Figuring out what a “thing” costs to order and ship to your door is black and white.

then after long, hard days of making “things” the bank account is not reflecting the effort. 
 

Do you calculate the man hours cost of locating, ordering, receiving, stocking and storing the item? If you had to pay someone else for these services would that change your formula?

 

with the advent of expected “free shipping” how does that change your pricing? 

 

when pricing your products, do you calculate the cost of packaging and shipping materials the same as the materials in the actual product, or differently? 
 

As we embark on a new year, it is a good time to update costing and pricing  formulas to account for things differently to ensure we have enough “pay” at the end of the day to make it worthwhile. I don’t know about you, but if I could make the same net profit sitting on the couch watching Netflix while petting the dog as sweating away in front of a melter then schlepping orders to th post office I know what my choice would be. 


let’s work on this model as an exercise together and see where we land. What product should we use for this simple exercise?


 

  • Like 1
  • Thanks 1
  • Thumbs Up 2
Link to post
Share on other sites
  • TallTayl changed the title to Let’s talk about pricing products. part 1: costing direct materials leading to pricing
3 minutes ago, franu61 said:

Soy 464, 8 oz tin, 6% fo colored wax..  Is that too specific?  

Perfect. 
a little more specific, how many... dun dun duuunnnn. If making small  quantities like someone starting out, say 10 lbs of wax? 
 

Would the simplest place to start be to use a supplier like Candlescience  since they have pretty much everything in one stop? 
 

we can move to other suppliers in the comparison, and remember to factor in our TIME to source the stuff.

Link to post
Share on other sites

I think that is a good idea, start out with small quantity and figure costs.  10 pounds of wax, a dozen tins.  CS is a good one stop shop.    I can do a mock order for supplies and get total prices and shipping cost.  Shipping costs will vary of course, I am on the west coast, so maybe someone on the other side of the country can do a mock order too so we can get a shipping cost range?    

 

I have to admit I've never even considered factoring in my time for sourcing, partly because I love to "shop" for FO's etc.  But yeah, that is a LOT of time spent, and if I was paying an employee to do it, it could be a big expense.

Edited by franu61
  • Thumbs Up 1
Link to post
Share on other sites
2 minutes ago, Paintguru said:

Need to add everything in, right?  Labels, shipping supplies, insurance, etc.  Or do you capture that in the 2x, 3x, 4x equation?  Obviously cost of insurance inversely scales with # of items sold.  

Want to keep it simple and add all the physical things attached to that candle to make it, and ship it? 
 

another initial assumption might be in house printing, graphics, photos, etc. and that we have the computer and a camera. We can calculate more of that later too.  Like how many candles will I need to sell to pay for a printer?

 

we can do overhead a little after finding out if we have a product to sell. We can also add costs to do a craft show if anyone is interested.

  • Like 1
Link to post
Share on other sites
2 minutes ago, TallTayl said:

Want to keep it simple and add all the physical things attached to that candle to make it, and ship it? 
 

another initial assumption might be in house printing, graphics, photos, etc. and that we have the computer and a camera. We can calculate more of that later too.  Like how many candles will I need to sell to pay for a printer?

 

we can do overhead a little after finding out if we have a product to sell. We can also add costs to do a craft show if anyone is interested.

 

Sounds good.  I mean I already figured out that I'd have to sell at least 50 candles in a year to pay just for the HSCG membership and insurance, which seemed crazy to me as a startup candle maker!  These are the things you don't realize you need to pay for, especially if you're doing things the "right" way.  

  • Like 1
  • Thumbs Up 1
Link to post
Share on other sites
13 minutes ago, Paintguru said:

 

Sounds good.  I mean I already figured out that I'd have to sell at least 50 candles in a year to pay just for the HSCG membership and insurance, which seemed crazy to me as a startup candle maker!  These are the things you don't realize you need to pay for, especially if you're doing things the "right" way.  

Exactly!  When the numbers are on paper the dreams can get a little squashed.

when faced with reality though we can do anything. Easier to know up front than at the end of the fiscal year when the accountant gives you “that look”. 
 

oh, and did you count the 50 candles as top line, or based on profit? 

  • Like 1
Link to post
Share on other sites

I have a rather complicated spreadsheet set up for this.  Basically I have 1 page of ALL my costs.  I can update any of my costs on per unit of measure on that page, and then all my individual products up date, and then I have a SUMMARY page for ALL products.  I haven't updated in over a year.  Some of the prices I am sure are off some.  NO LABOR is included.

 

 

cost1.PNG.05ff4fe15eac78aba2ba13533bf70ad6.PNG

 

How I break down my costs.

  • Like 3
  • Thanks 1
  • Thumbs Up 1
Link to post
Share on other sites

I find items like insurance, rent, equipment, and anything else that doesn't play well on a per-candle basis are best calculated on an axis of time as a period cost.  And I pay for it like this:

  1. I'll break down my costs for every unit (like @MilosCandlesdid above)... call these unit costs
  2. Estimate the sales for every unit over a period of time - let's use a month for arguments sake... call this revenue
  3. Determine the effective monthly costs that aren't unit-based... call these period costs
    • If insurance cost $500/yr, that would be $42 a month.
    • I buy about $50 of shipping supplies per month (hard to map this 1:1 with a candle if you occasionally ship multiples together)
    • If my equipment budget was $100/yr, that would be $8 a month
    • If my craft show overhead totaled $135... that would be $135
  4. For a one month period, I now have total costs of my operation (ignoring cashflow) by adding total unit costs with total period costs
  5. My net profit is the #2 - #4 (monthly revenue - all costs for the month)

The only way it makes sense for me to calculate time is if I truly hire somebodies help and can easily tie it into a unit cost of the candle... but typically that's easier to manage as a period cost.  "Paying" for my time on an hourly basis is wildly difficult to estimate, but it's fun to see how I end up over the course of a month by dividing my estimated total time investment by the net profit.

 

So yeah... keeping with the x2 and x3 idea is a bit crazy and really depends on the impact of your period costs.  As with all estimations, these things work best with data and good structure.  Hopefully I didn't take this wildly off track, @TallTayl!

  • Like 2
  • Thanks 1
  • Thumbs Up 1
Link to post
Share on other sites
1 hour ago, Kevin Fischer said:

I find items like insurance, rent, equipment, and anything else that doesn't play well on a per-candle basis are best calculated on an axis of time as a period cost.  And I pay for it like this:

  1. I'll break down my costs for every unit (like @MilosCandlesdid above)... call these unit costs
  2. Estimate the sales for every unit over a period of time - let's use a month for arguments sake... call this revenue
  3. Determine the effective monthly costs that aren't unit-based... call these period costs
    • If insurance cost $500/yr, that would be $42 a month.
    • I buy about $50 of shipping supplies per month (hard to map this 1:1 with a candle if you occasionally ship multiples together)
    • If my equipment budget was $100/yr, that would be $8 a month
    • If my craft show overhead totaled $135... that would be $135
  4. For a one month period, I now have total costs of my operation (ignoring cashflow) by adding total unit costs with total period costs
  5. My net profit is the #2 - #4 (monthly revenue - all costs for the month)

The only way it makes sense for me to calculate time is if I truly hire somebodies help and can easily tie it into a unit cost of the candle... but typically that's easier to manage as a period cost.  "Paying" for my time on an hourly basis is wildly difficult to estimate, but it's fun to see how I end up over the course of a month by dividing my estimated total time investment by the net profit.

 

So yeah... keeping with the x2 and x3 idea is a bit crazy and really depends on the impact of your period costs.  As with all estimations, these things work best with data and good structure.  Hopefully I didn't take this wildly off track, @TallTayl!

Not off track at all, Kevin.  This is a good discussion overall.

 

when factoring in details like @MilosCandles above the picture becomes more clear about potential when starting out.

 

@MilosCandles nicely prepared.  You’ve connected spreadsheets that perform like a relational database to give real-time situational data. A 77% margin is a very nice spot to be in. Had you used the costx4 you would be leaving $1.52 on the table with each transaction. That alone can make the difference between “making it” and being able to grow.  
 

did you set the target price, then work backward, or cost x some figure? 
 

I noticed, too, the $1.05 of the profit calculation of the product is baked into the shipping charge. do you participate in the Etsy $35 for free shipping? If so, how does that change your math? 

  • Like 1
Link to post
Share on other sites

Even if we are starting from our kitchen, below are things that we need to calculate in order to grow into real business.  When you have these $ figures, then it will lead you to the idea how to pricing your candle and when your business can grow out to commercial space and expand.  These numbers will kind of lead us to figure out how many we need to sell in order to get into commercial space, hire employee & how many, and when to invest in more machinery, etc.  When you have goal of sales volume, it could make you think about your marketing method in order to reach that goal.

 

"Direct labor cost" would be $1.25 per candle in Los Angeles CA (This cost could go down with more wax melting tank and dispensing guns.), and my "Direct Material Cost" is $5.05.  Manufacturing Overhead can be only calculated when you know your sales volume.  This is why I like to use 4X thru 12X to Direct Material Cost. 

*Multiplier should be depend on your operation size.  If you have small store, then it should be minimum of 6X or 8X.  

 

If you want to stay as home based part time business (which is great part time supplemental income), then you might not need to do this.  But then, it's your business.  You can do whatever you want with it.

 

image.thumb.png.3e3aa6bf04f2c7fd742a733c6d84657d.png

 

 

  • Like 1
Link to post
Share on other sites

This has always been my issue though...if a small volume maker wants to compete with any of the larger volume makers, they need to have similar pricing, in my opinion, at least to start.  When one orders small quantities of wax, fragrance oils, or anything else, they really take significant cost hits compared to bulk ordering.  Either the maker has to not pay themselves for a while until they start to reach higher volumes, or they have to hope people will pay the added cost of their product.  

  • Like 1
Link to post
Share on other sites
4 hours ago, Paintguru said:

This has always been my issue though...if a small volume maker wants to compete with any of the larger volume makers, they need to have similar pricing, in my opinion, at least to start.  When one orders small quantities of wax, fragrance oils, or anything else, they really take significant cost hits compared to bulk ordering.  Either the maker has to not pay themselves for a while until they start to reach higher volumes, or they have to hope people will pay the added cost of their product.  

Choose higher priced comparables? 

Link to post
Share on other sites
SHOPPING CART  
Item   Price Qty Total    
  8 oz. Candle Tin 12 pc Case $11.56   $11.56    
  Canary Yellow Dye Blocks 1 pc Block $1.19   $1.19    
  Navy Blue Dye Blocks 1 pc Block $0.96   $0.96    
  Red Dye Blocks 1 pc Block $0.96   $0.96    
  CD 16 6" Pretabbed Wick 12 pc Bag $2.47   $2.47    
  Warning Labels 1.25 Inch 100 pc Roll $3.01   $3.01    
  Lavender 4 oz Bottle $8.68   $8.68    
  Blue Spruce 4 oz Bottle $8.68   $8.68    
  Golden Brands 464 Soy Wax 10 lb Bag $17.96   $17.96    
  Wick Stickers Pro 120 pc Pack $5.96   $5.96    
  1 oz fragrance Christmas Hearth $2.65 1 Free    
TOTAL 61.43  
USPS Flat Rate Regional- Includes tracking $17.82                                      $79.25  
           

 

 

 

Here is an "order" from CS to get us started.  

Edited by franu61
  • Thumbs Up 1
Link to post
Share on other sites
5 hours ago, franu61 said:
SHOPPING CART  
Item   Price Qty Total    
  8 oz. Candle Tin 12 pc Case $11.56   $11.56    
  Canary Yellow Dye Blocks 1 pc Block $1.19   $1.19    
  Navy Blue Dye Blocks 1 pc Block $0.96   $0.96    
  Red Dye Blocks 1 pc Block $0.96   $0.96    
  CD 16 6" Pretabbed Wick 12 pc Bag $2.47   $2.47    
  Warning Labels 1.25 Inch 100 pc Roll $3.01   $3.01    
  Lavender 4 oz Bottle $8.68   $8.68    
  Blue Spruce 4 oz Bottle $8.68   $8.68    
  Golden Brands 464 Soy Wax 10 lb Bag $17.96   $17.96    
  Wick Stickers Pro 120 pc Pack $5.96   $5.96    
  1 oz fragrance Christmas Hearth $2.65 1 Free    
TOTAL 61.43  
USPS Flat Rate Regional- Includes tracking $17.82                                      $79.25  
           

 

 

 

Here is an "order" from CS to get us started.  

There aren't that much price differences of tins & waxes even if they are purchased in volumes unless it is purchased by the full trailer.  But if you calculate price of rent for the storage space & utility cost to keep them cool & warm, then there isn't much difference.  Maybe 20 cents per candle.  We will need to at least go by 1 lb of FOs prices.  Price difference is about 50 cents per candle if they are purchased in 4 oz bottle vs 1 lb bottle.  If FOs are purchased from manufacturer in 25 lbs to 50 lbs keg, then cost can go down another 40 cents.  Wick should be calculated at least 100/pack price which comes out to be about 9 cents per candle vs 20 center in 12 pc bag.  If wick is purchased from manufacturers by 3,000 or 5,000 or 10,000, then it would go down to about 4 cents each.

 

Here is my price break down if they are purchased in box price.  Below of price break down are my targeting retails prices in different places.

Tin: 48 in a box 

Wax:  45 lbs box

Wick:  100/pack

Additives:  Less than 5 lbs bag

Labels:  I make my own.

*I only do strictly wholesale & special direct retail where people order minimum of 10 to 300 candles.  

Picture1.png.1c177184febc5ef2827bed666d9a49b1.png

 

I find that best selling candles are priced at about $25 per 10 oz candles in big cities like New York, San Francisco & Los Angeles.  It would be about $12 or $14 in small cities.  However, best selling candles are priced at $20 to $28 in small but busy tourists towns (size 7 oz to 11 oz).  I have been checking out Etsy, and it looks like the candles priced at $20 range sold much better than $10 candles.  10 oz size candles are selling at $45 in high end resort like Pebble Beach with Pebble Beach logo.  But they will be looking for candles that are wholesale priced below $15, and they will be asking to do their logo on candles (private label candles) unless we are Jo Malone or Diptyque.

 

Placing our candles in right places with right prices would be key to our success.  If you are in small rural town and price structure does not work (many cases it won't), then concentrate on finding right place to put your product.  Whether it is online sales platform or doing wholesale to other cities.  Small town people might pay more for materials due to shipping cost (in and out), but they have advantage of cheaper labor and rent.  It kind of evens out and it's a fair game for all. 

*You can still sell your candles at your small town at super discounted retail prices telling people that they are cosmetic blemish ones.  We have See's Candy factory in our town, and they sell cosmetic blemish chocolates(the ones that are crushed little bit) at about 40% discounted price.  They are always sold out before 2:00pm.  Your town people will be glad to buy your candle with wet spots, frosting, whatever the blemish that you point out at super discounted price.  Chances are they will probably want more of those than your regular planned priced candles.

 

I do strictly wholesale and only do some direct special retails in volume.  My wholesale price is the same, but retail prices are totally different based on where they are sold.  Some might say it is not fair that some retailers like resorts & high end spas makes tons of money and I don't.  It's their name value that sells my candles not because my candles are that good.  I don't care as long as I get to take the portion that I want.  And the more they sell with more profits the more they will ask for more. 

 

Marketing research is critical part of pricing our candles.  Once we know that number, then we can work backward to sourcing our candle parts & ingredient at right targeted costs.  Don't forget that people always want bargain, but they don't want the cheap stuff.  Once again, this is just another my crazy opinion.

 

 

Link to post
Share on other sites
12 hours ago, Paintguru said:

This has always been my issue though...if a small volume maker wants to compete with any of the larger volume makers, they need to have similar pricing, in my opinion, at least to start.  When one orders small quantities of wax, fragrance oils, or anything else, they really take significant cost hits compared to bulk ordering.  Either the maker has to not pay themselves for a while until they start to reach higher volumes, or they have to hope people will pay the added cost of their product.  

 

Often I have the opposite problem cause people do not know how to price their items.  Take for example my pricing above.  Me charging $15 +$7 shipping.  Net Profit of $11.20.  No labor or overhead yet, no mileage.  None of my time on the computer doing marketing, customer service, driving around picking up items, taking out the trash, and breaking down all the boxes.  No Insurance cost in that, no electric, or internet. 

 

 

There are listing for basically the identical candle for $17 with free shipping. $5 less than mine.  If I priced that way I would I have a profit of $6.  If it is a hobby that price might be OK.  For me this is well past hobby level.   I have raised some of my prices to try and curb sales.

 

Someone else has $11+$9 Shipping.  BUT they also have $35+ free shipping.  So if you buy 4 of mine Plus shipping (60+7 = 67)  My shipping cost goes from $6 to $10 total, so my profit on $67 purchase is about $37 for 4 candles. ($8.25 each)  If you buy four of theirs if would cost you $44 (Cost them about $25 in expenses like me) and now has a profit $19 for 4 candles, less than $5each.   What are these people thinking?

 

Some else is selling them for $7 + $8 shipping.  Do not even know where to begin.

 

Just found someone else selling them for $6 +$6 shipping.  Maybe I will just start using her to drop ship my items for me.  That is a steal.  LOL

 

 

Edited by MilosCandles
Link to post
Share on other sites
7 hours ago, MilosCandles said:

 

Often I have the opposite problem cause people do not know how to price their items.  Take for example my pricing above.  Me charging $15 +$7 shipping.  Net Profit of $11.20.  No labor or overhead yet, no mileage.  None of my time on the computer doing marketing, customer service, driving around picking up items, taking out the trash, and breaking down all the boxes.  No Insurance cost in that, no electric, or internet. 

 

 

There are listing for basically the identical candle for $17 with free shipping. $5 less than mine.  If I priced that way I would I have a profit of $6.  If it is a hobby that price might be OK.  For me this is well past hobby level.   I have raised some of my prices to try and curb sales.

 

Someone else has $11+$9 Shipping.  BUT they also have $35+ free shipping.  So if you buy 4 of mine Plus shipping (60+7 = 67)  My shipping cost goes from $6 to $10 total, so my profit on $67 purchase is about $37 for 4 candles. ($8.25 each)  If you buy four of theirs if would cost you $44 (Cost them about $25 in expenses like me) and now has a profit $19 for 4 candles, less than $5each.   What are these people thinking?

 

Some else is selling them for $7 + $8 shipping.  Do not even know where to begin.

 

Just found someone else selling them for $6 +$6 shipping.  Maybe I will just start using her to drop ship my items for me.  That is a steal.  LOL

 

 

I suspect the low ballers don’t have any true sense of what it is costing them at the end of the transaction. Until I created the cost calculator spreadsheet I was blissfully unaware of the losses of real $. 
 

then, of course, there are shops trying to gather enough numbers to appeal to their target market. How many buyers won’t even look at a shop unless it has enough sales and reviews? 
 

 

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...