Wednesday, 22 February 2017

Be An Expert - Pricing - How To Price & Why

How to price your products is something we've covered before, and for those who missed it last time here's a link to a pricing formula that you can use to help you work it out: 

Today let's think about WHY we need to include labour AND profit in our pricing formula. As a self-employed sole trader all your profits count as your personal earnings, so you will be taxed on both your 'labour' and your 'profit' which you've added into your pricing formula. So why should you separate them into 2 categories when working out the formula and looking at how your business is doing? Here's why:
Labour should be your wages. This is what you actually need to pay yourself each month so you can afford to eat and pay for stuff for yourself (not stuff for the business). 
Profit is what you can use to help your business grow. Need to buy a new camera to photograph your items? A new printer for invoices or to start selling greetings cards? Want to buy your materials in bulk to bring the costs down? This is where you can re-invest your profits into the business, rather than spending your wages on them (and making yourself live on baked beans for the next month).
Make sure you don't spend ALL your profit on new toys though. Leave yourself enough for business expenses e.g. if you regularly spend £100 a month on jewellery findings, don't spend all your money on a new camera and then realise you can't buy jewellery findings for a few months. Leave yourself enough to pay your tax (even if you don't pay tax yet you might grow big enough to, so it's good to start setting some aside). Leave yourself a buffer for unexpected costs e.g. needing to refund a customer who spent a lot in your shop.
If you feel you can't put profit into your formula at the moment because it will push your product's retail price too high, then at least just include a small amount of profit. Once you've saved enough to buy materials in bulk this will bring your costs down and make your profit margin bigger, so you can grow it that way, rather than adding it to the retail price.
Just make sure you are earning enough to pay yourself and help your business grow!
Next week we're going to look at why your wholesale price should be approx 50% off your retail price.

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