How to price your products for profit

If your biz is one that creates and sells products, you're going to have two types of business expenses to deal with.


Fixed costs are the ones that are always there - whether you sell a ton of products or sell none at all. These are costs like your internet, your equipment, your studio/office/store rental. Your fixed costs are important because you need to cover them month over month.


pricing products for profit formula


With product-based businesses, you also have another type of cost, which isn't as as simple to deal with. These are called variable costs. Your variable costs are those that vary depending on your production. They go up when production goes up and down when production goes down - they're the costs that are tied to creating and selling your actual products (materials, shipping, transaction charges, etc.). These can be a bit more complicated to deal with when setting your prices because, well, they're always changing!


To price your products, you need to know both your fixed costs (the expenses you have in your biz no matter how many products you are selling) and your variable costs for your products.


Your fixed costs will tell you the min $ you need to make per month to break even, which is the first part of your pricing formula. To cover these, you want to consider realistically how many items are you going to sell in a month and then divide your fixed costs by that. Any products you sell on top of those, that becomes profit (happy dance)!


And then your variable cost per item is the next part of your formula (since you want to cover costs of a product in the price as well).


Then sprinkle more on to turn that pretty profit.

This profit sprinkle can either be your time cost (the amount of time it takes you to make an item at the hourly rate you want to charge) or it can be a markup. A standard mark up is 50% (or a 100% increase on the costs).


A formula

product price = (fixed costs/number of products realistically sold in a month) + (variable costs - how much it costs to produce that item) + mark up or time cost


Let's look at an example:

fixed monthly costs = $250

cost to produce an item (materials and transaction fee) = $25

time it takes to produce the item = 3hour

hourly "rate" = $25/hour

realistic sales goal = 25 items/month


Pricing formula using time cost for profit:

($250/25)+$25+(3*$25) = ($10)+$25+($75) = $110


Pricing formula using 50% mark up for profit

(($250/25)+$25)*2 = ($10+$25)*2 = $70