Pricing Your Product: What is the Cost of Goods?

Pricing of products is a huge part of building a successful foundation for a business. Determining the best price, one that is competitive yet sustainable for growth, is crucial for your business. There is a simple general rule that the price of your product should be three times the cost of good. Why three times? One third is to cover the cost of the good. Another third should cover your costs of doing business. The final third is to build in profit for continued growth. Although the math seems easy, following this formula is not as simple as it seems. Determining the true cost of goods is complicated, as is determining the true costs of running your business; especially in the early stages of a start-up.

Determining the cost of good can be very complicated. The amount of production can affect costs of materials and labor, with higher volume being cheaper per unit. When starting a business, initial costs of goods will likely be higher due to lower numbers and the inefficiency of being new and small.

Materials

What materials are required to make your product? This list for many products can be long. My product, Luxeire, is an innerwear garment which is relatively simplistic in its construction, making the list of materials needed very manageable. The quality of the fabric is a defining feature, and is thus my biggest investment. The best fabric for my product is currently milled in Italy. I have the cost of fabric per meter, but also shipping, custom duties and taxes to calculate into the cost of this material. These additional costs add an additional 30% to the cost of my fabric per meter. Many apparel products have trims, buttons, zippers, etc. There are also tags for origin of product, fabric content and care, and sizing. Although the cost for each additional material may seem minimal on its own, when added together, their sum can be surprisingly high and, thus, need to be included in the budget.

Manufacturing

For those of us who are outsourcing the manufacturing of our products, this is the next most obvious cost in creating a good. Using a local or US-based factory may add cost to the manufacturing to cover the higher wages in a developed economy, but you eliminate the import charges, reduce shipping costs, and should have quicker turn-around times for orders. The cost of manufacturing can vary tremendously based on volume. In the early stages of a business, when you are keeping inventory lean, you may need to spend more on manufacturing each unit than you will when orders are large. The improvement in later margin will be a nice bonus down the road, but be sure to cover your costs today.

Packaging for Your Customer

Are you selling directly to the consumer, through resale channels, or both? Packaging may vary depending on who is buying your product. For those of us who outsource the manufacturing, there is some basic level of packaging that goes with your product from the factory. Whether it be a hanger or polybag for an apparel item, there is a cost. Luxeire is sold both to retailers and directly to customers via e-commerce. Polybags may be adequate for bulk orders by retailers, but Luxeire also provides hangtags with attachment ribbon and pins that attach to care/content tags to prevent retailers from puncturing the fabric when attaching pricing. There is a cost for each of these – custom hangtag, attachment ribbon, and pin.

For my e-commerce customers, my packaging is entirely different and needs to communicate the luxury of my brand. A Luxeire package should provide each customer with the same thrill upon receipt of their order that they would have experience by being pampered at a luxury retailer. Custom boxes, tissue paper, ribbon, brand information inserts, luxury mailing containers all have costs. Fortunately, the middle retailer is taken out of the equation so there is a bigger profit margin built in to offset these considerable costs.

As for determining the costs of running a business, the budget should approximate the cost of the good. Details for the execution of this budget is another story for another time.