Hi Rose,
A lot of good advice up top.
Fundamentally, this is what i do for a living, pricing services and products. In addition, I help our clients decide what they should go to market with in terms of their product range.
Guess what the biggest trap they fall into is......assuming they are going to shift all their products, especially those who source from overseas and have to buy in bulk to get discounts or enough products to service the market.
They also forget about the impact returned or cancelled orders have on their business, most work on 8% to 10%, but on clothing it can be anything up to 30%, even on cash only sales (which includes cards & cheques, but excludes credit accounts).
Also, i think your aim to get a 25% profit on your products may be a bit ambitious, why not shoot for between 10% and 15% - unless you are paying shareholders, etc, then this should be adequate until you get up and running.
You have touched on the costs of running your business, and getting it down to the nitty gritty is an excellent start, but don't assume that all your costs are going to be known. For example, one of our clients was recently let down by their supplier and had to send a mailing out to a section of their customer base, 18,000 letters, which cost them a little over £9k including postage, etc. This may be small fry if your turnover is in excess of £10 million PA, but to a smaller company - this is quite a hit.
There are potentially several methods you could use:
1) Adding a margin onto each product
2) Adding a chunk of your overheads onto each product and adding a margin to that
3) Calculating how much it costs you to get each product out of the door, add a margin to that and then add that onto the product cost, etc
But there are also ways to make the money back
1) Charging postage & packing to cover your costs (mega money to be made here)
2) Charging a higher rate for single or low volume orders, as compared to larger orders
3) Getting the products drop shipped from another supplier
4) Link deals where customers get preferential rates on other items to build up the order.
I would be more than happy to give you a full costing if you want to give me some more details of the intended product range and your cost/overhead base.
By way of example, say you have three products A, B & C.
Product A you buy for £0.50 per product and you buy 10,000
Product B you buy at £1.00 and you buy 5,000
Product C costs you £5.00 and you buy 500.
Your product costs are £12,500
You know the minimum on the market is £1.00 for A, £2.50 for B and £12.50 for C.
Always price on your worst case, so let's assume 90% sales of products, which accounts for damages and returns/cancellations, this gives you potential net revenue of £25,875.
Your overheads are £10,000, which includes your staff, building/storage, heat light and power, telephone, PC's, marketing, packaging, Business Tax, postage/carrier etc.
So Cost of Sales = Cost of goods + overheads = £22,500
Net Profit = Net Revenue - Cost of Sales = £3,375 or 13% net profit.
This is where the fun starts
Option 1 - charge an additional margin (10%)
Product A Charge at 10% margin (not mark-up) = £1.00/0.9 = £1.11
Product B Charge at 10% margin (not mark-up) = £2.50/0.9 = £2.78
Product B Charge at 10% margin (not mark-up) = £12.50/0.9 = £13.89
Your net revenue at 90% sales jumps up to £28,750.5,
or a profit of £6,250.50 (21.7%)
Option 2 - charge a P&P fee of £1.95 per item, which on 15,500 items you bought, and 90% of which you despatched is 13,950 - or worth £27,202.50 extra on top of your original £3,375, gives you a whopping 57.6% profit…
However, I doubt the numbers in the cost of sales are anywhere near accurate and as always, it's the hidden costs that will screw you. You know your fixed costs, you can get a steer on your variable costs, but your hidden costs will bite you in the butt if you don't control them or put things in place to limit their impact.
Like I said, let me know if you want more help
Regards
Chris
