Some Costs You Need To Consider When You Price Your Products

We used to have a small store which my parents and I operate. My mother was in charge and she was the one who decided on how much the products we sold should be priced. Being mainly a small retail business, the costing was quite simple.

My mother merely considered the transport cost of the goods and the maintenance costs of the store, as well as the business permits and taxes we had to pay. She then considered how much profit she needed to make on each product we had to sell.

To make a long story short, our small store was a big financial help for our family. It enabled our family to make ends meet and it even allowed our family to save a bit of money for our investment goals.

But as you can see, our simplistic pricing strategy was quite dangerous. My mother didn’t consider the real cost and profit scenario of running a small store. However, her arguably aggressive pricing strategy proved beneficial for our business.

The product costing information I would be discussing in the succeeding paragraphs is geared more towards small online and brick and mortar retail stores. The reason is pretty obvious, my experience and studies leaned towards these.

But this does not mean that people who do costing for much bigger companies cannot find something useful in this article about small businesses. Afterall, what are big corporations but mothballed small stores.

It’s pretty obvious that I cannot possibly consider all the costs associated with a retail business whether its an online or a brick and mortar store. One thing we can be sure about is that an online store is basically the same as a brick and mortar but without the physical store.

This is pretty obvious if you have a brick and mortar business to store and display your products. This would be one of your biggest costs, but you must not solely look on the rent cost based on price alone.

The success and pricing of your products depend a lot on where your brick and mortar store is located. If your area attracts a lot of high value foot traffic, it is pretty obvious that you must price your products more at a premium. One of this is because of rental costs alone.

You might say that you don’t have to pay rent if you own an online retail business because you don’t have a brick and mortar store. But you also have to pay rent even if you just sell your products online.

You have to pay for monthly internet fees. If you have your own website, you pay domain name and website rental and maintenance fees. If you don’t own a website or do own one but also sell on e-commerce sites, the e-commerce sites may charge a fee or ask for a cut on your product’s sales.

Even if you only own an online business, you may still have to physically store your products somewhere. This may entail paying rental space as well. As you can see, there is no escape from rental costs even if you only sell online.

This is related to rent costs. One of the fastest ways that I have noticed businesses being killed is by rent increases. I used to work for a company whose margins were so tight that it can’t really handle significant rent increases.

It so happens that for example in Australia, the real estate market is so dynamic that real estate prices go up significantly not only in years but could move within months. I have seen real estate prices go up several times during a year.

Another reason for moving costs is when your company grows significantly or your manufacturing volumes increases significantly. You might need extra warehouse or manufacturing space in a very short time to accommodate your customer’s demand.

Even if you operate an online business, you might also incur the same costs. If your order numbers suddenly increases significantly, you might need extra space to store your products while they are not yet being sent to the customers.

If you add your moving costs only when your company grows or your manufacturing volumes go up. You might have to significantly increase your product price which could irritate and even turn off customers.

When there’s rental costs, then there’s electricity costs. This is especially true if your brick and mortar store has air conditioning. In our household, where we do not use air conditioning most of the time, we still find that our electricity bill is still a major cost for our household.

This might be the same case for you. No matter where you are in the world, electricity costs have become a major cost for households and especially businesses. The problem has become so rampant that it is not hard to find people who steal electricity from their neighbors.

Since electricity is mostly a variable cost in each country, one must be careful and not neglect to add electricity costs in their products. This does not matter if you only use electricity to power your computer products and use lighting.

Electricity costs especially matter if you also do your own product manufacturing. This is where the product information of your electrical devices especially becomes handy. A simple electrical device for example like an electric fan can easily add more than US$ 50 to your annual bill.

And most companies these days use air conditioning which is way more expensive than a single electric fan. Electricity costs can easily balloon to thousands of dollars annually. This is the reason why you should add your electricity costs in your product pricing.

No man is an island and no business is an island as well. People get transported and so do products. The more bulkier, heavier and delicate a product is, the bigger also is the transport costs.

I made this mistake when I was initially costing my product based on raw materials sourced both domestically and overseas. At first, I primarily concentrated on the price listed both online and from the firsthand information I got.

Then it dawned on me that I still have to pickup or have the raw materials I need delivered. Since most small businesses do not have a dedicated buying department to handle their raw materials need, this job is usually left to suppliers and transport companies.

If you have been buying products online for quite sometime now, you would realize that either products are sold with the delivery costs included or the delivery costs not included. When you do your costing, you should consider the higher price option.

This means costing your transport costs as if your supplier has arranged the transport of your raw materials. This may be your only realistic option especially if you are a small business. You might have to do the same thing to your customers. That is, you have to arrange transport.

This is another cost that can easily be overlooked but is very important especially if you are running an online business. An online product that costs as little as a few dollars may have packaging that costs several dollars more and even worth more than the product itself.

A product may need several layers of bubble wrap and then be boxed in a sturdy cardboard box before being encased in a plastic packaging envelope or bag. As you can see, this several layers of packaging costs a bit of money.

Does your product require this much packaging materials? Just take a look at the many online products you have bought, don’t they now contain a lot of bubble wrap, sturdy cardboards and come in sturdy plastic envelope or bag?

Face it, the bubble wrap industry alone is growing because of e-commerce. I could even advise that it would be a good idea to sell bubble wrap as a business. E-commerce is growing and you need to be at least knowledgeable in how e-commerce goods are being packaged.

Even if you don’t operate an online business, packaging costs could also be a significant part of your product pricing. Almost all product today come with their own packaging. The more elaborate is your packaging, the more you have to add to your product pricing.

This cost is especially important for those who manufacture their own products. It is an undeniable fact that human are not perfect both mentally and physically. They get sick or commit mistakes during the production stage of a business.

I used to work for a transport company for example and one of the employees there accidentally sent a truckload of our customer’s products to the wrong address. The employee actually sent the products to another country.

Needless to say, this one mistake is worth several thousands of dollars in actual financial and goodwill costs to the company. Even a small mistake like a worker accidentally dropping a thousand dollar product if repeated many times during the year costs a lot of money.

Don’t think that just because you have computers and manufacturing machines your production efficiency would go up. Computers and manufacturing machines are efficient, but they break down too or malfunction. When they do, your costs multiplies.

Production losses are hard to make allowances for. I for example would estimate this to be about 20%. This means that 20% of all my production activities and resources would be lost due to human and machine error or malfunctions.

There are many businesses who skip this cost especially the small ones. Insurance costs can easily add a lot to a product’s pricing, but they are essential. They are so essential that in some countries, you won’t get a business permit unless you have insured your business.

Of course, this is one cost that fly by night and unscrupulous businesses don’t adhere with to make their products cheaper than their competitors, but it takes only a small accident to ruin a business.

A business that is designed to last a long time should be able to weather out calamities like fire, floods, the accident of an employee and so on. That is why it is best to add insurance to your product’s costs.

Lawyers and going to court would almost certainly drain the enthusiasm of anyone. Lawyers and going to court are not only expensive, they are also a big drain in one’s time which could be better spent running a business or looking for customers.

But they are essential. A single disgruntled customer could sue you in court and with this one customer, your sales could drop and your reputation as a business tarnished. With legal costs, you not only consider legal and court fees, but the damage cost to your reputation.

The few costs which were discussed which should be added to your product’s pricing are just a few of the costs most beginner businessperson usually play down or don’t anticipate at all. These costs can easily mothball especially if they last a long time.

By adding these costs to your product, it might have the effect of adding to your product’s price. It is understandable that your product’s price should be kept as low as possible to attract customers, but there are other things besides the product’s price which customers consider.

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