Product vs Per Project Pricing: Many Makers create 2 types of product. The first is product that is made in multiples and sold to retailers, directly to consumers or both. You create versions of the same item and offer them for sale to multiple customers. I'll refer to this as the Product Pricing Model. Presented by Kristen Ainscoe, Partner, ONO Made in the 191.
The second product is specially made to satisfy a particular customer request. Your deliverable is based on the criteria your customer has given you for a highly specific result. I'll refer to this as the Per Project Model.
The steps to price each type are similar. You will need to know how much it costs to make the product in terms of materials, overhead and labor. But you will handle design development quite differently in each model.
Product Pricing Model Product Development
As you create your product assortment, you will need to spend numerous hours developing each item. Along the way you will need to work through overall design and design details; select the optimal materials; develop and evaluate the process to find the most efficient way to make the product, etc.
I recommend you keep a detailed record of the hours you have put into development, along with a detailed documentation of each step you have taken every step of the way. You will find this invaluable when you develop new or similar items. You can see what you have already tried and why you chose to adopt it or not, etc.
When you total up the development hours, you will think about it in terms of the total number of items you will sell in a given period of time. I suggest you estimate how many of this new product you will sell in a year. Then divide the total hour fee by this total number and apportion that amount to each item as part of the labor cost.
For example: It takes me 10 hours to develop a boot strap. I pay myself $20/hour. It took me $200 of labor to develop the boot strap. I will sell 100 boot straps this year. Therefore I need to add $2 to my labor cost for each individual boot strap.
Boot Strap cost = Cost of Materials + Labor (add $2 development cost) + Overhead
This wholesale price covers your product expenses. Now you must add a Mark up to plan for profit. You will need to add a minimum of 50% to your cost when selling to a retailer.
Wholesale Price = Boot Strap Cost x 1.5
If you sell direct to customer you need to add an additional 65-75% markup.
Retail Price = Wholesale Price x 1.65 (65%0 or 1.75 (75%)
Will the market bear this price?
Per Project Model Design Fee
Per Project work may result from a request for a scope of work (SOW) from a customer, or from a request to make something for a particular price. Either way, you will need to make sure the project is profitable before you accept the work.
You will need to do some design work that the customer will sign off on. You may need to do some testing of materials and process to make sure your design will work. It's tricky because you need to do this before you agree on a price.
I recommend you work on the SOW model. This method allows you to build in the cost of design and testing and protects your payment. You very specifically lay out what you will do, checkpoints, sign offs, and payments along the way. Your Scope of Work will include Cost of Materials + Cost of Labor + Design Fee (flat rate) + Testing/Model Building/ Prototyping (if necessary).
An SOW for an glass mirror might look like this:
- Design Fee - $1500 Payment due at acceptance sign off
- Renderings/Models - $2000 Payment due at acceptance sign off
- Materials - $5000 Deposit of $2500 due upon acceptance of renderings/models
- Labor - $2500
- Delivery - $250
- Installation - $250 Balance due
In this model, Design Fee, Renderings/Models/Prototyping, Labor and Installation will be where you build in profit, so it is imperative to get these numbers as close to correct as possible. The MOST common mistake in a per project SOW is under estimating the time you will put in.
I recommend you structure your SOW/Contract to have checkpoints to review where you are on the fees throughout. If you are losing money, revise with the client. This will really help you stay profitable if you run into time consuming issues. If you over estimate, you will bill your customer less and your customer will be ecstatic.
Pricing for Profit
No matter your model, you must make sure you have covered all expenses to make your product and then Mark Up your work for profit.