The price of your products needs to cover all of the expenses that go into creating and selling them, while still leaving some room for profit. This can be a complicated formula to figure out, so breaking it down to each piece can help you figure out how to appropriately divide the costs between different products and how to make sure your business is successful.
Labor Costs
Labor costs focus mostly on the labor that it takes to sell the completed products. Depending on your sales process, you can either calculate how much labor each product takes to sell or you can calculate the overall labor costs and divide this up equally between all the products that you sell. The main labor cost is your employee compensation. When thinking about labor costs, make sure you consider any required overtime, sales commission, and other bonuses that are paid out. You should also include any other payroll costs in your labor costs.
Manufacturing Costs
Manufacturing costs focus on how much money it takes to make the products that you are selling. This includes the cost of raw materials, the labor required to manufacture the product, storage and transportation fees, and any other costs associated with the manufacturing process.Â
This is one of the biggest cost drivers you should be looking at when pricing your products. Sourcing products from Mexico can help reduce the costs of shipping and tariffs. Unlike labor costs, it is unwise to group manufacturing costs together. Rather, you should divide each of them proportionally by the products produced and how much they take up in terms of resources.
Overhead Costs
Overhead costs are any of the expenses that are used to run your business other than creating the products and selling them. This often includes things like rent for retail and office space, utilities, insurance, business supplies, and maintenance. These are all necessary for your business operations, but they can’t necessarily be assigned to one specific product. These are best divided up evenly between all of the products you sell.
Once you have the costs for each of these areas assigned to a specific product, you can add them up to figure out what the break-even point of your product is. This break-even point should be the absolute lowest you ever sell it for, but you should be marking it up in order to make a profit. Once you have your price in mind, make sure to look at what your competitors are doing to make sure you aren’t overpricing or underpricing yourself.
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