As a small business owner, understanding the components that make up your cost price is crucial for ensuring profitability and making informed decisions. While the concept may seem daunting, breaking it down will help you navigate this important aspect of your business with confidence.
In this blog post, we'll explore the essential factors to consider when determining your cost price, providing you with the knowledge to confidently price your products for both retail and wholesale.
Material Costs
The first thing to look at when calculating your cost price is the cost of materials used to create your product. This includes the raw materials, ingredients, or components necessary for production.
Every little part matters, down to the glue dot that keeps your wicks in place, the extra sticker that goes on the outside of your notebook, and the thread that you use to stitch your garment. Even the most insignificant part matters. It may not seem like a lot now, but imagine if a small component cost £0.01, if you make 100, that would still be just £1, but if you made 100,000, it would be £1000.
Take the time to research and negotiate favourable prices with your suppliers, as even small savings can accumulate and positively impact your profit margin. Keep all your research, and all your costs in one place. This way, it will be really simple to review your cost prices if suppliers up their prices, or if you start buying in bigger volume, and can negotiate better prices.
Product Packaging
Packaging is more than just an aesthetic element; it adds value to your product and plays a crucial role in attracting customers.
It's easy to forget small things like those little clear stickers to close your boxes or the string on a swing tag, but everything needs to be accounted for and included.
Labour Cost
When you start out, if you’re hand-making your products, calculate how many of something you can make per hour. Then decide how much you would like to be paid for this. If you plan on scaling your business and hiring a team, base it on how much you would need to pay a team member to make your products.
If you always want to keep handmaking your products by yourself, then you may want to pay yourself a higher price for labour.
Example:
You decide on an hourly wage of £12, and you can make 100 pieces per hour. Then the labour cost for this product will be £12/100 = £0.12 per product.
If you have your products manufactured, the labour cost is most likely included, but you may have a smaller labour cost element if you need to package each product in a gift box and add a swing ticket or belly band.
Shipping/Freight, VAT, Duties, and Customs Fees
When setting your cost price, don't overlook additional expenses related to shipping, freight, and any taxes or fees that may apply. If your business involves international trade, be aware of customs duties and import/export regulations, as they can significantly impact your costs.
And if you’re not VAT registered yet, you will need to include VAT in your cost price from suppliers who are.
Understanding what to include in your wholesale cost price is essential for small business owners. Now that you have a better understanding of what to include in your cost price, it's time to review your current pricing. Look at each component we discussed and check if you’ve forgotten anything.
If you want to learn more about pricing your products for wholesale, download my free pricing guide today.
