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Day 7: Pricing Your Product and Valuing Your Time

Today's Prompt:

Give thought to the pricing structure for your product and to the value of your time. Use our spreadsheet (provided) to begin working on your profit and loss (P&L) analysis.

If you would like any input on your Excel sheet, you can email us at casey@30dod.com, or post questions in the comments section of our website at www.30dod.com

An important part of developing your business is value and pricing. Value vs. price is a wide-ranging, extensive subject that whole books have tackled. So, for our purposes, we’re going to start with a really basic exercise to get you thinking about how you’ll price your product properly from the beginning.

For simplicity’s sake, let’s start by pricing our product similar to the market, and let’s use an example – Margo, who makes couches.

Margo is currently working full time as a bartender, and she needs to work out how many couches she needs to sell for her furniture company to replace her bartender wages so that she can focus on her business full time.

Margo is targeting customers who want a slightly higher-end alternative to Ikea, so she looks at made.com to see how much their couches are selling for, on average. The average couch on made.com sells for £800, so Margo will start with that price in this exercise to check a) if this price will cover her overhead and materials costs and b) how many couches she will have to sell per month to replace her bartending job.

Overhead and material costs

Margo knows that her overhead costs (rent for her studio, monthly fee for her website domain and host, PayPal subscription to accept payments from customers) will amount to £200. She also knows that, on average, the materials (wood, fabric, cotton, etc.) for her “signature design” will cost £150. This brings her total costs to £350.

Time

Again, for simplicity’s sake, let’s price our time similarly to whatever our current earnings are now. We’ll come back to this later in the 30 Days because valuing your time is an additional discussion.

Margo makes £10/hour at the bar. It will take Margo 30 hours to build the couch, so it will cost £300 of Margo’s time.

Total cost

Margo’s overhead (£200) and material (£150) costs plus her time (£300) amount to £650. This means that, if Margo sells her couch at a similar market price to made.com (£800), she will have made a £150 profit per unit that she can reinvest into the business (more materials, marketing, etc.) or to pay herself at a higher wage than she was making at the bar.

As an additional check, let’s see how many couches Margo has to sell to replace her current job. She works 40 hours/week at the bar, resulting in £1600/month, which covers her living costs. In order to escape the bartending work, Margo will need to replace her bartending wages with her time wages + profit. Her time spent per couch (£300) plus her profit (£150) results in £450 to Margo per couch. This means that she’ll need to make four couches to replace (and slightly exceed) her monthly wages from the bar .

Keeping this example in mind, take a look at the Excel sheet provided. We’ll confirm whether our product or service is worth our time and if it’s feasible to eventually perform full time (if desired), considering the current market rate to purchase our materials, the current market rate our product can sell for, and how much our time is worth. (Margo’s costs are entered into the sheet attached in the red cells.)

Enter your own numbers in, and the formula provided will tell you how many units of your product you need to sell per month to break free from your current full-time position (again, if that’s the goal for you. It may not be, and that’s okay. If your goal is to create a part-time project for yourself, all of this will still be a worthwhile exercise.) Keep in mind that this is a really simple, watered-down version of how to price a product. There are a lot of other factors to consider (eventual funds necessary for marketing, potential need to hire staff, change in market rates, monthly fluctuations, etc.). We suggest reading further materials at The Design Trust’s website about how to price your product[1].

[1] Patricia. Pricing Strategies: 15 Different Ways to Price Your Creative Products or Design Services. http://www.thedesigntrust.co.uk/how-to-price-your-work-about-different-price-strategies-that-you-can-use/. 27 Jan 2017.

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