I’ve seen a couple of Posts asking about “ How to Cost “ properly and I thought I’d hop in and share how I’ve costed over the years with the different Product Categories.
First of all, you need a piece of paper and pen or a spreadsheet, I don’t think you need a fancy calculator app as yet. Get it all jotted down first before you work out fancy excel calculations, lol.
What you do need is a clear idea of your direct costs, apply the right cost for labor, apply the profits in the right place and be realistic, or your costing will be wonky and not sustainable.
If you only double your costs, that is what I call Hobby Costing ~ and if a retailer came to you, you would not be able to welcome their orders as there would not be enough margin, nor be able to hire a salesman.
I always felt that a good Cost Card was a micro version of what your profitability was going to reflect at the end of the year.
If your Cost Card shows your Landed Duty Paid Cost at $15 ... you need to retail it at $100.
Why? Let me map it out for you ~
Break it all down into Line Items like a Grocery List, I call all of these your RAW COSTS
Materials ~ this is everything you have to buy to make your product ~
If you are making a Tee Shirt for instance:
Fabric 1 m x 3.00/ m = $3.00
You have to use labor costs as if you were always hiring someone, as you will also have the profits of the sale of your product as well. Make sure the profits are in the profits section, don’t over pad the labor section.
This is for everything that you have to pay someone to make your product.
( Pretend you aren’t you, that you had to hire you out… what is the $ per hour you’d have to pay that person ??)
Whether it is a handmade item or manufactured, you have to use the cost as if you were paying for someone else to make it. For instance, if you have to pay someone $5.00 that's the number you put here.
Screens ( amortize over the units IE cost as $50 divided by 100 units = .50 each )
Handwork to apply special crystal etc
If it costs you .25 cents per unit to ship to the printer, you need to add that in as well.
Your RAW COSTS are now $10.00, then you have to figure out how much it costs you to land the goods in your country. So you'll need to add in the Customs & Duties ( often around 16-18%, check with a Broker or the Government ) I used to design my first collections in 100% SILK because there were no customs & duties to apply, as there was no Silk Industry in Canada. There are Brokerage Fees to pay to the Customs Brokers as well for Documents ( sometimes a flat $35 fee plus extra for a rush clearance if you request that, very handy for evening & weekends if necessary, as customs clearance can take a 1week to 10 days in your timeline, more if there is a backlog or strikes. )
Then you have to add in Freight.. is made in China & needs to be boated?
Or are your air freighting it in?
Now your LDP cost is probably closer to $15.
Shipping to Client ~ You want to sell to your charge all this to the client separately, this is called selling to the customer FOB
Most items are shipped FOB, that means the clients pays for the shipping ( I highly recommend that you use a system that does Post Office calculated shipping, it takes time to set up, you have to size and weigh everything, but once it is done, its automated and they pay for the shipping up front, not your problem. )
Here are some of the associated costs that you may not have thought of ~
Some people calculate the cost of the Shipping bag etc, for instance, Shopify allows you to see the cost of the actual postage, then you can choose to add $2 or whatever to the shipping so you aren’t out of pocket for the shipping bag )
Pick & Pack 1.00
Bag to ship in 1.00
Insurance & warehousing.50
Shipping ( a variable as it is in the shipping the client chooses online )
Cost of Doing Business ~
Cost of money, even if it is yours, you need to add the cost of borrowing whether it is 1%, 2%, etc. Think, if you had a chunk of money, what would your rate of return be if you invested it in the Bank? Or if you had to borrow money ( on your credit card, your line of credit, etc )
Overhead ~ Include rent, light, heat, etc over the year and apply a %, this should be a line item.
You can choose to add yourself as a salaried employee of the company or not here ( talk to your bookkeeper accountant )
Damages, losses ~ is a % of damages typically
Advertising ~ You may want to add 2% or so here if you are buying FB Ads paying for media leads, Google Adwords, etc
Here is my Costing Formula ~
I’ll use a $100 Retail so you can see the numbers easily, using the breakdowns noted ~
LDP Cost ( Raw Cost of Materials + Labour + Packaging + Customs + Duties + Freight ) $15
Suggested Retail $100
If a Wholesaler / Distributor comes to you, you sell it at $50 Wholesale
The Retailer buys it Wholesale at $50 and then they retail it for $100
In some cases, the Retailer will want 55 points so you will have to sell it to them for $45.00 and they still retail it for $100.
Always sell online at the same or slightly higher than the Retailer. If there will be a difference, sell them something exclusive instead of having an item that there will be pricing disparity.
If you use a Distributor, it depends on if they often buy it outright from you.
Or you may have to pay a Salesman fee of 10-12% for use of showroom.
That means they sell it at $50 and expect a 10% sales fee. These sales fees are usually due one the products are shipped and paid
IE ship $1000, they get $100 that depreciates your profit to 25 points.
This formula will help you make healthy financial choices for a sustainable business. You want enough margin so you can hire a distributor or if Trader Joe’s comes to you, you can hop on the opportunity. Those opportunities come at a cost ( sometimes there are advertising fees and warehousing that they will hit you with )
We often " Merchandised " prices after... let's say we were working on a grouping of 6 items. One seems too high, so we lower it slightly. One seems like it could be $2 more for what it looks like etc so once we know what the facts are, we can adjust them with knowledge.
Some people use the following formula of :
Total Cost of Goods x 2.5 = Wholesale
Wholesale x 2.5 = Retail
To compare it LDP Cost at $15 x 2.5 = $37.50 for wholesale, x 2.5 = $93.75 Retail
which I feel is slightly low to account for and I find there are losses, mistakes, cost of borrowing money, website costs, discounts, etc. that if you use my $15-50-100 formula, you will have the margins to absorb those costs of doing business.
This is exactly the formula that I have used over the 36 years I had in Fashion, and now in my Product development Business to generate over 300 million in sales.
It will be fun to see you sell 50% overall online at 85 points, 50% of you sales via a salesman at 25% meaning your total weighted profits of 55%.
See how this affects your bottom line?
I know this may be overwhelming, but if you take a piece of paper, write it all down, it will make sense. Put the right costs in the right places, put the profits where they need to be and structure your costing properly so you can build a sustainable business that will scale beautifully.
If you are looking for the basics on how to produce your own ideas, grab The Product Development ROADMAP to start working out your ideas. This is the same process I use for all my new ideas.