costing and pricing

Author:Finola Jennings Clark

for the Cultural Development

Foundation, Saint Lucia

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COSTING & PRICINGNo, it’s not your worst nightmare!




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Exercise before you get up and running!

Take a moment and write down 5 things you think you need

to include in yourcost of production




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COST OF PRODUCTION




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Do I really need to

take EVERYTHING

into account before I can sell anything???

Well…yes…and no….




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Understanding the process is very

important

You need more than a ‘Guesstimate’

KNOWLEDGE is POWER




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Direct or Variable Costs / COGWhat is COG? Cost of Goods -EVERYTHNG that goes directly into making an item – such asRaw Materials used in your products Inward Shipping for anything you import to

use in your productionImport Duties for anything you import to use

in your productionLabour – the time you take to make your

productsPackaging & Labeling used on your products




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Indirect Costs / Overheads CODBWhat is CODB? Can you guess? Cost of Doing BusinessEVERYTHNG that has to be paid whether you produce items or not – such as Rent / Mortgage Annual Insurance for premises Internet Admin Staff Your wages when you are not in

production




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Semi-Variable Costs These costs vary as

your business expands or from time to time – so they are neither fixed, nor variable, but Semi-Variable

Why do you think these costs are semi-variable? Lets go through them Production Staff costs Electricity & Water

Telephone Transportation Professional Fees Outward Shipping

Costs Contingency /

savings for expansion

Equipment Purchase & Repair




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You need more than a ‘Guesstimate’

Able to PAY YOURSELF!!!

Taking the time to get to know your costs will ensure

you are actually…




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OKAY so let’s do a costing

Do you know

what your materials

cost?




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I got

the

beads f

reeI bought the

beads on holiday in WalmartThose old beads…?

Let’s start with MATERIALS

I got a bargain online




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HOW DO WE COST MATERIALS? Well first of all NOTHING is for FREE

Eg things people give me, free design, waste materials – they do have actual costs to you

What do you think the cost of FREE stuff is?For example, did you drive to pick up ‘free’ materials? Did you spend time posting on Facebook to see if you

could get ‘free’ stuffDid you have to store all this ‘free’ stuff in your

studio/home until you used it?Then there are costs to this free stuff




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NOTHING is for FREEYou drove to pick up ‘free’ materials?

Your time taken to driveYour gas to get there and backWear and tear on your vehicle

Did you spend time posting on Facebook to see if you could get ‘free’ stuff

Your labour cost for the time it took to post and follow up




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NOTHING is for FREEDid you have to store all this ‘free’ stuff

in your studio/home until you used it?Storage space costs rent

If I had to pay for it costUse substitute costs – eg online

So, you were on HOLIDAY? Can you order some more

from Walmart?




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The beads were on 70% sale online– GREAT! What happens if you get a

big order and need more?

cost the cost of replacement not what you did or didn’t pay for it!

Always think ahead! Think like the business person you are – any savings you make getting ‘free’ or bargain inputs is great – that profit – but your COST is what it would cost if you had to pay ‘full’ price




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Costing Imported GoodsUsually when you import you shop for a variety of things at once – how do you make sure you have accounted for the true LANDED COST of the goods?

Quant Item Unit cost Total10 2oz paint $5 502 2 oz paint $8 161 Pk brushes $20 20

500 Headpins $10 10250 prs Ear wires $50 50

Sub -Total 146 Shipping 60 Customs 110 Total 316




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Costing Imported GoodsAdd up the shipping and customs (insurance too if applicable) = $170Your purchase price online is $146 so TOTAL PRICE = $316To the real cost of each item, 316/146 x the price of the item or 2.16 x price of each item

Quant Item Unit cost Total Ship & Cust total Price / item

10 2oz paint $5 50 X2.16 108 10.802 2 oz paint $8 16 X 2.16 34.56 17.281 Pk of 5

brushes $20 20 X 2.16 40.32 8.06500 Headpins $10 10 X 2.16 21.60 0.04

250 prs Ear wires $50 50 X 2.16 108.00 0.43Sub -Total 146 312.48Shipping 60 Customs 110 Insurancebrokerage

Time to orderTotal 316




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Costing Imported Goods

What are the important takeaways from this exercise?

Nothing is for freePay yourself firstIt is your business so LEAD IT!Learn to calculate your riskKnow when to outsourceLearn to say NODo what is right for the businessKnow your true / full costInclude labour cost

You may notice the adjusted cost is a little less than the real total – so in this case, you could round UP the adjustment figure to make sure you have covered everything – so use 2.17 instead




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Costing Imported Goods

HomeworkCost at least 3 of your most important materials




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Costing

Review How did you fare with your homework?

Are there any areas you need to go over?




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I make LOTS of money from my Crafts!

Let’s figure out what you should be charging for your labour / for your time

Which one is you?

Many crafters and artisans don’t charge for their time or charge an arbitrary figure –which usually isn’t enough!

I don’t make enough money

from my Crafts!




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Figuring out what to charge for your time

There are a few ways to look at this, first Do you have, or did you have another job?

What is/was your hourly rate?Monthly salary x 12 mths / 52 weeks / 5 days / 40

hrs = hourly rate (use 45 if you normally work 45 hrs per week)

Decide if you want to earn the same, more or less

What are the things that affect this decision?Continue on to calculate your time charges

using a job earnings comparison




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How many weeks/days will you work a year? Will you take Holidays? Divide the AMOUNT YOU NEED TO EARN by

number of working weekseg if the total you need to earn is $30,000 and you will work 47 weeks a year, then you

need to earn30,000 / 47 = $638.29 per week IN

SALARY/WAGES If you work a regular 40 hr week (8 hrs / day)

then your hourly wage needs to be $15.96 / hour

BUT if you only work 6.5 hrs a day (1hr for lunch ½ hr breaks) then you need to earn what? – calculate it





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If you don’t have a job – do you know what you’d like or need to earn? To calculate this – decide first is this

just for you or 1) do you have to consider cost of

kids too; or 2) do you have someone else

contributing?and3) Do you have personal plans to

travel, build a house or have a medical procedure or…?





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Now start to list all the things you need money for Rent/mortgage Utilities Food Transport – bus & taxi / car loan, fuel, service, insurance Clothing & Personal items Entertainment - Movies, parties, presents, hobbies,

books Health Savings Home repairs Unexpected Anything else Total all these items per month and then x 12

= AMOUNT YOU NEED TO EARN





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Do you have another source of income (eg Job) if yes, you can deduct that amount from your

annual needs. The balance = what you need to earn per year Using the method described in the previous

slides - What would be the hourly rate for someone who Needs to earn $50,000 per year Has a job that earns $35,000 per year Can only work part-time on evenings,

weekends & holidays which totals 500 hrs per year


See our COSTING YOUR LIFE powerpoint for useful Excel tables for this costing exercise




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ARE WE THERE YET??? Ok, in a big business, a professional will

do all the calculations of overheads, COGs, variables etc and figure out production quantities etc…we are NOT going to do all that – we can do an estimate with what we know

You’ve already made some decisions and knowHourly cost of your labourHow you will cost your materials




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Ok, so here’s what most people to so all these costs are coveredAdd a percentage on top of your COGs

to cover these kinds of things and all those you can’t foresee - how much do you think we should add? Well, we’ll take a look in a few slides, but for now…

Let’s take a step back now – what goes into COGs?Let’s list all the things? For the bracelet




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Direct or Variable Costs / COGWhat is COG? Cost of Goods -EVERYTHNG that goes directly into making an item – such asRaw Materials used in your products Inward Shipping for anything you import to

use in your productionImport Duties for anything you import to use

in your productionLabour – the time you take to make your

productsPackaging & Labeling used on your products




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Cost of Goods for the Bracelet

ITEM UNIT PRICE QUANTITY TOTAL

Red bead 50 4 2.00Silver bead 75 6 4.503mm cord /cm 10 20cm 2.00

Lobster claw 75 1 .75End caps 25 2 .50

chain 50/inch 1” .50Pink bead 50 1 .50

TOTAL 10.75




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Indirect Costs / Overheads CODBWhat is CODB? Can you guess? Cost of Doing BusinessEVERYTHNG that has to be paid whether you produce items or not – such as Rent / Mortgage Annual Insurance for premises Internet Admin Staff Your wages when you are not in production

Now remember CODB (see below) – where you add in the overheads. NOTE – if you don’t have staff and separate business premises, you can just include these in working out your labour rate (see Costing Your Life) – just MAKE SURE it is covered somewhere!




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If you DON’T want to include it in your cost of labour, you will need to make an estimate of overheads First add up all the things you have to pay in a year for in your business that are NOT part of COGDon’t forget to consider things like ‘Depreciation’ & Breakage

How often you need to replace tools and equipment etc? For instance, your computer – how many

years can it last? Your car – how long before you need to

replace it? Approximately how many tools get broken

each year

For our purposes you can estimate how long it will last then divide the purchase price by the number of years




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Eg: a computer costs $2400 and lasts 4 years, therefore it costs $600 per year: you can now add in this cost to you annual costs of your wages or, spread it across all the items that you make

To apply it to your production costs, start with the total $-value of goods you make in one year –

E.G. $30,000 in goods at wholesale prices, and total annual costs of overheads is $2,000, gives:

2,000 / 30,000 = 7c per dollar to my COG

So if an item costed $10 before, you would now add 10x 7c = 70c and it would cost $10.70

Do a thorough check of what you need to take into account? List them all, add them up and then lets move on…




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From Costing to Pricing the bracelet

COSTING - Items ValueCost of goods 10.75% for overheads etc 20% 2.15Subtotal 12.90% for contingency 5- 10 % @5% 0.65Subtotal 13.55% for profit 30% 4.07WHOLESALE 17.62

Wholesale Cost




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COSTING - Items price unitsWHOLESALE for the MAX price break 17.6

2100

WS for middle price break 18.50 50WS for small price break 21.00 10Single unit WS 25.00 1

Wholesale Price $25.00




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TYPES OF PRICING

Wholesale Price: Price to a reseller Bulk Price: Wholesaler quantity discount or

Direct to customer buying quantity******** - discount of RETAIL Price




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PRICING - Item ValueWholesale Price 25.00SRP – usually minimum of 2x Wholesale 50.00% allowed for consignment 35% off retailPrice break for retail multi-item purchase reseller% discount for retail direct from makerPrice break for retail multi-item purchase maker




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ARE WE THERE YET??? Almost…

In an ideal world this formula for PRICING would put you right on the mark – But …

Why are you in Business?Use up free time?Pursue a Hobby?Make money?

Should we price at the formula price or




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ARE WE THERE YET??? Almost…

The costing part needs you to follow a formula to make sure you are not WHAT….. ?

Pricing, now that can be done differentlyMarket testingComparative pricingSetting your price

What do you think each of these involves and what are the advantages and disadvantages?




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Market Testing How / What’s needed?

Advantages

Disadvantages / Challenges / Dangers




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Setting Your Price How / What’s needed?

Advantages





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Comparative Pricing How / What’s needed? Tough low cost

competitors Fair trade Superior quality Visual Appeal

Packaging as well Buy Local loyalty Customization




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Custom Costing & Pricing How / What’s needed?

Advantages





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YES!!!!

But there’s HOMEWORK

ARE WE THERE YET???