This comes in response to the many pricing and costing questions which many of you have. Also, this isn’t so much an answer as it is things you need to think about.
Most companies are pretty good about calculating costs based on yardage but I find that the same companies aren’t so good about the other components (elastics, thread, buttons, plastic bags etc). The first step is to make sure that you figure the real costs of all your components. The reason I say this is that most companies -and I do mean most- fail to take everything into consideration when figuring component costs. The item most people overlook is freight, better known as what your suppliers or freight companies charge you for shipping and handling. If you haven’t been calculating this cost, you may find that over the ensuing months your costs will be increasing and you won’t know why so get a handle on the cost of shipping before record gas prices take you by surprise. This may add a substantial amount to the cost-per-unit price.
While it’s true that you can just add a percentage to your overall product cost for overhead (for example, 30%, 40%, etc.) because it makes things easier, the problem is that you really need to know exactly what each factor in your product is costing you in order to make informed decisions. If you find that your costs of managing and handling inputs is high and you know those costs, you’ll have a better idea of how you may go about reducing them. However, if you don’t know the intangible costs of inputs, your overhead could be unnecessarily large and unwieldy.
Since many of you are working from small spaces it may be that you’re renting storage space for your components (or finished products) so be sure to add that as well. One advantage of lean production means not needing to store inventory but I realize you may not be there yet. Similarly, if you are hiring someone to handle the components, manage their inventory or move them around, you have a labor cost in there as well. While none of these costs may make a big difference on cost-per-unit on the quantities which you purchase, they are still costs which you incur. An easy way to do this after the initial calculations is to determine what percentage of the actual component cost the added costs amount to (for example, 8%). Using this percentage for future pricing should keep you “in the ballpark” and make this part of costing easier to figure. The summary of this is that your 25 cent per button cost may actually be closer to 28 or even 30 cents so it is the latter cost (supplier invoice plus incidentals) that should go on your product costing sheets.
As far as the mark-up percentages are concerned, rather than specify an exact amount (such as two or three times the cost) I prefer to mark-up to what the market can handle. Using this method you will probably have a variety of mark-up percentages (or levels) in your product line. What I like about this method is that it allows you to enter and generate sales in markets where pricing would not meet your “minimum” mark-up standards (but you would still have a mark-up) while allowing you the opportunity to get bigger than normal mark-up in other markets.
An example of this would be if I were making men’s and women’s jackets. It could be my women’s wear would only tolerate 2X cost but my men’s wear would tolerate 4X cost (if you read Paco Underhill, you’d know that men are less fickle than women regarding pricing) and while the women’s wear wouldn’t meet my mark-up standard, the men’s wear would compensate for it. In other words, don’t limit yourself or your earnings by sticking to “set-in-stone” mark-up amounts. Be flexible because each market is unique and it is only through experimentation that you’ll learn to take advantage of this.