OK. There is a bit of science to it. Which by the way, my high school science teacher would be flat out amazed that I even remember the word let alone the practice off.
The world of setting pricing as it pertains to marketing is paramount to understanding ones business. It’s a world of spreadsheets and reports that can make anyone want to through up ones hands and say ‘enough’. However, if one wants to understand their break-even point is vs. profitability vs. loss. They are a must.
The first, basic, order of business is to know what your monthly operating costs are: rent, employee’s salaries (yours included), electricity, office supplies, etc. Next is to include your cost of sales (marketing, advertising, web, SEO, etc) and total these up to get at your cost of doing business. If possible sorting it down to the cost of employee to sales to break even per month is even better. It’s a lot to do and initial set up of this model is time consuming. However, if you know this information and manage it, life and managing the shop to profitability will be possible and satisfying.
So what next? Once you understand your operating costs you need to understand what each product costs wholesale, to include shipping (down to the number of skeins, etc). Last weeks mention of a good point of sale software that can manage the input and output of your product, both cost and quantity, can be immensely helpful at this stage. It can not only help you with inventory control, but also to see buying patterns that aren’t successful and holes in your inventory.
At this point, by understanding your expenses and inventory you can price your product to industry standard % to sell to the public at a price that your market will pay. If your store product includes higher end products your % point might be higher. If you carry product that can be had at three other local shops within a 25-50 mile radius as well as available on the internet you have less flexibility and some thinking to do on your differentiation. With this basic work done you’ll begin to have an understanding of what you need to sell to make your expenses and a profit.
These spreadsheets and models can get pretty complex. My rule of thumb is when they are getting unwieldy I stop and think how I can get (and read) the information in a simpler report. Sometimes that means creating several reports tied into a master model.
Now that you have a place to started you may be asking yourself, how do you get the customer to not only come in, but buy? We’ll tackle how to market (promote) your store and product next week.
Resources
Point of sales
QuickBooks, Microsoft, Possum, and Lightspeed (MAC)
Marketing spreadsheet programs
Spreadsheet Marketing, Marketing Insights, Business Power Tools
Disclaimer: I’m pretty comfortable in excel and have developed my own spreadsheets over the years. For those that are not familiar with spreadsheets, a decent place to start is with an inexpensive program that you can by on the web. Caution, don’t spend more than $80.00 on a program and be prepared for only getting the basics. You’ll need to expand them to suit your needs.
