Costing/Pricing Evaluation ー Understand what your product/service actually costs from production to fulfillment, understand what you can sell it for to individuals/wholesale/etc, understand the profit margin and if this is sustainable
Objective: You will learn how to assess the costs of your product/service, what you can sell your product/service for, and whether this profit margin is sustainable.
Knowing what your product/service will cost to offer, what you can sell it for, and whether that profit margin is sustainable is critical for your business to function and even more so to succeed.
You need to ask yourself a lot of questions when you are making this assessment: what do you estimate it will cost to make this (the prototype, but also in mass production, also including packaging, shipping, etc depending on what you’re making) or to offer it as a service (labour, time, resources/materials used, etc)?
What are people willing to pay for something similar? If there is nothing similar, what do you think people might pay (it’s worth sharing your idea with a lot of people and asking them, while also assessing what problems your idea solves and how people value those problems so you can estimate a price)?
Is the difference between what it costs (along with social and environmental costs) and what you think you can charge (which can often increase if you are socially and environmentally responsible) enough to be sustainable? Basically, are there enough profits left to pay yourself and others properly. This depends on what you’re offering, but for many products you need a large markup. For example, if you plan to sell a product wholesale to stores, they usually want a 50% discount on your retail prices. So if your product is $50, they want to buy it from you for $25. That means your product needs to cost less than $25 to make (also factoring in that you need to make money from your business to survive).
Sometimes the numbers just don’t add up. An idea can be awesome, but too expensive to make based on what people are willing to pay for it. If you won’t make money from your business, if the costs outweigh what you can charge, it won’t be able to sustain itself or you.
The above are the fundamental questions, and the further readings will take you deeper into different types of pricing analysis, and how you can use these frameworks to benefit your business design.
- Write out a list of estimated costs to offer your product/service. Include costs from all phases of the project, and include social and environmental costs. Try to assess what this adds up to on a per unit basis (or per visit or per month or whatever payment framework you will use).
- Write out your estimates of what people might pay for something similar. Look to competitors in your market or products/services that solve similar problems. If there is nothing similar, try to assess what problems this product solves and what dollar value solving those problems might have to people. It is worth sharing these estimates with a few trusted members of your community to understand their thoughts and feelings around the pricing estimate.
- Assess the potential profits (the difference between your estimated cost and your estimated price). Are these sustainable? Will you have enough money to pay yourself and anyone working with you properly without harming the environment or exploiting other people?