Updated: Oct 3
One of the most challenging aspects of being a herbalist is deciding how to price your products. Price them too high and no one will buy them. price them too low and you won't make any money. How exactly do you find the pricing sweet spot?
Thankfully there is a formula that you can use to help you find the perfect price.
costs + overhead + retail markup
Your costs include the following:
The cost of raw materials used to make the product.
The cost of the materials used to package the product.
The cost of the labour used to make the product.
Herbalists tend to be very good about accounting for the cost of their raw materials and packaging. However they often make the choice to ignore their labour costs. This is especially true for herbalists that work alone. The thought process is, my labour costs me nothing so I am not going to charge my customers for it. In reality your labour is a cost. If you are spending time making a product, you don't have time to do other things such as develop new products or market your current ones. It is costing you time and ultimately money. Not accounting accurately for labour is the biggest mistake new herbal business owners make and is one of the biggest reasons herbal businesses fail.
Overhead is the amount it costs you to keep the lights on for your business. It is calculated as a percentage of your income and includes utilities, administrative costs, internet, phone, licenses, insurance etc. Basically any cost that is incurred regardless of whether you see a client or produce a product, is considered overhead. Your accountant can help you calculate this, however you can do it on your own by taking your overhead expenses for a typical year and dividing it by
your average yearly income and then multiplying it by 100.
Once you have a calculated your overhead percentage. it should be added to the cost of every product you produce. For example, if it costs you $10 to make a product and your overhead is 7% of what you make in a year, then you would calculate 7% of $10 to get $0.70. You would then add the $0.70 to the price of the product. That product would then be priced at $10.70.
If you are just starting out in your business and don't know what you will be making in an average year, you can use the standard overheard calculation which is 7-9%. If you have few expenses,
use 7%, if you have a few more use 9%.
Retail markup is your profit margin. It is calculated as a percentage. How much you markup your product is determined by the competition in your local market. Generally speaking retail markup is 200%. However you can adjust this up and down depending on what your competition is charging and your business model.
That said, when doing your research ensure you are comparing your product to a similar one produced by a similar business. If you are a one person show making small batch hand cream with herbs you grow yourself, you can't compare yourself to a mass produced hand cream bought at a drug store even if both are made with similar ingredients.
Determing a price
So how do you find the perfect price for a product? Start with using the standard pricing calculation with the standard 200% markup. Then do research on your competition, adjusting your markup accordingly. Because your costs are taken into account, any markup chosen will result in a profit. However it is important to keep an eye on sales of the product and be willing to adjust the price according to demand.
If you are finding that in order to sell the product you need to sell it below cost, take another look at the raw materials, packaging and labour. By making small adjustments to your costs you can make a big change in the price. As tempting as it may be to sell a product at or below cost, your business will not survive long using that strategy.
It may take some trial and error, but eventually you will find that magical price that gives you the return that you are looking for.