The HSCG Price Calculator is based on standard accounting principles for determining
a product price based on what is called "Cost-Plus" or "Markup" pricing. It is the
method of pricing where the price is based on how much it costs to make the product. This page explains how it works.
There is no pricing formula that automatically fits every business and product.
However, there is a generally accepted process that can be used to create the formula
that fits. That's why each part of the HSCG Price Calculator is adjustable and gives you
options to make work for your business.
There is only one absolute rule when it comes to pricing:
The PRICE of a product must be more than the COST of the product.
No business will stay in business if they are selling products for less than they cost.
It is literally how much it costs you to make the product. The cost consists of three parts:
the materials used, the labor to make it, and the overhead of having a place in which to make it.
With the HSCG Price calculator, if you have already figured out the cost per bar for
the materials, labor or overhead, you can enter it directly. If you haven't figured them out,
there are worksheets to walk you through the process.
The cost of materials includes all of the things that are used up to make the product. Mostly
that would be the ingredients and packaging, but it could also include disposable items that are used such
as gloves or pipettes. The total cost for the batch is divided by the number of products to get the
cost per product.
If you are using the Cost of Materials Worksheet, you need to enter the item, how much you
bought, how much it cost and the shipping. Then enter the amount you used in the product
and the worksheet will calculate the cost.
When you buy and use ingredients, not every tiny scrap is used up in products. There is
always a little bit of loss from spillage, or just the bit that is left in the measuring containers
or the original container. There is also often product left after filling the containers or molds,
and for soap there are trimmings and end pieces that aren't saleable.
The Allowance for Loss accounts for the bits that can't be used. The default is 5%, but you can
change it up or down depending on what works for you. If you are extremely diligent about
using every little bit of product that you can, then you might want to adjust it down to 2% or
3%. If you often have spillage, lots of left-overs, or large amount of trimmings or end pieces (for soap),
you might want to adjust the percentage up to 6% or 7%.
The cost of labor includes what it costs for the time to make the product. Even if it's your
business and you make the product yourself, you should account for the cost of the labor. If you
want your business to grow, you will need to hire helpers. If you've priced your product with labor
included, you will have funds to hire the helpers you need.
For general calculations, you could add up all the time it takes to make the product
and assign a reasonable hourly wage.
For more accurate calculations, break down everything that needs to be done into separate
tasks, figure out the amount of time for each and assign a reasonable hourly wage. Some tasks may
warrant a higher or lower hourly wage depending on the skills necessary. The calculator will figure out
the amount for each task. The total amount for the batch divided by the number of products determines
the cost per product.
Whether you are paying yourself or paying someone else, there are additional costs to the hourly
wage -- the employer taxes. The amount of taxes must be included in your labor calculations. Federal
employer portion of Social Security and Medicaid is about 9% and there may be other employer taxes
required at a state or local level. Be sure to factor in the cost of accounting or bookkeeping to
calculate the payroll and employer taxes as well. The HSCG Price Calculator is set for 18%,
but you can adjust that up or down based on your situation and local tax amounts.
The fixed overhead costs are the costs that are "fixed". You still have to pay them
even if you don't make a single product. Fixed costs include things like rent, utilities,
insurance, basic phone and internet, and your website. Discretionary or marketing costs
(show fees, advertising, booth displays, etc) are not included in fixed overhead.
Even if you don't yet rent a separate space, calculate realistic rent and utilities into the
cost of your products. If you don't yet have insurance, calculate that into the cost of your
products as well. That way when your business expands into its own space or you do get insurance, your products
will be priced high enough to carry the increased costs.
Fixed overhead costs are spread out over ALL the products made during a month - not
just the products in this batch, so an estimate of the total number of products you make
per month is necessary. If you don't know the exact number of products, make a reasonable
guess. The HSCG Price Calculator has a worksheet for calculating the fixed overhead costs.
TIP: The fixed overhead
cost per unit is the same for every batch because it is based on
the fixed costs and the number of products per month. Once you have calculated it,
use the same number in price calculations for all your products without having to
enter all the information into worksheet for every product.
It can be eye-opening to see what it really costs to make a product. If
your product costs are too high, here are some strategies to bring the cost down.
Reduce the material costs:
Reduce Labor Costs
Reduce Overhead Costs
The wholesale price is generally the lowest price at which you could happily (and profitably) sell your
product. In Cost-Plus pricing, the wholesale price is determined by multiplying the cost by the markup.
The general rule is that the wholesale price should be about 2x (200%) to 2.5x (250%) of the cost to make the product.
If you have boutique or high-end lux product, the wholesale markup might be more. The markup is where the money to run
your business comes from.
the HSCG Price Calculator is set up with a default of a 2.5x markup. You can change it to more or less as you
If your business model includes using Wholesale Reps to market your product for you, you need to account for
their commission (usually 15%). If you choose, the HSCG Price Calculator will adjust the wholesale price to
include an additional 15% for your reps.
The retail price is normally 2x the wholesale price (because wholesale buyers expect to be able to charge about
double their purchase price). Even if you don't wholesale your products
now, resist the urge to retail your products for the "wholesale price". If you do that, then you have
no room to give a wholesale price when someone wants to buy bulk or resell your product.
The different between your retail price and your wholesale price is where the money comes from for
the sales and marketing necessary to promote and sell your product.
In Cost-Plus pricing, the retail price is determined by the cost and the markup. To
get the retail price down, you have three options:
If the price is still so high that you don't think you can sell the product, then reconsider
whether you should include it in your product lineup.
The Handcrafted Soap and Cosmetic Guild, Inc.
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