Understanding how price is calculated
The HSCG Price Calculator uses standard accounting principles for "Cost-Plus" or "Markup" pricing. This means price is based on the true cost of making the product. It is important to understand how this cost is calculated.
Here, we explain how it works:
Pricing is not standard
No pricing formula fits every business and product. However, there are generally accepted rules to help create the right formula for you. That's why we made each component of the HSCG Price Calculator adjustable, to make it work for your business.
There is one absolute rule to follow: the price of a product must be higher than the cost to produce it. Otherwise, it’s impossible to stay in business.
What is included in the COST?
Cost is the expenses you incur to make your product, and consists of three parts:
- Raw materials used
- Labor to produce it
- Overhead for the place where you are working
If you have already figured out the cost per bar for your materials, labor or overhead, enter it directly. Otherwise, the HSCG Price calculator includes forms to walk you through the costs.
Cost of Raw Materials
This includes everything used up to make the product. Not just ingredients and packaging, but disposable items, such as gloves or pipettes
Total cost of batch ÷ number of products = cost per product.
When using the Cost of Materials worksheet, enter the item, how much you bought, and the cost, including shipping. Then, enter the amount used in that batch and the worksheet will calculate the cost of raw materials.
Allowance for Loss
Not every drop of ingredients gets used. Some may spill, or there may be a small amount left over. With soap, trimmings and end pieces can’t be sold. Allowance for loss accounts for product that isn’t used.
While the calculator default is 5%, you can change it up or down to suit your needs. If you are very careful, it may adjust down to 2% or 3%. If you are just starting out and have frequent spillage or lots of scrap or leftovers, you can adjust the percentage up to 6% or 7%.
Cost of Labor
There is a cost for the time it takes to make your product. Even if it is a side-business and you do everything yourself, account for the cost of the labor. Eventually, you may need to hire staff. Including the cost of labor in your pricing ensures you have the funds to pay them.
A simple formula is to add up the time it takes to make the product and assign a reasonable hourly wage. For more accurate calculations, however, break down every step into a separate task, determine the time for each and set reasonable hourly wage. While tasks may have different wages based on the skill required, the calculator will figure out the amount for each.
Total cost of labor for a batch ÷ the number of products = cost of labor per product.
Allowance for Labor Taxes
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.
Fixed Overhead Costs
These are the expenses you pay, no matter how much product you make or sell. Fixed costs include your rent, utilities, insurance, phone and internet and website. They do not include discretionary or marketing costs such as craft show fees, advertising, booth displays, etc.
Even if you are work at home, calculate realistic rent and utilities into your product cost. If you don't have insurance, include it in your product cost. That way, as your business grows, your prices will cover additional expenses.
It is important to note that fixed overhead costs are spread across all products made in a month – not just this batch. So, estimate your total yield across that timeframe. If you don't know the exact number, make a reasonable guess. The HSCG Price Calculator includes a worksheet for calculating the fixed overhead costs.
Fixed overhead cost remains the same for every batch because it is based on consistent expenses and production every month. Once you set it, you can use it for all pricing. You don’t need to recalculate for every product.
What if my product cost is too high?
Don’t worry! It can be very eye-opening to see the full cost of making your product. If it seems too high, here are some steps to bring it down.
Ways to reduce material costs:
- Buy in bulk
- Use less expensive ingredients
- Use a smaller amount of the expensive ingredients
- Price compare for the best prices on ingredients
- Use less expensive packaging materials
- Buy packaging materials (especially bottles and caps) in larger quantities for better prices
- Use reusable instead of disposable items
Ways to reduce labor costs:
- Use fewer ingredients
- Simplify design
- Outsource label printing (if lots of labor is spent on printing or trimming labels)
- Consider equipment that will make mixing, filling, lidding, molding, cutting or labeling go faster.
- Break out less skilled tasks and pay less per hour for those that require less skill.
Way to reduce overhead costs:
- Make more products per month
The wholesale price is usually the lowest price you could sell your product and make a profit.
In Cost-Plus pricing, 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 are making boutique or high-end luxury products, it might be higher. This markup is the money used to run your business.
The HSCG Price Calculator is set up to use a 2.5x markup, but it can be changed to fit your needs. You can change it to more or less as you see fit. If you are using Wholesale Representatives to help market your product, you should also account for their commission (usually 15%). The HSCG Price Calculator can adjust the wholesale price to include a % for commission.
Retail price is typically 2x the wholesale price. This is because wholesale buyers expect to charge 2x more than they paid.
As a maker, the difference between your retail price and wholesale price is the money you use to promote your product.
As an HSCG member, you have access to all custom, bulk and private label requests that come in through our website. Learn more
Even if you are not selling wholesale now, resist the urge to sell at this price. If you do, there won’t be room to set a lower wholesale price should someone request a bulk order or to resell your product.
What if my retail price is too high?
In Cost-Plus pricing, the retail price is determined by the cost and the markup.
Ways to reduce your retail price:
- Reduce your costs (see #9 for suggestions)
- Reduce your wholesale markup (= less $ to run your business)
- Reduce your retail markup (= less $ to promote your business)
If the price is still high enough that you’re worried whether it will sell, consider whether you should be including it in your product mix.