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How to Price A Product - Calculating Margins

April 04, 2012 | Comments: 0 | Views: 188

In my previous articles, I talked about the importance of planning and understanding costs involved in manufacturing even prior to committing to production. The last thing you want when launching your products is to produce your product and then find out that you won't be able to make money.

So after you've figured out how much to manufacture your product, the next thing to do is to determine if and how to price a product effectively so you can become profitable.

First let's talk about profit margins. Margins is the pricing strategy commonly used by buyers to measure profitability. The goal of a buyer when negotiating pricing with a manufacturer is to make sure that they hit their margin requirements. Consequently, your goal as a manufacturer is to make sure you can meet your margin requirements.

In order to be successful when negotiating pricing with a retail buyer, you must:

Clearly understand profit margins Know the retailers profit margin requirements Your own margin requirements How much you plan to sell your products at retail

A retailer buyer works with a margin variance that works for their revenue model. Most specialty stores typically work with 50+% and chain accounts use 40+%.

If you have products that cannot meet the retailer's profit margins you may have to lower your margins in order to close the sale.

So let's work on an example.

Let's assume the following:

Your landed cost is $7.00 Your wholesale cost is $10.00 You believe you should retail your product at $20.00 The retailer wants to work at a 50% margin

How to Calculate the Manufacturer's Profit Margin:

Wholesale price minus Landed Cost divided by Wholesale price = Manufacturer (Your) Margin

10 - 7 = 3 / 10 = 0.3 or 30%

How to Calculate the Retailer's Profit Margin:

Retail price minus Wholesale price divided by Retail price = Retailer Margin

20 - 10 = 10 / 20 = 0.5 or 50%

In the above scenario, you meet the retailer's profit margin requirements so you're good!

If you need to make more than 30% then you'll have to make some adjustments to your numbers.

CAUTION: Profit margin should not be confused with markup. Mark up is frequently confused by entrepreneurs. These are two entirely different ways of pricing a product so be careful not to interchange these terms. Retail markup is commonly calculated as the difference between the wholesale price and retail price as a percentage of wholesale.

KI Marketing Intl. is a full-service consulting and management marketing company that offers convenient, turn key solutions to launching consumer brands to market. Karla Ilarde, founder and president of KI Marketing Intl. and has almost 20 years of experience in marketing, manufacturing and sales in the entertainment and consumer products industry. Through her consulting, training and mentoring business, Karla guides and supports emerging inventors, entrepreneurs and manufacturing business owners how to launch, market and grow profitable consumer products that attract sales at retail. Visit to learn more about their products and services.

Source: EzineArticles
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