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Know Your Product Price and Cost Target

Know Your Product Price and Cost Target

A quick note about determining a products price and cost target earlier than later in the process.

Ultimate goal for any new product is to generate profit and sales volume. Profit is something that should always take precedence when making decision on the features, material selection and manufacturing processes. If you have a good understanding of the target market and thus the user/buyer tendencies with respect to price, you should be on track. Another thing that needs to be considered is the sales channel. Meaning will the product be sold online in your store, via retail establishments or through distributors.

If you will rely heavily on selling to resellers (retailers) than immediately your price will reflect the wholesale unit price. A general rule of thumb is wholesale pricing is 50% of the MSRP. Some large chains also apply various incidental charges on top of this such as; restocking fees, co-op fees and damaged goods fees. The resulting gross revenue per unit will be even less than the 50% I just mentioned.

Now this leads us to why controlling the price and cost is so important. Lets look at an example:

MSRP: $29.99

Wholesale: $14.50

Max. Target Unit Cost (@25% of MSRP): $7.25

Gross Margin: $7.25/unit (wholesale) — 50%

Gross Margin: $21.74/unit (direct sale) — 72.5%

Using a general rule of thumb of a target cost to be not greater than 25% of the target MSRP is a good start. Over time you will become more efficient with the manufacturing which will hopefully lower the unit cost. This will allow you to protect profits while providing some flexibility with respect to sale pricing. Lets look at the same scenario now with a sales priced item but with efficiency-driven cost decreases.

Sales Price: $24.99

Wholesale: $12.50

New Unit Cost: $6.25

Gross Margin: $6.25/unit (wholesale) — 50%

Gross Margin: $18.74/unit (direct sale) — 75%

Hopefully this illustrates the importance of cost and price control for the success of a product not just out the gate but for the life of the product.

Be diligent and shop the product around until you get the best most economical cost.

Good luck.

Sean

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