The Single Most Important Business Killer: Bad Pricing

Insane pricing structure courtesy of Danielle Vincent.
Insane pricing structure courtesy of Danielle Vincent.

You know that nightmare where you’re being chased by a horribly terrifying thing, only to find that your legs won’t work and your feet are somehow sinking into the ground like it’s made of molasses?

That nightmare is happening to 80% of businesses, and it might be happening to yours right now. But you won’t know it until you see the scary thing and start running.

That scary thing is the end of your money.

Did you just feel a little panic flow over you? I did. That’s the single scariest thing I can imagine—scarier than land-walking sharks carrying pythons that are made out of hundreds of spiders.

What about my time? Is this a volunteer job or would I like to actually have an income?

Amorphous as it might seem right now (I hope), a terrible fog might be coagulating into a business-consuming monster right behind you on the journey of your business. By the time you see it, you better be able to run. But if your legs suddenly start sinking into the ground just as the monster is closing in, well, you’re screwed.

I started my handmade soap company, Outlaw Soaps, about three years ago and learned all of this hands on. I didn’t actually learn any of this stuff from any previous job. I did have a great coach, though: Lela Baker.

Let’s get started. Here’s what I’ve learned about how to not screw yourself and your business over.

Make sure your business is profitable.

The only thing that can save you is making sure your business is profitable. And the only way your business is going to be profitable is if you sell your products for more than what it costs to make them.

Sounds simple: If a bar of soap I make costs $5 for ingredients (and shipping those ingredients to me) and I sell my soap for $6, I’m making $1 on every sale, right? NOPE.

Because the cost of making the item isn’t just about the ingredients. I have to wrap the soap in something. Let’s say packaging costs $1.

Our bar of soap costs $6 to make…or does it?

What about where it’s made? Even if I own my house, do I want to be doing this out of my garage forever? What if I need to scale up? My soap business has to support the rent.

So, $7?

What about my time? Is this a volunteer job or would I like to actually have an income? If I want to make $15/hour, and I can make 60 soaps in an hour, making the soap adds $0.25/bar. Plus the time to wrap it, so $0.50/bar.

Our theoretical soap now costs $7.50 to make…but that’s not all!

What about other overhead, like phone, electricity, office supplies, web hosting for my website, and internet? The soap business has to pay for those as well…and now a bar of soap costs $9.50.

OUCH! A $9.50 soap without a single cent of profit. If I was charging the original $6/bar we calculated earlier, we’d be losing $3.50 per bar. This is a terrible business model, yet many makers are engaged in it right now!

The rule of thumb is that a product should make double its costs in profit. So our $9.50-to-make soap should be attractively retail priced at $19/bar.

Except…if I want to sell to retailers who will resell in their store, they will want half off the retail price. So we’ll charge retailers $19/bar and make our tidy $9.50 in profit for business expansion, and we’ll sell for $19/bar at farmers markets and on our website.

WRONG. The retailer can’t pay for my bars at $19 and sell them for $19—they also want to make a profit. They’ll double what they paid to cover their expenses, plus making a profit. We can’t undercut their price, so we have to charge what they’d charge.

Our theoretical handmade soap is now retail priced at…drum roll…$38 each!

“But no one will buy a $38 bar of soap!” you might exclaim.

Right you are. (Well, some people will, but you’re going to have to be very marketing savvy to attract those customers.)

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How do you get your costs down?

We have to figure out how to get our costs down by buying supplies in bulk. For example, if we buy our supplies at the grocery store, we’re paying five times more than what we might pay if we bought in bulk. If we buy our packaging 100 at a time, we’re paying four times what we might pay if we bought 2000 at a time. If we made 600 bars of soap in an hour instead of 60, the labor would be $0.0025 per bar instead of $0.25. If we found a more efficient packaging method and we could wrap twice as many soaps in an hour, the labor would cost $0.125/bar instead of $0.25.

Add up those costs, plus the other overhead in, and our soap went from $9.50 to $4.

Which means the wholesale price is $8/bar, and the retail price is $16/bar. Better than $38/bar, right?

And that is your business. The only way you can make the bars more affordable is buying in more volume, which means that you have to sell more, more, more. Which means marketing and advertising, which means more money.

Believe it or not, there are lots of soapmakers buying ingredients at the grocery store and selling their bars at the farmers market for $6/bar, thinking of the handsome $1 profit they’re making off each.

And you swoop in selling at $16/bar, and no one wants to buy your soap because it’s too expensive. But you have to weather that, because you might be selling 600 bars every month and barely breaking even, but at least you’re breaking even on every sale.

The monster will eat those competitors before they even realize they’re losing money. It will be swift and painless, because they didn’t invest what you invested in order to bring your costs down. And now you have a metric ass-ton of soapmaking supplies and 50-pound bags of lye, so this isn’t really a hobby anymore: You’re in an actual business.

So you’re selling $16 soaps, and people compare you to the people that sell for $6/bar.

Is this terrible? No, it’s business. It’s why 50% of businesses don’t last their first year, and why 80% of businesses don’t make it to their fifth.

How do you get people to buy $16 soap?

So what do you do?

  • First, look at your costs, like we did in earlier in this blog post. Unless you actively want to lose money on the business (hey, it could be a front for a drug ring, which I totally want in on), you have to be profitable. Some products can make more, some can make less—look up “loss leaders“—but on the average, you must make a profit. You can’t “make that up in volume” unless you use that volume to cut costs. If you think, “But I can’t charge $16 for a T-shirt when everyone else is charging $6, so I’m just gonna charge $6,” stop your business. It is going to bankrupt you.
  • Second, find a group of people who like what you have enough to pay $16 for it, and then market to those people. Because people want what they want, and they will pay for what they want.
  • Third, get your branding on point. If you have a strong brand and a good marketing strategy, people will pay more because of the intangible value you provide. You’re going to need to have a good visually identifiable product with social media, an informative blog, a great website, and a compelling newsletter.
  • You might even, ahem, write blog posts for Pyragraph to build goodwill for your product and get exposure.

You’re going to need to become an expert storyteller. You have to show people why it costs so much for your soap when they can go get soap at Target for so much less. You may think you don’t have a story to tell, but 99% of people in the world will never make soap, so even the act of making soap is an interesting story.

There are many aspects to keeping a business profitable (um, you have to make sure you do sell the soap), but pricing is the single most important one.

When people mention they’re going to start a business, it’s the first thing I tell people to evaluate, because it’s the biggest monster on your back.

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