How to Cut Your Costs Without Cutting Quality
A Guide to Help You Turn More of Your Revenue Into Profit
Ok so you've started your business, you've been going strong for maybe a month or two, or a year or two. You're sales are steadily growing, and if you could just make a bit more profit, you could start to consider quitting your full time job and taking on your business full time. But how can you sale more products, or better yet, how can you make more money on the products you currently sell, without raising the price? Easy . . . You cut costs!
If you've tried to cut costs in your business, without cutting product or packaging quality, you know it's easier said then done. But by the end of this post, you'll have some fresh ideas on how you can cut costs so you can start making more money from the current sales you already have.
Now to properly cut costs, you first need to find out exactly (at least within a penny) what your cost to make each of your products are. What I talk about cost, I mean, ALL costs associated with making the product. If you haven't done this already, and you're selling products, I suggest you stop making and selling products until you've at least got your costs figured out.
How to figure your costs.
To figure your costs you add up the cost of everything it takes to make your product, then divide it by the number of pieces you have, that will give you your Cost Of Goods (COG).
Example
You're making bath bombs, the total recipe makes 20 bath bombs. Take the cost of all your ingredients. To figure out the cost of your ingredients per batch, take the total cost of the ingredient to you (For instance Sodium Bicarbonate) you get 15 lbs for $15. You use 1 lb for your recipe. To figure out how much it costs you per pound, ($15/15 = $1) it costs you $1 in sodium bicarbonate to make this batch of bath bombs. Now you'll need to do this with all of your ingredients. (Below is an example of how to figure the cost of the whole batch, all numbers are examples)
- Sodium Bicarbonate - $1
- Citric Acid - $1
- Powdered Milk $1
- Coconut Oil - $0.40
- Fragrance Oil/Essential Oil - $0.55
- Coloring - $0.90
- Polysorbate 80 - $0.20
- Witch Hazel (for spraying, if you use it, you need the cost for it) - $0.10
- Packing (for 20 bombs) = $20
Total Cost of Ingredients & Packaging - $25.15
BUT THAT'S NOT ALL! If you add just those ingredient prices, and think that's your COG, you're wrong! You also have to figure in labor costs. Either you or an employee is going to make the bombs, so you're going to have to pay them. (This is a BIG mistake a lot of small business owners make, they forget to pay themselves!) You also have to figure in electricity (this is a fixed cost you should already have for your business. Take your monthly electricity bill, divide it by 30 days and you'll have your daily fixed cost. Divide that by 12 hours (or how ever long your work day is) and that's your cost per hour for electricity. The same thing needs be done with the rent, and all of your other base costs for the business. (Below is the continued example of the bath bomb costs. For the example we are using a 12 hour work day. Also we are basing the recipe on 3 hours to make AND package)
- Rent ($600 per month, divided by 30 = $20 per day, divide by 12 hours= $1.67 X 3 hours) - $5.01
- Electricity (if the monthly bill is $120) Total for 3 hours = $1.02
- Insurance ($275 a year, broke down to the hour) = $0.10
- Labor (Base labor on what you WANT to get paid, for the example $15 and hour. If you figure it for you as a base, when you're paying someone else less, you're making more profit, just by having someone else do it and cutting your labor costs) 3 hours @ $15 = $45
(Don't forget to figure in shipping costs with ingredients, or, labor if you or someone is going to the local wholesale shop to pick the items up. This is all associated with the cost of making the product. Think of anything you can. For this example we'll stick with these)
Total fixed costs $51.03
The total cost to make the bath bombs (in this example) = $76.18. That comes out to $3.81 per bomb.
Figuring out the price to sell your product (bath bombs in this example)
Now that you have the total cost to make your bath bomb (product) it's time to figure out what to sell it for. You want to make sure you maximize your profit, while still being competitive. When figuring out how to price your product you want to do a couple of things;
- First decide if you're just going to sell the products in your own shop or online store, directly to your customer. Or are you also going to wholesale them to other shops?
- Study the competition. Checkout where you're going to sell your items. Maybe it's an online marketplace like SoapSell Marketplace or Etsy. Don't stop there though, do Google searches, browse other companies websites. Takes some notes, and figure out the average price.
- Decide if you want to price average, above average or below average.
Now that's you've got this all figured out, you can price your product. (Below are some examples with the previous bath bomb example)
Here are some ways you may price your products depending on your choices and information above. For this example we're going to say the average bath bomb is $6.50.
If you're just going to sell your products to the public, then decide on what you want your profit margin to be (60% or higher is suggested, but when sales are directly to the customer, some products are sold as high as 200% to 300% or more over the cost) At $3.81 per bomb (from the example above) and the average price being $6.50, you could reasonably price your bombs at $7.50 and receive almost 100% markup. But you may find that you sell many more just by lowering the price. That's what you want to do, is find the price where you make the profit you want, but they still fly off the shelf. You can always cut costs to increase profits.
If you are going to sell your product wholesale to other businesses, you really need to look at your pricing model different. Most companies want to purchase your product at 50% cost of what the advertised retail price is. This is where some businesses make mistakes. If your cost is $3.81 per bomb, you're advertising on you website or SoapSell Marketplace shop that they're $6.50 per bomb, when a company approaches you to purchase your bombs wholesale and wants them for $3.25 per bomb (half of the advertised retail price) you now have to tell them no, or lose money on the order (unless you know how to drastically cut costs quickly to adapt for the order. i.e. you can order packing in bulk and get it for half the price, you can order your ingredients in larger amounts and save another 50%, etc.)
So what you will need to do if you are going to wholesale your products to other shops, is decide how how much you want to make on your wholesale bombs. What's good is while you don't make as much profit selling wholesale, you can have minimum order amounts, making sure the order is worth your time.) So if your minimum purchase is 50 bombs for a wholesale order, you could charge a 25% increase ($0.95 per bomb) and still profit almost $50 off of every wholesale order. (What's great about this too is the order is larger, if you can pay someone else to make them for you, less then what you pay yourself, you could increase profit on the wholesale orders only, and you wouldn't have to spend the time making them. That's why I suggest when figuring out your costs, you figure labor for what you would pay yourself, 25% or more higher then what you will pay someone to do it, that way when you hire people it can cut your costs)
The retail price of the bomb (if you wholesale) would be $9.52, much higher then other shops. This could result in slower sales on the retail side. These are all important things to think about when figuring the price of your products. It's important that you know what it costs to make each product you make, it's the life blood of your business.
Please let me know if you have any questions or comments. You can also email me at Info@SoapSell.com
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