How to Price Your Product – 3 Post-Manufacture Costs You Should Keep in Mind
We’ve all seen the variety of product prices during our shopping trip – maybe it was a new phone, new monitor, or suitcase. But have you considered why? Was there a cheaper version? More expensive? – and how are these costs determined in the first place? As consumers, we often don’t realize all the costs that go into making a product available on the market.
Today, we will discuss 3 significant post-manufacture costs that need to be considered when pricing a product:
- Shipping Logistics
- Warehousing & Fulfillment
These are absolutely critical for comparing your product to your competitors and positioning yourself in the market. And we will take a look at a couple of bonus items to keep in mind for the long term as well.
First Some Context
The price of a product is dependent on a lot of things but for a business to be sustainable, it must at least cover all costs of operating the business with more to spare for you (and maybe growth capital). These are the biggest costs that come after the product development and manufacture phases of a project. After all is said and done, it is normal to see a product be priced 5-10 times the price of manufacture. Let’s dive into each of these, why they are necessary and how much they typically cost.
1. Shipping Logistics
Shipping logistics is the bulk relocation of the product from the manufacturer to the warehousing & fulfillment center you are working with. If you are working with a manufacturer in Asia, as most globally competitive businesses are, you are going to be shipping (or air freighting) large batches of product overseas. There are considerable costs associated with this.
This cost is also dependent on a number of factors including:
size of your product – if shipping, the quantity of product that fits in a container means batching in those quantities or shipping extra containers. If air freighting, the volumetric weight will need to be accounted for.
weight of your product – if shipping, this is more pertinent to carton sizing and palletization (see next). If air freighting, this will directly impact your cost, unless it is smaller than volumetric weight.
carton sizing and palletization – multiple products are packed into cartons (shipping term for boxes) and these cartons are packed into larger master cartons. These are (often but not always) packed onto pallets (wooden base that allows the use of a forklift). All of these, of course, come at a cost.
the class and cost of your product – duties are charged with product imports to most countries. These are especially significant between countries that are having trade disputes (ex/ US and China).
fulfillment warehouse – trucking is necessary to get your product from the dock (or railyard if using rail) to the warehouse. The warehouse then must receive, store, and classify your product.
These costs are different for every product, and if you are too early stage to calculate these in detail, you use some rules of thumb to estimate which we’ll go over later on.
2. Warehousing & Fulfillment
Warehousing & fulfillment refers to storing your product, receiving individual customer orders, finding, packing and sending your product to customers’ addresses. This is actually a significant cost as it includes managing your orders, updating inventory, and dealing with returns (receiving, restocking, and updating inventory).
This fee is heavily dependent on the fulfilment center that you choose to go with. Some are cheaper, some are faster, some are more reliable, some will service you better.
Developing the product is great, but how will you make your potential customers aware of your product? Marketing is extremely dependent on the type of product you have and the type of customer you are going after.
Most new products will rely heavily on paid advertising to get the word out – whether through google, facebook, Instagram, LinkedIn, Youtube. Very few, if any, products will not rely on paid advertising through their whole lifecycle. There are also more classic forms of advertising like billboards, magazines, bus stop ads, etc.
Some Bonus Costs
Of course there are a lot of additional costs involved. If you’re planning to sell through a wholesaler or brick and mortar chain, they will typically request 40 – 50% off of your online sales price.
You also can’t forget your payroll costs – whether they are the ones overseeing product development, or servicing your customers or managing your marketing.
A High Level Look
So that is a brief look at the additional costs that come into play after manufacture, and there are many other costs including your profit margin, branding, website and online retail fees, etc.
So how do you estimate the end cost when you are first starting out product development process? A rough rule of thumb is the product should retail for 5-10x the price of manufacture. And this can be used to back calculate the approximate manufacture cost of a product as well if you have some competition out there you are looking at.
It is often shocking to find out how small the cost of manufacture is when compared to the final price of a product – or how expensive the product is when compared to the manufacture cost. However, when we start taking into account all the other aspects of business that are included in the product cost, it is often impressive that products are as cheap as they are.
About the Author
Ventrify is a product design and manufacture firm that helps entrepreneurs bring product ideas from concept to market. We take in fledgling ideas and bring them through our iterative design process to create products our clients can be proud of. Then, we work with manufacturing facilities across the world to bring our clients the highest quality products at competitive prices.
If product pricing is something you are struggling with, feel free to reach out to the Ventrify team through Facebook, LinkedIn, or our Website. We love talking product and can give you our unbiased 2 cents!