Profit Margins

[greensara]

So, I am hoping that by sharing my business profit margins that others might be willing to share and help us all to shed light on reasonable pricing while growing our businesses.

The longer I'm in business, the more I realize that my prices should be higher (ideally). Currently, my bars have a 69% profit margin if I pay myself ONLY $18/hr through my OWN store. Margins fall to 35% when I sell retail through stores/wholesale.

As time goes on, I see that I should be using at least a $23/hr labor to cover the cost of payroll (when I hire later this year) etc. That would bring the cost of my bars to around $7/piece (again, disclosing this only because I am hopeful that others will be willing to share as well). I am hesitant to raise my prices this high, but I must account for the cost of expanding my business.

I've accounted for raw materials, packaging, overhead and labor. If you aren't sure of your profit margins, check out this link (it's super easy): http://www.calculatorsoup.com/calculators/financial/margin-calculator.php

What are your profit margins? How do keep your pricing reasonable while also pricing for profit? Any thoughts, insights would be appreciated!

 

[MarisaJensen]

in St. Pete, FL I have found most soap makers are selling their bars from $8.00 to $10.50 (decent sized bars). There are some that sell for less but their soaps are microscopic in size. There is a small shop where the lady sells glycerin soaps for $8. I about died when I moved here this August. Back in Melbourne, FL the going rate was more like $4.50-$6.00. It was a bit of a change for us. We will be selling soon and I've had a hard time (morally charging so much). Supplies cost me a bit more though, so It's a numbers game. We still haven't decided what we will charge but it will probably be based on location/ supplies/ cost of production (there's only one of me making soaps).

 

[lsg]

If a profit margin was essential to my soap making and bath & body making, then I would go back to the job I had before I retired. No Thanks!

 

[shunt2011]

I'm with ISG. No thank you! I'm not retired but would rather work than have to have a large profit margin to make my products. Good Luck to you. I make enough to support my business and have some extra. No complaining here.

 

[OliveOil2]

I have noticed that the cold process soap prices have increase on Etsy over the past year. I make bars that are on the large size with almost everything over 5 ounces, however I would not feel good about selling for such a high price. If I was trying to make a decent profit I would do wholesale sales again with a minimum purchase amount.
I am happy to make enough to cover the cost of my supplies and have a little extra. I'm not up for the pressure of large production, deadlines, and the things that it would take to be profitable. This is a hobby that I enjoy, and I don't expect to make a lot.

 

[Earthen_Step]

So, I am hoping that by sharing my business profit margins that others might be willing to share and help us all to shed light on reasonable pricing while growing our businesses.

The longer I'm in business, the more I realize that my prices should be higher (ideally). Currently, my bars have a 69% profit margin if I pay myself ONLY $18/hr through my OWN store. Margins fall to 35% when I sell retail through stores/wholesale.

As time goes on, I see that I should be using at least a $23/hr labor to cover the cost of payroll (when I hire later this year) etc. That would bring the cost of my bars to around $7/piece (again, disclosing this only because I am hopeful that others will be willing to share as well). I am hesitant to raise my prices this high, but I must account for the cost of expanding my business.

I've accounted for raw materials, packaging, overhead and labor. If you aren't sure of your profit margins, check out this link (it's super easy): http://www.calculatorsoup.com/calculators/financial/margin-calculator.php

What are your profit margins? How do keep your pricing reasonable while also pricing for profit? Any thoughts, insights would be appreciated!

Price, design/labeling, and web design have been the biggest pain for me. I started off selling my bars at a very low profit margin. With my prices so low I could not get into any stores. They mark up quite a bit, I would make nothing and so I was stuck. I plan on expanding into more shops over the upcoming years, and to do this I needed to increase my prices. I have been told by many people "people will pay what you charge". If you price too low, people will assume your product is inferior. If you have a high quality soap, don't sell it for too low. You can always have sales and other things.

What I have done is priced it where I can sell to retailers in bulk and still make enough profit to make it worth doing. With a higher profit margin you can offer great deals that you otherwise could not afford. Right now I'm doing buy 3 get 1 free. I have offered free shipping, $2 off, and have plans for other deals. With my higher prices I was able to adjust to a flat rate shipping cost for all sized orders.

I think it's better to start off on the higher end then starting too low. I had to change my prices because they were too low. When I did that I gave every past customer a 35% coupon code valid for for 2 purchases through the rest of the year. This helped ease people into the new prices. But, it would have been better to have started where I needed to.

When you start selling, you can always offer a 20% off intro sale. Something like this to draw people to try the product. But if they know your price will normally be 20% higher that's not a big deal. If you raise your price later by 20% that's a much bigger disappointment than a sale ending.

I hope to make a living out of this someday. If all I am doing is covering costs that is fun, but there is no potential to make this a living. It's completely up to you and what direction you want to take.

*Morally I find this an honest and amazing career potential. The products we make take development time, cure time, money and care. Most jobs are much less sincere IMO. Working for a massive company/government exploiting people and resources and causing pollution is very common. We can pick more sustainable ingredients and packaging materials. We have control over what this business is all about, working for others we have not had that luxury.

 

[OliveOil2]

I should probably add that if I am at a craft fair with other soap makers I am respectful not to undercut those that make their living making soap. I am at a point where this isn't a business for me, I know how high handcrafted soap can retail and yet every time that I see it the wheels start turning. I have seen bars for $9.00 at the nice winery a few miles away.

 

[The Efficacious Gentleman]

So, I am hoping that by sharing my business profit margins that others might be willing to share and help us all to shed light on reasonable pricing while growing our businesses.

The longer I'm in business, the more I realize that my prices should be higher (ideally). Currently, my bars have a 69% profit margin if I pay myself ONLY $18/hr through my OWN store. Margins fall to 35% when I sell retail through stores/wholesale.

As time goes on, I see that I should be using at least a $23/hr labor to cover the cost of payroll (when I hire later this year) etc. That would bring the cost of my bars to around $7/piece (again, disclosing this only because I am hopeful that others will be willing to share as well). I am hesitant to raise my prices this high, but I must account for the cost of expanding my business.

I've accounted for raw materials, packaging, overhead and labor. If you aren't sure of your profit margins, check out this link (it's super easy): http://www.calculatorsoup.com/calculators/financial/margin-calculator.php

What are your profit margins? How do keep your pricing reasonable while also pricing for profit? Any thoughts, insights would be appreciated!

3 words for you - Lower. Your. Costs.

It's that simple. Materials is straight forward - get your supplies cheaper, either cheaper product or buy in bulk/direct for the best deal.

Wages isn't an easy one to reduce per se, but if you increase batch sizes you then reduce the time taken to produce one bar - wages cost per bar is likely to be one of the biggest issues.

Playing with the prices is dangerous - if you go low, you can damage the market. Many people would ask "so what?" to that statement, but go and ask a business advisor how important it is.

If you go low and then have to increase the price, people will want a good reason for it. "Now I need to make a profit" is not an answer that will go over very well.

To all who sell -

Prices should always be market appropriate. That might be higher or lower than the average - it might be the cheapest or the most expensive. But always appropriate for the market. If that means that the formula (all costs x 4 = retail cost) is too low, then you need to look at your costs (see above).

 

[shunt2011]

I agree with Effy...However, I already purchase in bulk. 50 lbs at a time for most of my supplies. I also make anywhere from 15-20 lbs at a time. I'm not willing to change my recipes as they are what my customers are accustomed to and come back for. However, I have been able to increase my prices a bit every other year. I do small increments .50 at a time. I still will make a profit and continue on. Each year gets better for sure. The economy in our area is slowly getting better.

I would also like to sell a lot of product at my current prices than sell very little. My business has been building and I'm happy with that.

So, we each have to do what works best and keeps customers coming back. The upside is I'm also able to get more than 2 x cost for my wholesale accounts. So that evens it out a bit more too.

 

[girlishcharm2004]

Living in the 5th most expensive city in the U.S. (which is also right next to the 4th most expensive city), I can sell at a farmers market for a "reasonable" price anywhere from $10-$15 for a 4oz bar of soap. Go online to Etsy where everything is half that and I see hobbyists selling a 5oz bar for like $3. *facepalm* Don't be ashamed of $7 if that's what you need to expand. If anything, you need to work on your marketing to tell people why your soap is worthy of that cost.

 

[judymoody]

To me $7 seems like a totally reasonable price for a 5 oz. handcrafted bar of soap. If you want to sweeten the deal, offer 4 for $25.

 

[JustBeachy]

The market will always dictate price. It doesn't matter what you have to spend to make it. It doesn't matter if you have to hire 20 people to supply the demand. The market will bear what it wants, relative to the demographics of your region. This is universal, and it doesn't matter if your selling soap, TV's or as Newbie would say, "rendered chipmunk tallow"(that little gem may stick with me for life . You can try to set a price, as Craig refers to as 4x the costs. However, if that calculation drives your price beyond what the market dictates in your area, then you aren't going to sell any product.

For example, Girlishcharm says the soap in her area is selling for 10-15 dollars, for a 4 oz bar. If I tried that in South Texas, I'd find myself laughed out of the business. The market here will just not bear the price that the market in SoCal dictates.

Your options are again universal. Lower your profit margins or, as Craig said, lower your costs. It's the only fiscally sound method to adjust your profit margin. If you had the last gallon of water left within a 500 mile radius, you could sell it for whatever you wanted. Unfortunately, there are plenty of other people to buy soap from. If your price doesn't stay within the realm of what the market in your area is willing pay, then you will not have to worry about your margin for very long. You won't be in business. A old saying in the new home construction business comes to mind. "We lose money on every sale, but we make it up in volume." It was a saying we used to describe some of the competition that we figured would soon be out of business.

I know this was a little long winded, and please don't take any offense to it or think of it as preachy. I've learned to never claim to be an "expert" on anything. There is always more to learn. But I do know a little about running company's and profit margins. I've managed what some would consider to be large entity's, started built and sold a couple of businesses, etc. Not sure this will pass any filters and/or if it's out of line (if so moderators feel free to delete it), but another great saying about any business venture is, "the market is a fickle *****, and she suffers for no one."

 

[Earthen_Step]

The market will always dictate price...

This is all very true, but there is room for price fluctuation for quality/luxury items. If you have higher prices you need to justify that increased price to your audience. If you go too high and no one thinks it's worth it, you won't make any money. For many people handmade soap is a luxury item, sometimes only bought on special occasions. For others they can't stand the typical soaps available and it's a must. But because we are in the luxury for most category I think it's a more flexible market.

I charge higher than the competition around here, but I also sell more soap than them. Why? Because my soap lasts longer, smells real, has quality ingredients, and people love what it's done to their skin. If I charged the same price as my competition I would be nearly breaking even. So my market area has adjusted to an increased price for higher quality. Just because everyone around is selling bars for $3.50 doesn't mean there is no room for $10 bars.

This does not mean the market did not dictate the price, your underlying principle is real. But I wanted to comment that it can be flexible if you have an item that can stand out superior in some way. If there is no real difference from your bar and the cheaper bars around you will not have repeat customers that have tried the other bars.

*Good points being brought up on this thread!

 

[girlishcharm2004]

I want to add to what JustBeachy said. "If your price doesn't stay within the realm of what the market in your area is willing pay, then you will not have to worry about your margin for very long. You won't be in business." While this is true, on the brighter side, there are many markets! There's the vegan market, the "all natural" market, the animal fats market, the egg yolk soap market, the milk soap market, the "old lady" market, etc. Find your niche. Figure out who you sell to, what they want, and price they are willing to pay. This goes back to marketing and explaining why your soap deserves it's price... to the right people!

While residence in South Texas may not be willing to pay $15 for a bar of soap, I also doubt they pay $1500 for a studio apartment nor $18 for a gallon of milk. You can't just do 4 times the cost of goods like others suggest because I bet a lot of soap makers get their oils from, say, Soaperschoice which doesn't factor in the cost of living in the different regions to make a fair price. You have to price your soap at what it takes to expand, but market it to the right people.

 

[girlishcharm2004]

We must have been typing at the same time. You are spot on, EarthenStep!

 

[JustBeachy]

This is all very true, but there is room for price fluctuation for quality/luxury items. If you have higher prices you need to justify that increased price to your audience. If you go too high and no one thinks it's worth it, you won't make any money. For many people handmade soap is a luxury item, sometimes only bought on special occasions. For others they can't stand the typical soaps available and it's a must. But because we are in the luxury for most category I think it's a more flexible market.

I charge higher than the competition around here, but I also sell more soap than them. Why? Because my soap lasts longer, smells real, has quality ingredients, and people love what it's done to their skin. If I charged the same price as my competition I would be nearly breaking even. So my market area has adjusted to an increased price for higher quality. Just because everyone around is selling bars for $3.50 doesn't mean there is no room for $10 bars.

This does not mean the market did not dictate the price, your underlying principle is real. But I wanted to comment that it can be flexible if you have an item that can stand out superior in some way. If there is no real difference from your bar and the cheaper bars around you will not have repeat customers that have tried the other bars.

*Good points being brought up on this thread!

There is nothing wrong in what you've stated and I applaud you for producing a quality product that is noticed as being "above" the competition It really means more than even you might think. People will buy want they want, faster than they'll buy what they need.

The idea of "better quality" is a sales technique that i would say Mercedes Benz has epitomized. No doubt it is a great car and most would say , one of the best cars built. Yet, I can buy a "luxury" car for less than I can buy a Mercedes and if I've never really owned a Benz, not realize the difference . If you look at the market saturation of cars being sold, Mercedes is lower than most of it's competition. Does this mean Mercedes is doomed? Not hardly. They've had years to establish a name and a loyal following. As so, they charge a premium for their product. Yet, if you look at the financials, the "competition" to Mercedes actually has a higher profit margin and will outsell them hands down every year.

A friend of mine from high school will soon inherit a "precious gems business" from his father. They are extremely well known, in the high end of the jewelry business. Great reputation, actually world re known as diamond buyers, that have been in business since the late 60's. We were out for drinks the other night and were talking about this exact situation. As he put it, there is without a doubt a big difference between a high grade diamond and something you buy at amazon.com. Yet, through some marketing genius, one company, (not mentioned here, but he went to.....), will always out sell and out profit him. Is his product superior? Absolutely. Does he charge more per karat? Every day. But the bottom line is, they will always sell more product, at a higher margin than he will. And they will always be more profitable. Will he go out of business without adjusting his "luxury" status. Absolutely not, but even he admits, his luxury status is dependent upon the repeat business. His stability is a commodity within itself.

Again, in all sincerity, I bow to your accomplishment of setting yourself above the competition. It's a feat that I feel very few company's even strive for these days. I'm just saying for the mainstream of the industry as it relates to this thread, price point at a reasonable profit, is an easier goal to achieve. :0

The goal of any of the businesses I've been a part of or owned has always been to be one of the best in what i do, but still outselling the majority of the competition. Not always possible, but without lofty expectations, what's the point of even trying. :wink:

And I agree, best marketing/sales strategy I've seen on these boards.

 

[JustBeachy]

I want to add to what JustBeachy said. "If your price doesn't stay within the realm of what the market in your area is willing pay, then you will not have to worry about your margin for very long. You won't be in business." While this is true, on the brighter side, there are many markets! There's the vegan market, the "all natural" market, the animal fats market, the egg yolk soap market, the milk soap market, the "old lady" market, etc. Find your niche. Figure out who you sell to, what they want, and price they are willing to pay. This goes back to marketing and explaining why your soap deserves it's price... to the right people!

While residence in South Texas may not be willing to pay $15 for a bar of soap, I also doubt they pay $1500 for a studio apartment nor $18 for a gallon of milk. You can't just do 4 times the cost of goods like others suggest because I bet a lot of soap makers get their oils from, say, Soaperschoice which doesn't factor in the cost of living in the different regions to make a fair price. You have to price your soap at what it takes to expand, but market it to the right people.

In my opinion, you are exactly right. There is no magic number for projecting your price point. Your examples of product cost is right on the money. This is an industry that is maintained by the median. Meaning that the majority of the business is being done by people all buying their material for same average price, but selling in different regions and markets. You being in SoCal, should be able to average a higher profit margin, than little ole me, can do in a market in South Texas. Our suppliers being equal, with our market being worlds apart.

 

[greensara]

Wow, this has been so helpful! Here in Ohio, I'm largely competing with businesses who sell their bars of soap for around $5.00 for 4.5-5oz bars. We have product in all of the major malls in our area as well as small shops and the pricing tops off at around $7.00; these soaps tend to sit on shelves for months with the occasional specialty buyer. Local craft shows are more of the same and I can't count the number of times I've heard customers look at my soaps, compliment my soaps and then see a $6.50 price and gasp! Online, pricing varies (Etsy) but again you've got a lot of $5.00 bars.

Niche markets have been our goal-women with a high degree of disposable income within the LOHAS market. The balance between pricing for our immediate community as well as the global market (online) has been a little tricky. I'm blown away by the pricing by state-wow! Great food for thought, especially considering the fact that none of us are really limited by geography.

Cost-wise, I've gotten raw materials just about as low as I can although essential oils continue to be our largest cost. We buy in bulk to get the lowest price possible but getting costs down to increase margins is a great point. The cost of doing business rises as we expand and it has been a balance to price for that growth without pricing ourselves out of the market. Business and accounting aren't my forte, so at times I do feel a little clumsy in this area.

Earthen_Step, great point about being able to offer sales with a higher price point! Our pricing structure right now doesn't allow that. Our lip balm, however, retails higher than almost of our competitors but that also means that we are able to offer multiple discounts!

The points made about using quality as a differentiator are true, yet tricky. In the handmade market, small batch, all-natural and quality ingredients are sort of the norm, no? I have loyal customers who swear by my soaps and so I do feel that we could fetch a higher price. In fact, I may need to in order to be around next year!

I'll stay tuned for more discussion-great conversation and tremendously helpful!!!

 

[OliveOil2]

I have really enjoyed all of the input on pricing, and production costs. For me as someone who doesn't sell on a regular basis it always involves studying the market that I am selling in. I know my local market and the top price point, but across town at the country club craft fair I can charge more, and people will buy; in fact if I charged less they may view my product as inferior. When I am in Southern California I am not usually there to sell soap, but when I have, in certain neighborhoods I can charge quite a bit more. For me it is knowing my customers and setting the prices so they are not out of line.

 

[JustBeachy]

Wow, this has been so helpful! Here in Ohio, I'm largely competing with businesses who sell their bars of soap for around $5.00 for 4.5-5oz bars. We have product in all of the major malls in our area as well as small shops and the pricing tops off at around $7.00; these soaps tend to sit on shelves for months with the occasional specialty buyer. Local craft shows are more of the same and I can't count the number of times I've heard customers look at my soaps, compliment my soaps and then see a $6.50 price and gasp! Online, pricing varies (Etsy) but again you've got a lot of $5.00 bars.

Niche markets have been our goal-women with a high degree of disposable income within the LOHAS market. The balance between pricing for our immediate community as well as the global market (online) has been a little tricky. I'm blown away by the pricing by state-wow! Great food for thought, especially considering the fact that none of us are really limited by geography.

Cost-wise, I've gotten raw materials just about as low as I can although essential oils continue to be our largest cost. We buy in bulk to get the lowest price possible but getting costs down to increase margins is a great point. The cost of doing business rises as we expand and it has been a balance to price for that growth without pricing ourselves out of the market. Business and accounting aren't my forte, so at times I do feel a little clumsy in this area.

Earthen_Step, great point about being able to offer sales with a higher price point! Our pricing structure right now doesn't allow that. Our lip balm, however, retails higher than almost of our competitors but that also means that we are able to offer multiple discounts!

The points made about using quality as a differentiator are true, yet tricky. In the handmade market, small batch, all-natural and quality ingredients are sort of the norm, no? I have loyal customers who swear by my soaps and so I do feel that we could fetch a higher price. In fact, I may need to in order to be around next year!

I'll stay tuned for more discussion-great conversation and tremendously helpful!!!

I want to preface this comment with the statement that I'm not advocating the belief that your soap doesn't need to be great. A great product, almost sells itself.

Almost. That's where marketing, specifically target marketing, can be your best friend. You're absolutely right, in the soap market, everyone has a "natural, homemade, quality ingredients", soap, even when it's not exactly the fact. So you need to market in a way that makes people in your target market want to buy from you, instead of the 40 other brands that mimic your product. There's a bunch of ways to learn more about how to do this, schools, books, experience, but the easiest way is to piggy back.

You've designated your target market. "women with a high degree of disposable income within the LOHAS market." (Very good btw. A definitive targeting) Research into different products that the people in your area, who make up this demographic, purchase on a regular basis. Not necessarily soap, in fact, I'd look more at anything but soap. Once you find some different products, find some larger corporations, businesses that are selling these products. Study their advertising. Look for the common denominators, the buzz words, color patterns, graphics.

Most of the time these larger entity's are going to have marketing teams, that have already done all this research, tested their marketing theory's and have designed their marketing to attract attention and produce sales. Look for the "triggers" they are using to get people to WANT, the product even if they don't NEED it. You can "piggy back" off of their experience and enormous marketing budgets to help you market your product.

This is where I refer back to my opening preface, quality is a great aspect to work with. That said, a good quality product with great marketing will always outsell a great product with poor marketing.