Continued from Part 4 (or start at Part 1)….

Once you have answered the previous questions, you are well on your way to effectively marketing your item.  Next, ask yourself:

  • How much is your item worth?

Pricing an item can be intimidating to even the most experienced businessman.  It usually involves a lot of research, and maybe even a little trial-and-error.  You don’t have to be completely overwhelmed, though.  There are several factors to consider that will help you develop a fair price.  The easiest way is to figure out the following:

  • If it is a non-living item, how much did it directly cost  to make?
  • If it is an animal (or meat from that animal), how much did it cost to purchase, raise, and/or process into meat?
  • What indirect costs were involved in making/raising the item?
  • How much time did you put into making/preparing for the sale?
  • How much follow-up time is involved after the sale?
  • How much is your time worth?

If you are making soaps, cosmetics, homemade foods, etc. or raising an animal, you need to know every cost involved.  There are direct costs, which most folks consider, but there are also indirect costs associated that many people forget about. 

Direct costs would be the animal, raw materials, and/or supplies needed ( jars, lids, labels, ingredients, hay, feed, bedding, etc.)  Everything must have a cost assigned to it.  For example, if you milk goats for your family, and use some excess to make soap to sell, some people make the mistake of not counting the cost of the milk since it is just their extra.  However, that milk is a main ingredient, and it has a value.  The easiest way to do that is to look at market value of the raw product.  Raw goat’s milk, for example, around here is $10-$18 per gallon (Yes, it really is that valuable!!  Truly liquid gold!!)  So, if you take an average of $14, then your soap milk would cost $3.50 per quart.  Break down or multiply as necessary.  Remember, it may be an excess to you, but to price fairly, you have to understand that if you sold the raw milk, it would be worth that much, so it’s still worth at least that when you use it to make your soap.   Animal feed can be tricky.   For example, I buy hay in a large batch, but I feed it to chickens, rabbits, the donkey, and the goats.  In order to accurately figure my cost, I have to estimate a percentage of hay that is fed to each animal (or group of animals), and go from there.  It sounds complicated, but it isn’t too bad.  Remember I failed the technical courses in school.  If I can do this, so can you!!

The indirect costs are things you may already have and use for other items, or things you purchase once and use for a long time.  A vehicle and gas to drive to farmer’s market, the barn and fencing, advertisements and signs for your business, bowls, mixing, and measuring supplies, a computer if used for business, and even part of your home if you make the item in your kitchen.  Same with electricity.  A lot of people don’t consider that, but if you use electricity, it is a cost of making your product.  Estimate the wattage used, and assign it a cost.  Indirect costs gets really technical, and far too many home-based businesses avoid considering these costs altogether.  If you want an accurate account, however, you must.  If you have a truck used solely for business, that makes it simple to calculate.  If, however, you have a personal truck that you also use for your business, then you have to calculate out a percentage of the truck’s cost that is used for your business.  Same for things like your dual-purpose computer, barn, or kitchen supplies.  Furthermore, you wouldn’t apply a $1000 computer cost to a single year, because the computer would last you for several years.  For long-term costs like that, estimate how long they will last, and divide by that number.  I find it much easier to break things down into annual costs for farming and home-businesses.

Then there is the value of your time and efforts involved.  The item you are selling is only as valuable as the time and effort you put into it.  In order to protect people’s time, our government has set a minimum wage, which at this time, is $7.25 per hour.  That is the bare minimum you should consider your time worth.  However, you have every right to up that price based on your training, schooling, experience, physical labor involved, and so forth.  Many successful folks I know of value their time at a minimum of $10/hour.  So, if you select that as an hourly wage, then if you spend 3 hours making soap, you could earn $30 for that time.  If you spend 2 hours per day for 180 days directly caring for the animals you will sale, you have every right to earn $7200.  If you don’t do it, you would be paying someone else to do it.  Now, if you are raising one goat, you probably think I just lost my marbles because you can’t get $7200 for it.  Hang with me here.  I’m just getting started!

What about follow-up service?  That is still time given to the product, the sale, the customer, and ultimately, to the business.  If you are selling a bar of soap, you may spend 5 minutes talking to the customer about it and never see them again, in which case, follow-up time is a minute portion.  If, on the other hand, you are selling an animal, and you spend several hours demonstrating how to trim hooves, train, groom, tack up, etc.  If you are delivering the animal, that adds time, fuel, and wear-and-tear on the trailer as well.  All that has value.  Add it up.  Estimate if you need to.

Now add all those costs up.  Then, divide by the number of items sold.  You may have heard the concept that it really doesn’t cost that much more to raise mutiple animals instead of just one.  The total cost explains why.  As I mentioned above, you can’t expect to sell a single goat for $7200.  However, if you are spending 10 minutes to throw feed to one goat, it would likely only take you an extra 5-10 minutes to feed 10 or even 20.  Although it will up your feed and supply costs slightly, it allows you to use your time more efficiently.  So, if a single goat is valued at $7200, you could possibly raise 20 for roughly $8500.  Now, however, you could sell each goat for a more reasonable cost of $425 each, and still pay for your value.  If you think you can make and sell 400 bars of soap in a year, divide your cost by 400.  If you plan to raise and sell 10 goatlings, then divide your costs by 10.  The resulting number will give you the minimum you should sell your item for, just to cover the costs involved.  You will then have to determine how much to increase that price in order to make a profit of any sort.  

Once you have a total cost involved, you will begin to see why so many farms and businesses go bankrupt.  Particularly with those indirect costs, it is easy to see what parts of your business become more work than it is worth.  Therefore, I highly recommend you do this, even if you don’t plan to set prices by it.  You need to know about the true costs involved.  I know of a farmer who sold dressed chickens by the pound (I can’t remember the number, but I’m thinking it was around $4-5/lb).  They figured they could dress a chicken in under 10 minutes, so a four pound chicken would result in $20 for 10 minutes time, and they were happy with that.  They refused all customer requests to skin or cut-up the chicken as a result.  A few years later, however, they realized that if they took an extra 3 minutes and packaged the breasts for $10/lb, the legs and thighs for $7/lb, and the rest as dog food for $5 lb, then the same chicken would bring in closer to $35 for just 3 minutes more of their time!  At the same time, they realized that cleaning gizzards and offal for human consumption just wasn’t worth the price they could get, it wouldn’t cover their time involved, so they chose not to do it. 

At this point, you have to keep in mind that your personal use items start to have value.  If your soap is worth $4/bar, and you use 1 bar a week, then either you have to view it as buying $16/month in soap from your business, or you should raise the cost of the other bars slightly so the business will remain profitable enough to cover your own use.  This is the same for special offers, gifts, and giveaways out of your business inventory.  Some over-generous new businesses go bankrupt quickly because they give away more than sales will allow them to cover costs of. 

If you have made it this far, you are likely having 1 of 2 thoughts…either you are seeing dollar signs at the potential you had no idea your product had, or you are thinking more realistically in terms of “There is no way I could sell my item for that much!”

If you are in the former thought process, I’m happy for you.  If you are the latter, I would say, “maybe, maybe not.”  That’s where marketing comes in.  I will get into that more in future posts.  If you see other goat soap selling for $1/bar, and you figure your costs to be $4/bar, it is easy to think no one would be interested.  Refer back to the previous posts though; you have to make the customer understand how your item is better and how it will benefit him.  It is highly possible to get 4-5 times the standard price.  I’ll use goats as an example. 

If you go on Craigslist, you will likely see backyard-bred goat kids being sold for $10-$50.  You may see unregistered (purebred or not) does being sold for $100 or so.  At least, this is the case in my area.  You could easily build an entire herd of goats for under $300 if you bought from these sellers!  Well, for the last year, I kept good records on all expenditures for the goats.  When I offered our first doeling for sale, she was a crossbred and unregistered.  Her dam had not been shown and since it was her first year as a milker, she wasn’t yet proven to be a good milker.  You could say there was nothing special about her, and I suspect most would have sold her for around $30.  After I factored in my costs, however, I decided I needed to ask a minimum of $150.  You think I’m crazy, don’t you?  In order to cover her cost, I had to get potential buyers focused on her good qualities–the unique things about her that would benefit them.  More about that in another post.  Granted, she didn’t sell right away, but about 2 months later, someone who could appreciate her bought her for my asking price. 

Now, here is a very important point.  You may have heard the expression that “Buying the horse is the cheap part, no matter how expensive it is!”  That’s because of the upkeep costs involved.  The same applies to any purchase.  You can buy cheapo towels from a discount store and save money, but have to replace them every year or so.  Or, you can pay 2-3 times the price and buy towels from a high-quality specialty store.  Up front, it seems more expensive, but if you don’t have to replace them for 10 years, then you actually come out ahead of the game.  This issue was solidified in my mind after I sold our doeling.  The buyers had also purchased 2 other goats a few days before.  They thought they had gotten a great deal on a doe/doeling pair for around $75 total.  However, within 24 hours, they realized the doe was not well.  By the time they called out the vet, paid for all she needed, paid to set up fencing to isolate her, their costs were into the several hundreds.  On the other hand, my doeling’s purchase price was it.  She was healthy to boot, and there were no unexpected costs involved.  Therefore, although more expensive up front, she was far cheaper in the long run.   Once you can appreciate this fact, you can have more confidence in selling your item for what it is worth. 

Which leads me to pricing animals specifically.  Unfortunately, there are a lot of unethical business folks out there.  They tend to over-price animals for a profit and/or sell animals that turn out to not be as advertised.  As a result, they can drive market prices, or the prices customers are willing to pay, way down.  That’s why $30 goats are so common, and it is so difficult to get the true price of even a really good, but unregistered, crossbred goat.  No buyer wants to risk it.  You, as the seller, have to learn how to overcome that fact of life.  One way is through paperwork. 

I know, that word might as well be a 4-letter word, but bear with me here. 

I learned long ago that papers generally meant nothing in regards to the quality of an animal.  I saw registered dogs come into our vet clinic that were so inbred they had every disease known to their breed.  I also saw plain ‘ole rescue mutts live healthy and happy to ripe old ages.  When I trained horses for the BLM,  I quickly learned to appreciate each animal for it’s individual quality more than any old piece of paper.  If a horse had good feet and legs, and a strong back, I could do something with it.  I had a grade horse at one point that I was able to sell for $5000, simply because of her training and experiences.   At the same time though, a friend paid bigtime money for a proven, AQHA-registered show horse, who came up lame shortly after his purchase.  After over a year and more money, they couldn’t give him away.  It was sad.  That being said, however, a new animal raiser with no reputation has to make a choice.  Some animals can be sold on individual merit easier than others.  Horses for example can go for a higher price based on training than on papers in some cases.  Goats, on the other hand can be more difficult to sell on merit.  My little doeling never would have fetched the price I sold my buck for because training isn’t really factor, and she was too young to be proven in any way.  With dairy goats, it’s all about the milk.  With this doe, I just couldn’t make any guarantees.  In this case, papers can give a buyer some assurance of what they are buying.  Proven milkers can have milk tests and earn their stars.  Kids can be sold based on the stars earned by their dam or even grand-dams and great-grand-dams.  If a sire or dam did well in the show ring or during a linear appraisal, then a kid is more likely going to have good confirmation and good milking genetics.  If nothing else, paperwork showing negative results for some basic blood tests for diseases can provide enough confidence to the buyer and set you apart in such a way that you can ask a fair price.  Again, although the kid isn’t proven, the paperwork gives the buyer a pretty good idea of what he can safely expect out of her.  That is why we decided to sell out of our cross-breeds and focus on purebred dairy goats.  I realized it was going to cost me the same amount to raise each goat, but I could more easily cover all my costs, and possibly even pay for my own milk and meat by selling purebred, registered goats of reputable quality.  If I wind up being able to turn a profit, it means my husband may not have to return to working outside the home.  Just be sure that if you choose to go for papers, realize that papers still don’t mean anything unless the stock is good quality, and it is reflected on the papers.  Then later, once you develop a customer base and a good reputation, you can have the option of selling high-quality, unregistered, or grade stock because your customers will trust you. 

Finally, I want to make one last point about pricing, again, in regards to animals. There is an interesting phenomenon in pricing completely irrelevant of true cost, and that is supply and demand.  I mentioned in a previous post that, as a seller, you need to be aware of the competition.  With animals and meat (among other things), demand is increasing rapidly for the organic, natural, grass-fed, chemical-free husbandry methods.  Here is what makes it interesting to the seller…if you raise a herd of animals on a dry lot and feed hay and grain, your cost goes up, whereas, if you raise a herd of animals on intensively managed pasture grass only, your costs drop tremendously.  HOWEVER, due to supply and demand, right now, the simple fact that an animal is grass-fed creates high demand, and drives the price up, as that adds value in the customer’s mind.  On the other hand, hay and grain fed animals are in high supply, which drives the market price down.  So, even though cost and time involved in grass-fed animals is actually less, the final price is much higher.  This has to be taken into consideration when setting your prices. 

Well, that’s pretty much it for pricing.  If you hung with me for all that, you are an amazing person!  Headache-wise, pricing is the worst part of a new business.  Use these tips, though, and you will be well-prepared for the next steps, as we get into actually marketing your item.