Inventing Basics: Price Points and Profit Margins
This is the first post in a series of inventing basics – key focal points for the new inventor.
Price points: cost to manufacture; wholesale; and retail sales price are crucial to the success of any consumer product – including your fantastic new product.
Many inventors take an attitude about price points of I'll get to that later and then turn their focus to patents and prototypes. Focusing early efforts on prototyping is a good plan, but soon you should begin determining your price points. Otherwise, much time, effort and money may be wasted on an innovative invention that simply cannot be produced and sold profitably.
How are price points determined?
A rule of thumb is that, to be successful, a product needs to have a 4X to 5X mark up from manufacturing cost to retail sales price, for example:
- Manufactured cost: $4.00
- Wholesale price: $9.50
- Retail price: $20.00
That is an example of a 5X mark up. The above price points yield profits for the entire retail chain.
Your profit from wholesale is $5.50 per item. The retailer has a profit of $10.50 per item.
Generally the wholesale price should be at or below keystone pricing (keystone = 50% of retail price). If you offer a wholesale price a bit below keystone (as in the above example) then your product becomes more attractive to the retailer who is always concerned about allocating valuable shelf space to a new, untested product. More profit = less perceived risk.
Often an inventor finds a manufacturing cost he can readily obtain, say $7 and then assumes that the retail price should be about $35. Then the retailer may say their retail price for similar products is perhaps $20 – less than a 3X mark up for the inventor. Then the expected wholesale price is $10 or less, leaving the inventor with extremely low profits on wholesale selling.
Instead the process works best in reverse.
The inventor approaches the retailer to learn what their retail/wholesale prices should be for her product (example: $20/$9.50) and then calculates that her manufactured cost should be $4 for solid profitability. That pricing may then drive her to manufacture overseas because onshore manufactured costs are likely too high.