Pricing is one of the most important facets of any product lifecycle. Starting a laser engraving home business without thinking about pricing beforehand is a recipe for failure. Here is the problem – if you price your products wrongly, you will either get no sales or run at a loss. You want to nip the pricing of your laser products in the bud in order to make your new venture profitable.
How much should I charge for laser engraving? Start by determining the cost of making your product. To do this, you will need to take all your variable costs and add them to the fixed costs. Secondly, research what customers are willing to pay vis-à-vis what your competitors are charging. Last but not least, calculate your profit margins and settle on a price that makes you a good profit but is still not too far from what your competition is charging.
Let’s break this down into a step by step process. Here are the steps to follow when determining how much you should charge for laser engraving:
- Determine your costs
- Know your customer
- Know your competition
- Calculate your margins
Determining your input costs
Knowing your costs is important because this is the only way of knowing if you are really getting a profit. This is usually easier for people who buy and resale finished products. But since you will be making laser engraved products from scratch, you must factor in the costs of your raw materials. If you bought your raw materials in bulk, try to calculate the unit cost for each. For instance, if your raw material costs $120 per piece, divide that by the number of items you will make from that raw material and you will have a unit cost.
Then go to an often-overlooked factor – the time you invested in making a product. This is usually a hard nut to crack but it is still important to consider it. Ask yourself this – what is an agreeable hourly rate to make from my business? Once you have a figure in mind, divide it by the number of products you make per hour and that will give you the cost of time spent on a product. Valuation of time invested in a product is a tricky affair so it is best to set it as a variable cost.
Make sure to list down and compute all other hidden costs. Here is an example of the kind of list you should make:
- Cost of material – $4.10
- Production time – $2.54
- Packaging – $ 1.98
- Advertising – $2.25
- Total cost – $10.87
In our example, it will cost you $10.87 to make one engraved product. It’s important to calculate the cost per unit because that will give you a better idea of how much to charge for the laser engraved item.
Know your customer
You have to do some form of market research in order to know your customers. Market research is usually easier for established businesses because they can either survey the customers they already have or set up a new sponsored campaign. However, since you are just starting your laser engraving business, you most likely do not have a ready email list that you can use for your research. You, therefore, have to get more creative with your research.
The most important thing you want to know about your customer is how much they are willing to pay for your laser engraved products. The easiest way to do this without spending a dime is going to Etsy and Amazon to see which other products in your niche are selling and for how much. For instance, if there is a similar product priced at $54 which has lots of reviews, it is an indicator that customers are willing to pay that amount. Obviously, there are other factors that might have led to the successful sales of the product in question but the important thing here is that customers are willing to pay that much.
Customers can be segmented into three distinct categories for purposes of pricing. These are; the convenience centered the budget sensitive, and status sensitive. Just browse through the reviews and you can easily tell which category your typical customers fall in. Another tip is to look around the website to see if there are other cheaper or more expensive products and how well they are doing. If the customer base is more budget-sensitive, the cheaper products will most likely be selling more than the expensive ones.
Know your competition
Put yourself in your customer’s shoes – if you were to go to Etsy to buy a laser engraved item, wouldn’t you want to compare several options? Wouldn’t you want to get the best price but without compromising on the quality? That’s exactly what your customers will do. If there is a similar product that is retailing at $40, it may not be a good idea to start selling at $90. But there is a process of knowing what to do. The goal of knowing what your competitors are charging is so that you can use that price as your base price. Once you have the base price, you can decide to either charge less or more.
- Charging less than your competition
This is usually the easiest way to beat the competition. The trick is to use the cheaper price to steal customers from your competition. Obviously, the main challenge with this pricing strategy is you will get smaller profit margins. You should therefore only take this approach if you have thoroughly assessed the cost of the business and are sure the lower selling price will not ruin your laser engraving business. One common strategy is to offer a discounted rate for a limited time as a way of creating a buzz around your products. Even though you might be making a loss in those first initial sales, this can be viewed as a marketing cost because once the promotional period ends, you will keep getting sales from new customers, who will be impressed by the lots of reviews you have already received.
- Charging more than your competition
Charging more than your competition is also a viable pricing strategy. However, there are two important factors that will determine if you should take this route. First of all, determine if your audience is convenience sensitive, budget-sensitive or status sensitive. Using this pricing strategy with a budget-sensitive customer base will result in utter failure. But if you are targeting a status sensitive or a convenience sensitive customer base, a higher price will not be a problem. The second factor is the value you add to your product. For instance, if you are selling laser engraved jewelry items, you need to add something else to your product that makes it unique. Analyze similar products from your competitors and find a way of making yours better. For instance, you can offer to customize the piece of jewelry by laser engraving their names on it. If customers see value in a product, they won’t mind paying a higher amount than what your competitors are asking for.
Calculate your margins
Once you have analyzed the cost of making one item, done some research on your prospective customers, and studied your competition, you can now get to the final step – calculating your margins. A simple way of calculating margins is having an expected profit (as a percentage figure) in mind. For instance, if you want to make a 20% return, just look at all the costs incurred and calculate how much 20% of that would be. In our earlier example, we figured it would cost us $10.87 to produce one laser engraved item. A 20% profit on that item would, therefore, be calculated using the formula: (20/100*10.87) + 10.87. That comes to $13.044.
Tweak the price with the competition base rate in mind to push the margins up or down accordingly until you have a margin that you find acceptable. In fact, it is best to calculate these margins before even buying your laser engraver. This way, you will not be starting a laser engraving business from a point of weakness.
The thing to remember when computing your margins is that fixed costs are not easy to compute so your cost of producing one unit may not have taken that into account. For instance, you will probably spend thousands of dollars buying your laser engraver and then spend more money on setting up your new laser engraving home business. These fixed costs should be factored in when doing your breakeven analysis rather than when calculating your margins. Once you have broken even, your margins can still remain the same even though you will have already recovered the amount you spend on fixed costs.
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As a rule of thumb, think of the future of your business when coming up with a price for your laser engraved products. Try to think of how your pricing strategy is going to be affected by the growth of your laser engraving business. For instance, if you set your price slightly above the cost of making the product, you will not afford to run special promotions offering a discounted price. Give yourself some wiggle room because as your business grows, you will probably need to update your prices from time to time.