Beata Leyland
Former Financial Controller & Business Owner & Author of this article
Price tells a story about you and your enterprise. Too low and you will be adding money from your home budget, too high and you might not have clients or attract the wrong crowd of people.
Let me walk you through same basics with practical example how to define your retail price!
Intrigued ?
It's important to follow your competitors but at the end you define your own ROI.
What is ROI ?
ROI is an abbreviation for Return of Investment , one of the major reasons why many businesses are out of business ( especially if they skipped ROV !!! ).
You can easily find ROI Calculators online, but here I would like to focus more on how to interpret ROI
Example 1 ( basic )
Your investment in new software costs you 1000€, and after 6 months you would like to see at least 2000€ so ROI 200%.
If you make 1500€ your ROI is 150% , if 1800€ it will be 180%.
You can also for better visibility recalculate percentage so 1500€ would be 50%, and 1800€ 80%.
Easy and intuitive, right?
ROV – Return of Value.
It’s an amount which a company puts into its business ( human capital of company, technology, marketing ) in fact all costs which help company to keep clients happy, attract new ones and run smoothly.
As every company operates differently ( sales, forecast, what is important when, long- and short-term planning )
ROV for every company will look different.
Business trips, a new website, marketing strategies ( incl. business cards, merch ) , software will pay off long-term not immediately that’s why it’s important to note all business expenses and later on incl. in ROI the final calculation.
A separate but very important part of ROV are people as it’s better to make their life easier so they will bring more profit to the enterprise ( software, technology, bonuses etc )
Your ROV will be determined by timeframe and what is important at 1-2 years scale for you to grow and make sure you keep financial flow.
Example 2 ROI calculation
Starting your Brand. How to calculate retail price if you use 3rd party manufacturer ?
For the first 2 years for many enterprises, almost all income goes into expanding the brand.
Let’s imagine you found a great niche in a cat beauty brand.
Now is the time to hire someone (a freelancer, maybe Leyland Consulting 😊 ) to help make your dream come true. We usually start from a small project to prove our quality and establish trust.
In your ROI you need to include costs of your sourcing help, but also the money that you plan to put into production, marketing, warehousing etc.
If you want to create a new cat brush you need to make sure production costs will be reasonable so you can afford to hire Sourcing /Manufacturing help and have enough to start advertising.
Let’s look at an example production cost breakdown:
-Production of your cat brush will cost $10.
-MOQ in the factory is 2,000 which means 20,000$,
-Consultant /freelancer 1,500$-2,500$
-Marketing $1000-5000$ (depends on what you want to achieve, what’s your sales channel etc )
-Warehousing, 3PL 1000$ monthly
In this case your total beginning capital must be somewhere around $27K.
If you want half of it as ROI of 50%, your sales have to be around $41K.
And your product price around twice the production cost so 20$-21$ per brush
For many enterprises that’s the beginning for the first 1-2 years where almost all income goes into expanding the brand.
Later on, with high MOQ, the price of production will drop and ideally after 3-4 years of starting your brand, your production cost should be 1/3 of retail cost.
Disclaimer!!! It varies from industry to industry, and product to product.
On purpose I put here figures easy to read and calculate