Posted on 08/07/2024 2:48:16 PM PDT by griffin
To all my entrepreneurial patriots out there, I've got a question on Gross Margin (GM) and how do most view the topic of 'paying the entrepreneur' question.
Q:As a budding manufacturing business owner/engineer I would like to know if:
1) my $99 price point product has enough margin or if I need to up the price?
2) Would most entrepreneurs include the labor in the GM calc if they are the only one performing labor and they are not supposed to be paying themselves like the sharks on Sharktank always harp on?
Background....
I'd really like to keep the price at $99 to generate initial market buzz, to attract market attention and gain market share. I have a product at the $99 price point. Materials cost is $49. For MATERIAL ONLY in the COGS calculation, that's a GM of 51%.
If I add in my labor ($56) and overhead ($3) my GM goes down to -9%. I've heard that entrepreneurs shouldn't pay themselves, but right now this is my only job.
**My current outlook on it is up the price to a decent margin later after I achieve some market acceptance, which would include labor and overhead in COGS. My competition's price point is in the $200 - 300 price range.
I’m rusty at posting...looked for a vanity setting but didn’t see one at all. I tried to put it in blog/personal. Please change it if I miscategorized. I always screw up posts.
What’s the volume? How many widgets are you going to sell per month or p.a.?
1st month I’d expect 10 or so.
Oh yeah, how many hours of labor required to produce each unit?
At $99, based on your costs, you are losing money. But that is a choice many businesses make as they launch their new products. So make your choice.
But you are losing money.
by 6th month I expect to be up to 50 per month
1 year, 200 per month
You can “work for free” to gain market entry, but if you’re going to scale up you should calculate your labor cost (using whatever metrics you might have available for the type of labor you need) to determine if your product is truly viable in the marketplace.
Thank you. I’m grappling with how to view this.
But do I consider it losing money if I pocket $50 for each unit sold? ($99 - 49 = $50)
3 hours initially.
But as volume goes up and batches go up I will probably get it down to 90 minutes before I need to start thinking of hiring and convert it to a parallel production line (no batching).
Question:
If your competition is in the $2-300 range, why on Earth would you sell yours at less than half the competition’s price range?
I’ll be brutally blunt here: You are experiencing business failure on paper for reasons TOTALLY UNRELATED TO BUSINESS ACUMEN.
Think HARD on that and make your price point $10-20 (5-10% at the lower scale) less than your competition, know your margin & how low you can go to stay profitable should a price war ensue, and market on the upsides of your product. And yes, include your labor costs as though you are a paid employee. That means salary, taxes, etc.
You should be successful and, most importantly, solvent.
Ok. That sounds reasonable and inline with what I was thinking.
Like I said at the end, my product competition price point is quite a bit up there...so at my price, working on my own, I don’t think they can touch me RIGHT NOW.
I just fear that if I’m too low, I get buried in orders, can’t keep up at that low price point and wreck the whole deal.
Thank you.
Why on Earth? Just to gain market share easily, I’m a product development engineer. So far I’m not skilled at marketing and sales, but I do know engineering and munufacturing. I figure If I have a low INITIAL price point then sales will take up less of my time and I can concentrate on more product development and flushing out the LIMITED standard product offering with some LIMITED optional add-on items.
And you set customer expectations - meaning future price increases to a profitable level will be very difficult to implement.
Margin is everything. Set the price as high as you can get away with - the free market will correct you if you get it wrong.
Ok. Thank you.
That makes sense. Much easier to drop the price than raise it.
Thank you to everyone for their thoughts and comments!
Yes, very difficult to raise prices later!
Laugh at the clowns who say “pay yourself first.”
That is crap. PAY tHE GOVERNMENT FIRST. Save at least 30% of every dollar in a leapfrogged six month CD for the government. They will f u up in a second AND have the option of locking your ass up in jail for as long as they want to. You are a small business owner. THE GOVERNMENT HATES YOU. If you are white, you are a target and there are lots of bureaucrats who will take you out just for fun.
I don’t know your product but DO NOT hire friends or family. And do NOT be friends with your employees. As racist and sexist as this sounds, avoid hiring AAs and women.
Best of luck. Been self employed near 20 years now in manufacturing.
Very good points. Thank you.
You shoot yourself in the foot without listing actual price and doing a “promotion” discount say, to the first 100 customers.
Better, referral rewards in CASH or local business gift certificates.
Free advice. I’ve seen it repeatedly over decades.
General Rule of thumb: It’s what the market will bear.
2nd Rule of thumb: Don’t sell yourself cheap.
1st Business Rule of thumb: A fool is soon parted with his money, but the bigger fool is the businessman who gives it away without a plan to gain it back + %.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.