You need to raise your prices [part 4]
How to build a pricing strategy that scales, and why scaling matters
This is the fourth post in my series about raising your prices. If you haven’t already, check out my first and second posts, which explain why I think raising your prices may be the best answer to slumping sales, and the magic formula that ensures your sales won't decrease if you increase prices. My most recent post offers an example of how Fernseed turned a once-free service into a solid revenue generator. 👍
In this post, I want to talk about scale, and how a pricing strategy that builds in room to scale is, in my opinion, the most sustainable way to grow a brick and mortar business.
It all started with these tiny dry bouquet magnets.
The magnets are a genius product that our previous floral manager invented using scraps of material from larger dry bouquets. They are, in essence, a scrap of paper wrapped around the short heads of broken dry flowers with a circular magnet (the only part of this product that costs us "real" money at 25 cents each) glued to the back. Customers love them, they're adorable, and they're a consistent seller. So far this year we've sold 132 of them for a total of $681.
Even if you calculate the cost of scraps at $0.80, which is high, the cost of goods on the tiny dry bouquet magnets would be $1.05. The way we used to do things, my team would look at this number and triple it ($3.15) to arrive at retail pricing on a floral product, so it seemed like an excellent margin (79%) when we were selling the magnets for $5 each.
That is, until we tried to turn them into a wedding product.
I've always thought the magnets would make excellent wedding favors. This year, we've (finally) been getting around to launching wedding favors in an effort to increase our average wedding sale. These products, like dry flowers in a tiny cork topped glass vial or succulents potted in a tiny terra cotta pot, are easy to make, sell in bulk, and can add anywhere from $150-1,000 to a wedding sale. But when I asked my team about selling the tiny dry bouquets in quantities of 100 or more, they balked.
No one on our floral team wanted to sit there and make 100 at a time.
It wasn't that they were shying away from hard work! It was rather, they explained, that it would take hours to build 100 tiny dry bouquets, and in the lead-up to a big wedding, they needed to focus on the more important fresh floral arrangements.
"How many hours?" I asked, trying to understand how long it actually takes to make them. We hadn't calculated the cost of labor before, in part because tiny bouquets were made from scraps and we always had time to make a few in our down time.
Our floral manager estimated that each one actually took about 8 minutes when you factor in folding the paper, making a tiny floral arrangement, tying the string, then gluing the magnet.
So if we actually had to sit down and make a hundred, it would take 13.333 hours to make them. Suddenly it didn’t seem worth our time.
My floral manager, at the risk of sounding like she just didn't feel like making a hundred at once, was pointing out that the effort almost wasn’t worth the reward.
$5 x 100 mini bouquet magnets = $500
minus cost of goods ($1.05 each = $105) = $395
minus 13.33 hours of labor at $20/hour (average incl. taxes, etc.), which is $266
$129 profit
One way of solving this would be to stock up on making magnets in our down time so we always had 100 extra in back stock. And that would be one way to go, until a nonprofit wants to give these away at a benefit for 500 attendees, and we find ourselves in the situation of needing to make 400 extra over the course of a few days.
Assuming our floral team would be busy making the big stuff, it hardly makes sense to hire and train a floral associate to churn out magnets for such slim a margin, not to mention that when someone purchases 100 of something, they might look for a bulk discount. If we discounted magnets to $4, we'd make $29 on a sale of 100 after factoring in labor.
The floral team felt like we'd reached a dead end, but I suggested a different approach. How about we start selling the magnets for $8 retail?
“I don’t think people will pay $8 for these.”
Of course there were people on our team who were skeptical that we could sell the magnets for 8 dollars. There are all kinds of reasons we believe people won’t pay a higher price.
We’re conditioned to the current price
We ourselves would not pay that price
We feel guilty about how much profit we’re making
If we’re making prices up out of thin air, it feels like lying
Nothing else like this exists in the marketplace, so I have nothing to compare it to
People have already complained that it’s expensive
We could listen to these reasons and keep prices low, or we could experiment.
I clarified with the floral team: I am not saying people will pay $8 for the magnets. Maybe they won’t.
I am saying I would like to run an experiment to see if people will pay $8, and if they do, revisit the idea of turning this into a wedding product because then we will have the margin to hire someone else to build them in bulk.
If no one buys the magnets for $8, we drop the price again!
Results of the $8 magnet experiment
We officially changed the price from $5 to $8 ten days ago, and our unit sales have remained the same as the previous 10 days. We’re selling just as many magnets for $8 as we were for $5. Our gross unit revenue, however, is up 60 percent. By doing nothing but changing the price on the magnets, we increased our sales by $29.40 in 10 days.
While of course we need more than 10 days of data to confirm that $8 is the right price, it gives me confidence that we can execute a bulk sale of 100 with breathing room. We can even offer a 25% bulk discount on a sale of 100 (selling them for $6 each) and net $229.
Leaving room for wholesale, the path to scaling
If we could slightly decrease the cost of materials (bulk ordering), or the time it takes to make each (efficiency through repetition), we could even wholesale the magnets at a 50% discount.
If we get the cost of the magnets down to $1.05 each with labor factored in (possible, since bulk ordering magnets brings the cost down to $0.06), profit on each is $2.95 at the wholesale price. Does it seem possible to wholesale 5,000 in a calendar year and increase our gross revenue by almost $15k? Maybe.
Up until now we haven’t really tried our hand at wholesaling anything. But making something we already make, just in higher quantity, and increasing our annual revenue by $10-15k feels like a low risk, minimal effort way to get more money in the door during a down economy.
It’s a lot more appealing than hosting classes, which has failed us time and again.
(If anyone wants to coach me through a wholesale strategy I’m all ears, by the way.) 😂