The Foundation of Profit

If you’ve decided that it’s time to turn your hobby into a business, pricing your products is one of the most important steps to take when you get started. The logistics of pricing candles, soaps, bath bombs, perfumes and more are all relatively similar—calculate your costs, identify your products’ perceived value, and crunch the numbers based on your profit margin to get to the bottom line. To calculate costs for your business, consider three key figures: 

• Variable Cost 
• Fixed Cost
• Total Cost 

Understanding Your Costs

Variable costs fluctuate with production volume—more production means higher spend on raw material, hourly labor, and utilities like water and electricity. These costs vary daily, monthly, and yearly, increasing as your business grows. Start with your current figures: calculate expenses for raw materials, labor, and utility bills involved in production. Remember, shipping costs also vary and need monthly reassessment. For example, if you make candles, include expenses for wax, wicks, containers, and additives like dye. If you pay someone hourly to help, add their labor costs. Finally, factor in utility bills for electricity used in your production process. Determine the cost per unit (one candle), then multiply by the number of units produced to find your total variable cost.

On the other hand, fixed costs stay the same each month, regardless of production volume. In our candle example, whether you make 10 or 10,000 candles, fixed costs like rent, salaried labor, and insurance remain constant. Add these up for the month and combine them with your total variable cost to find your total cost. The exact figures will vary depending on your specific business situation, location, time of year, and product type, so be precise to avoid losing money.

The Power of Perceived Value

Beyond the math, consider your product’s perceived value—the price customers are willing to pay based on quality and meaning, not just production costs. For instance, the production cost difference between a $40 and a $400 cotton t-shirt is minimal; the brand and perceived value make the price difference. Reflect on how your product improves customers’ lives. A bar of soap’s value increases with its design, fragrance, and packaging, enhancing the user experience. To raise perceived value, study luxury brands for their aesthetics and marketing. While calculating perceived value is harder than figuring out costs, knowing your target audience and brand identity is crucial. For more tips, check out other episodes of AFI Explains or head over to Fragrance University for a free course on starting a business!

Wholesale vs. Retail: Finding Your Strategy

Okay okay…you got all your numbers. You know how much it costs to run production for your business. Now it’s time to slap on those price tags! Wholesale commerce, or business-to-business sales, involves selling your products to a retailer who then resells them to consumers. This approach offloads branding and marketing to the retailer. Typically, wholesalers operate on a larger scale, shipping more volume than direct-to-consumer sales. Wholesale pricing is generally lower, often around double the cost of production. Retail, or business-to-consumer, involves selling directly to consumers without a middleman. You’ll manage your own branding and marketing and usually deal with smaller order volumes. Retail pricing is higher, often ranging from three to five times the cost of production, based on the product’s perceived value. Many business owners offer both retail and wholesale pricing, catering to individual consumers and retailers purchasing in bulk, so don’t feel pressured to categorize your pricing to just one option!

The Golden Rule: Don’t Undersell Yourself

Above all else…don’t undersell yourself! If you want to support yourself by running a business doing what you love, it’s important to know the value of your product from both a qualitative and quantitative view – that means both the math and emotion involved in pricing your goods. If you try to compete with others based on pricing alone, you’ll struggle to break even and potentially make a profit. And even though people love a good deal, underpriced products can be perceived as low quality, meaning customers might pass up on your goods entirely! Take pride in your business and value yourself based on EVERY little thing that goes into the production of your soaps, candles, perfumes, bath bombs, and more.