Illustration by Sonya Andrews
When I plan product pricing, or put together a project bid, I get a mental image of pancakes that stack up to the finished price. Stack up your pricing from the bottom up:
- Cost of Goods – start with the cost of materials, project-specific labor, and sales commissions;
- Overhead – add in a portion of your Overhead calculated by dividing your total overhead by the projected number of jobs you will have in a year if you’re pricing a project; or divide by a conservative projection of total product sales if you’re pricing a product;
- Profit Margin – multiply what you’ve got in the stack so far by 20% profit if you haven’t another industry standard to reference;
- Value Margin – this is the difference between what you’ve stacked up and what you believe the market will pay for your product or service.
The pancake stack model adds confidence to your quotes, because you built your price with reason.
It also helps you see the impact of any price negotiations. You can negotiate to reduce your price by cutting into your Value Margin, or even your Profit Margin. But don’t share your Overhead and Cost of Goods pancakes.