How Much Should I Charge for My Soap? This question is not uncommon. In fact, it has been asked to me so many times and in so many ways. My response is always the same; price your product in line with what the market will bear. Vague right? Well, not so much. Let’s look at a few hypothetical situations.
Soaper A creates a soap that she says “Everyone that uses it loves it and will never use anything else. I have orders for it but I do not know what to charge.” Congratulations Soaper A, you have single handedly captured the market on soap. If no one will ever buy another brand but yours, charge anything you like. How about $1 million per bar? The reality is that the price is absurd but in this example it makes a point that $1 million is what the market will bear based on no competitive soap makers in the market. It is as simple as supply and demand. Soaper A is the sole supplier of soap and 7.125 billion of the world’s population demands it.
Soaper B creates a soap that she labored over, it is now fully cured and she wants to sell it. What should she charge? Back up Soaper B, you have made your first mistake. Never create a product and price it. Always price your product first then produce pending the price is deemed in line with what the market will bear. Of course it is different if you are purchasing prepaid product and reselling it. The price is already determined by your supplier you in turn a creating a mark up. But when making a product from the ground up, price first then produce.
Supply and demand is verifiably the core of our market economy. In theory, the lower the supply, the higher the demand (as in the case of Soaper A) and visa versa. Setting market prices based on the supply and demand in your market is imperative. Know your market!
Here is how it works: (the following examples considers that all things are constant)
Let’s consider that Soaper B’s farmers market looks like the chart below. In column 1 we see that there are 10 soap makers (Qs or Quantity Supplied) selling oatmeal, milk + honey soap at a cost of $4.00 each (Price). At the $4.00 price there are 25 customers who will buy the soap (Qd or Quantity Demand). And so on for the various prices. We can add this information to a graph and make it visual.
Soaper B creates a soap that she labored over, it is now fully cured and she wants to sell it. What should she charge? Back up Soaper B, you have made your first mistake. Never create a product and price it. Always price your product first then produce pending the price is deemed in line with what the market will bear. Of course it is different if you are purchasing prepaid product and reselling it. The price is already determined by your supplier you in turn a creating a mark up. But when making a product from the ground up, price first then produce.
Supply and demand is verifiably the core of our market economy. In theory, the lower the supply, the higher the demand (as in the case of Soaper A) and visa versa. Setting market prices based on the supply and demand in your market is imperative. Know your market!
Here is how it works: (the following examples considers that all things are constant)
Let’s consider that Soaper B’s farmers market looks like the chart below. In column 1 we see that there are 10 soap makers (Qs or Quantity Supplied) selling oatmeal, milk + honey soap at a cost of $4.00 each (Price). At the $4.00 price there are 25 customers who will buy the soap (Qd or Quantity Demand). And so on for the various prices. We can add this information to a graph and make it visual.
Looking at the graph below, where the supply intersects the demand, the equilibrium price is $4.70. Meaning that based on this farmers market statistics, the price at which the quantity of the OMH soap offered is equal to the quantity of the OMH soap sold. All things constant, Soaper B should sell 19 bars at this price.
However the market rarely stays the same. Let’s introduce the idea that the demand for OMH soap rises from 18 bars to 30 bars (Qd). What will it do to the equilibrium price? As shown below, it increase. 26 bars are demanded at a cost of $5.18. In simple terms, if the customers are requesting more and no new soap makers enter the market, Soaper B can charge more while selling more.
What will happen if the demand remains the same (Qd=30) but the amount supply decreases to 10 (Qs)? If the number of soap makers at the farmer’s market dwindles {hey, it is winter now and some soapers are fair weather sellers} then each seller of OMH soap, including, Soaper B, can increase their price to $5.30 per bar. But keep in mind that this does come at a slight cost, only 21.5 bars will be demanded.
Back to Soaper B’s original question, what should she charge? I think she now has her answer (or at least knows how to determine it). When creating a product for market, analyze first then tailor a recipe based on the maximum amount your customers are willing to spend. Of course you will need to consider all of your costs are associated with producing the soap. But this discussion is for another post.
Don’t price yourself out of your market and don’t supply above what is demanded. And be sure when making a product from the ground up, price first then produce. This is your economic recipe for success!
Don’t price yourself out of your market and don’t supply above what is demanded. And be sure when making a product from the ground up, price first then produce. This is your economic recipe for success!