“Your time is not a business expense, it’s an opportunity cost.” Before I start in on this belief of mine, let me be clear: I am not proposing your time is value-less, nor am I attempting to state that you should stop paying yourself or your employees. If you are a small business owner, especially if you are the one making your products, (or if you do anything custom/assembly/etc. for your customers), this is for you.
I once read an article on how to price your handmade and custom products. The format was roughly the following:
[Any Marketplace Fees] = [Price of Product]
Here’s the problem I have with that formula: that hourly rate is supposed to be whatever you want it to be. Meaning, if you want to make $50/hour, you should be pricing your products that way. Now, this formula might only apply to those of us who make our own wares, but the concept can still apply: the time you spent making that product isn’t worth what you think it is, monetarily speaking. It should be counted as an opportunity cost of your business, not part of your pricing structure. What good is that product you just made if it never sells because you’ve priced it too high?
Opportunity cost is the “cost” associated with any taken action is valued at the price of the alternatives not taken.
The short of that? Your time spent working on your business isn’t worth anything. No, really, hear me out. What else would you be doing? Watching TV? Working out? Sleeping? While most of us probably love the idea of more sleep, it doesn’t help your business move forward. You’re not growing your business by watching Shark Tank. You’re watching Shark Tank. Even if you’re knitting your famous scarves while watching TV, the time you spend doing so would have netted you no profit otherwise, so why are you charging for it?
Here’s a different way of thinking about pricing your products and what your time is worth. Time is a limited resource; that much is very true. For some things, you can put a price on your time: when you could be doing something more valuable. For instance, spending hours re-pricing all of your Amazon listings when you can get a program to do that for you. However, that’s a different type of opportunity cost. The price of that $25 a month for the re-pricing program is equal to 20 hours a month of your time, let’s say. How many more of those scarves could you knit in that 20 hours you gain?
The way you should be pricing your products is just that: by your product. Don’t factor in time and think about the cost associated with directly producing the product. How is the quality versus your competitors? (Be completely honest with yourself on that one; there’s no shame in offering a cheaper alternative to something popular that’s slightly less quality.) What sort of specific edge do you bring that no one else does? What kind of keywords can you attach—”handmade” or “custom” can bring a pricing premium to your products? These things should factor into your pricing structure, not necessarily how much time you spent on the piece.
For the sake of covering my bases, let’s look at this in another light. Let’s say you sell car parts. (I am not an aficionado at car parts, so please forgive the generalizations that happen next.) The scenario: you have a set catalog of things you sell, and one day a buyer comes to you with a special request. He needs a specific car part for his ’67 Mustang, and it doesn’t look like you have it in stock. In order to please your customer, you search for that part and after hours of searching, you find it. Now how do you price it? Add a “3 hours” x “$50” to the price to cover that time spent? Probably not. You’ll more than likely sell it to them at the price you bought it for plus a percentage markup. Maybe a little “special request” fee, but certainly not something based on how long it took for you to find the part.
It’s not a gratifying fact, but rather a hard truth about selling your wares. Your customer is usually coming to you for one of two things: they like you, your brand, or your particular product enough to pay a premium, or your products are the cheapest in comparison to your competitors. Either way, the actual amount of time you spent making or obtaining your product usually has no bearing on how much they expect to pay. There are other components that are more important.