To Be Successful, Know the True Cost of Your Handmade Soap
You’d never let a random stranger on the internet price your house. How much a meal costs depends on so many factors! And, of course, what your neighbor prices her car for has nothing to do with what your car is worth.
That’s why I do a facepalm when someone asks in our Facebook group, “What should I charge for my 4-ounce bars of handmade soap?” Or says to me, “Well, most people on Etsy charge about $6 for artisan soap, so that’s what I’m going to charge.” That is not the way the owner of a sustainable business goes about pricing handmade soap!
What really matters when pricing your soap
Here’s what does matter:
- How much your soap costs to make
- If your business can pay you fair wages
- That you can afford advertising, education, outsourcing, and other overhead
- Pricing your soap to be profitable for the long haul
- If your pricing is target market tested and approved
(Want guidance on pricing handmade soap that is super specific to your products, your niche, and your goals? Join Soapmaker to Moneymaker and make your business dreams a reality...with the profit to match.)
Laying out the cost of your handmade soap...
We often hear business owners say they can't afford to do xyz to grow their business because they are only making enough to cover restocking supplies. What a dreadful cycle to be trapped in! A little sleuthing reveals that they have only considered the cost of their supplies (if that) when pricing their handmade soap.
You have to know the real cost of your handmade soap before you even think about setting a price. And that means calculating your cost of materials, your labor costs, and your overhead expenses.
Adding up the cost of your soap supplies
Let's say we make soap in roughly 50-pound blocks. We’ll utilize Brambleberry's Lots of Lather Quick Mix (for the sake of easy math). And, for this little guide to the true cost of your handmade soap, we're going to work with our Soothing Lavender Soap product (which is completely and totally a figment of my imagination).
35 pounds of Lots of Lather Quick Mix is now listed at $106.50. Shipping costs an additional $32.08. So our total cost for base oils is $138.58. According to Brambleberry's website, you need 80.6 ounces of lye and 185 ounces of water to turn that 35 lbs. of Lots of Lather Quick Mix into soap.
If we ordered the lye from Brambleberry, it would cost $30 + $12.73 shipping for six pounds. We only need a little more than five pounds, so lye ends up costing us $35.61.
If we ordered lavender 40/42 essential oil from Brambleberry in five-pound quantities, the current cost is $280.00. However, the shipping is an extra $12.50. Bringing the total cost of five pounds of lavender 40/42 to $292.50. With a usage rate of 3%, we'd need 24 oz. for a 50 lb batch of soap. So our essential oil cost rings in at $87.84.
Onwards, to our distilled water! We need 185 oz. of distilled water. (And there are 128 oz. in a gallon). It's $1.79 per gallon at a local grocer, bringing our water cost to $2.59.
So, our materials cost for 50 lbs. of Soothing Lavender Soap, scented with Lavender 40/42 with no color added is $264.62. We'll say 50 lbs. of soap yields us 150 bars of 4.5 oz soap after curing and trimming. That makes our raw materials bar cost $1.76 each.
Don't eat unexpected costs
Did you notice that I calculated shipping for each ingredient individually? That’s not a mistake on my part. If you run out of lavender essential oil and need to order it alone, I want you to be prepared for that extra shipping cost. It will happen, I promise you. It's better to be safe than sorry when it comes to figuring your cost of goods sold (COGS).
If you are making special trips to pick up supplies, make sure you factor in your time and mileage. Although shipping costs seem high, for most supplies, having them delivered to your door is the least expensive choice. To keep things simple for this example we will say I grab distilled water on my weekly grocery run.
Don't forget packaging costs!
For packaging costs, let’s do a custom printed soap box. My most recent order from Your Box Solution totaled out to $0.52 per box after shipping. So we'll go with that, bringing our total material + packaging cost to $2.28 per bar.
Surprisingly, many soapers stop here (if they even get this far) in the costing process. They will tell you their profit is anything they make beyond reimbursing themselves for their cost of materials. But, that’s just not true!
Now, it's time to hit labor in the face
Would you support a business that routinely refused to pay its employees? No. Then why would you put up with anything less from your own company? A sustainable business pays its workers a fair wage. Period.
Let’s say it takes an hour to weigh ingredients, melt the oils, and make the soap from start to finish. In addition, we’ll need another hour to cut the soap and package it into boxes. In my opinion, production should never be calculated at less than $20/hour. I would never want a minimum wage worker making my products, and I would never want to pay myself minimum wage. So that makes the labor cost of your handmade soap on a batch $40, right?
Labor costs more than just the amount of money the employee takes home. There are benefits, the cost of doing payroll, and taxes. Depending on the situation, this can add 10 to 20% to the hourly wage. We'll go with the middle road and use 15%, bringing our hourly wage cost for production to $23 per hour. Two hours of labor means $46 to produce 150 bars. That makes our labor cost $0.31 per bar.
(Even if you don’t have employees now, you want to make room in your pricing in case you want to hire them later.)
But that's not all, y'all!
And then there is overhead cost of your handmade soap...
You have to spend money to make money. Overhead is the money you spend running your business. A lot of factors go into that number - from rent and utilities to advertising and education. And so much more.
Students tell us all the time that they make soap in their homes, so they don't have rent or utilities. No, no, no, no! You do have rent and utility expenses. Your biz just isn't paying for them. Figure out how much of your personal costs are being utilized by your biz. Then hold your biz accountable. (And, if your biz needs its own space in the future, the cash for that is already figured into your pricing.)
Also, we see so many soapmakers skimping on the overhead expenses that make the biggest difference in boosting their bottom line, especially marketing and education. That is a false economy. Did you know that you should be spending roughly 20% of your operating expenses on marketing when your biz is in a growth phase? Our students are well aware of that because they invested in education. You have to plan for those expenses if you want to expand your business!
What if you are in start-up mode?
Ideally, you will have a solid budget and have your overhead costs down pat. But, especially when you are starting out, that’s a challenge. Even if you don’t have a handle on specifics, don’t neglect to figure in overhead costs when pricing your soap. Start with 15% of your product costs and keep detailed records so that you can make adjustments when you run the numbers for next year.
A note about COGS
Keep in mind that figuring out your cost of goods sold for pricing is going to look different than your COGS for accounting and tax purposes. Figuring your cost of goods sold for pricing is about estimating, planning, and padding for situations like being on the hook for extra shipping charges. But, figuring your COGS for accounting means recording what you actually spend. (And you are bound by tax laws on whether or not you can account for your own labor, how to figure business use of space in your home, etc. So, enlist a pro, like a CPA, to give you a hand if you need it.)
Bringing costs down
Save cash on supplies
Soapmakers who have done their due diligence have their raw material cost of handmade soap per bar down to $1 or less, especially if they are making 50-pound blocks of soap. If you aren’t there yet, here are some tips.
- Order in bulk in the largest sizes you can afford, store, and utilize in a reasonable time.
- Order as much as possible in a single supply order to limit shipping costs.
- Shop around to find the best price for the best quality.
- Have backup suppliers for each ingredient.
- Only buy supplies for products that you currently manufacture or are in active research and development (R&D).
- Switch to true wholesale suppliers rather than companies that serve hobbyists.
Reduce your labor costs
Time is money. Get more done in less time.
- Produce the largest batches that make sense for your business. You only have to expend a bit more effort to make 50 pounds of soap rather than 5 pounds.
- Don't waste time on intricate soap designs. That's thinking like a hobbyist rather than an entrepreneur.
- Create Standard Operating Procedures (SOPs) so that you aren't reinventing the wheel every time you step up to the soap pot.
- Organize your space efficiently so that your production is streamlined and you don't misplace (and rebuy) supplies.
- Outsource tasks that can be done better/cheaper/quicker by someone else. (If you currently print your own labels, that's a great place to start.)
Audit your overhead
Look at all of your overhead expenses during your year-end review and planning session. There is no need to retain that software license or renew that trade organization membership if you are not benefiting from the cash outlay.
Handmade soap pricing basics
With a cost of $2.98 per bar, if we set the retail price for our Soothing Lavendar Soap at $5 per bar, and wholesale keystone at $2.50, we aren't making money - we are losing money. Even at $6 per bar retail ($3 per bar wholesale), that's a $0.02 per bar profit.
Um, that's nuts!
Personally, I figure out my total COGS and multiply that times two to hit an idea of the bare minimum price I want to sell for. My bare minimum price is the furthest discount I ever want to give. It's less than my wholesale price so I can offer incentives like opening order discounts and temporary price reductions to new wholesale accounts.
Don't want to wholesale your soap?
Maybe you aren’t interested in wholesaling. So, you don’t really care if keystone wholesale pricing is profitable. Well, okay, but what happens if you decide you want to get into wholesale later? Or you grow large enough that you decide you want to open a storefront? You won't be able to afford to take those steps to improve your business, because you didn't leave any space in your pricing.
In order to wholesale successfully... Scratch that. In order to run a biz successfully, it is essential to know your costs so you can price your products properly. That’s square one. If you are guessing at your expenses, it's time to pick up the calculator and work out the true cost of your handmade soap. (Or, even better, finally get your inventory and costing software up and running.)
(Looking for more information on wholesaling successfully? Read up on why anyone should wholesale their soap, the bare bones basics of what they need to wholesale, and the words they need to know in building their wholesale program.)
A real-life example
To illustrate pricing once you have scaled up to bulk buying from wholesale suppliers a bit better, I picked a 4.5-ounce soap out of my contract manufacturing history. Here’s the math:
- Raw material cost = $0.73
- Custom box = $.52
- Labor = $.31
- Overhead = $.23
- Cost = $1.79 per bar
- Bar minimum price = $3.58
- Wholesale price = $4.25
- Retail price = $8.50
And you know what? That bar actually ended up retailing for $12. Because pricing handmade soap is not just about the cost of your handmade soap. There's so much more to the equation!
Personally, I'd rather offer a stable price and not have to hit my customers with an unexpected escalation in situations where crops do poorly (olive oil, anyone?), so I subscribe to the APP mantra: always pad pricing. Round the heck up. Tally 20% overhead. Give yourself $30 an hour. Multiply by 3 to reach wholesale. Do whatever you need to do to make sure you have a cushion before you need it.
Soap has killer tight profit margins. It really does. If olive oil jumps in price by 30%, what will your bottom line look like?
What if the market won't bear what I price my handmade soap?
If you only knew how much of a hot button question that is for me!
Recently, I surveyed a happy chunk of soap makers. I asked them to divulge their retail pricing per ounce of soap. And I was completely blown away by the results. 21% surveyed said they charge less than $1.25 per ounce. Another 64% said they charge $1.25 to $1.50 an ounce. That's 85% of the 300 soapers surveyed.
I haven't charged less than $1.75 per ounce retail in years. And to add a little fuel to the fire: all the soapmakers I know who have employees and count soap as their bread and butter (not a supplemental product)? They charge at least $1.50 per ounce retail for their artisan soap. Why is that? They know their cost of goods sold down to the penny, my friend. And they know that to big part of being a successful entrepreneur is being profitable!
Advice from the trenches
I shared this tidbit of soap pricing advice with a soapmaker (Hi, Melissa!) who was worried about pricing herself out of the market:
Have you investigated if maybe you are in the wrong market, appealing to the wrong customers, selling in the wrong venues, or can up your game elsewhere (branding, packaging, etc.) to create a perceived value? If a bar of soap is loaded with luxury ingredients, it should cost a premium price and be marketed as such. Don't short change yourself. Your work, expertise, and exceptional product quality DESERVE a fair price.
If your market won't bear what you price your handmade soap, find a new target market, superstar. It's out there. Otherwise, this soap wouldn't exist. Neither would this one. The same goes for hundreds of other soaps on the market! (Plus, when you sell a product with a higher profit margin at lower quantities, you make more money for less work!)
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