Costing and pricing handmade soap

Pricing soap goes wrong in two predictable ways. The cost leaves things out, most often the maker’s own time, or the price aims at a margin and calculates a markup. This guide costs a real batch in the cost calculator, line by line, then shows what margin, markup and the old doubling rule each mean for that batch.

What goes into the cost

Four things go into the cost of a batch: the ingredients, the packaging, your time, and a share of the overhead that no single batch uses up but every batch needs.

Ingredients, by weight

Soap is made by weight, so cost it by weight. For each ingredient, the cost in the batch is the grams you used times the price you paid, divided by the grams in the pack you bought. A supplier who sells oil by the litre prints the net weight on the label or the invoice; use that, because a litre of oil weighs less than a kilogram and the recipe is in grams.

The example batch is 70 % olive oil and 30 % coconut oil, 1000 g of oils at a 5 % superfat, scented with lavender essential oil at 3 % of the oils.

The lye and water are the lye calculator’s for this recipe at a 33 % lye solution. The prices are round examples in no particular currency; use the ones on your own invoices.

Three lines deserve a second look. The lye costs little and still counts. Tap water is as near free as makes no difference, but distilled or bottled water is not, and belongs in the table if you use it. And the essential oil, 2 % of what went into the mould, is 18 % of the ingredient cost: at 72 a kilogram it is by far the dearest thing in the batch.

Packaging

Everything that leaves with the bar: the wrap or box, the band, the label, a sticker. Cost it per bar. The example allows 0.60 a bar, 6.00 for the batch.

Your time

Count the hands-on minutes for the whole batch, from weighing out to wrapping, at the rate you would pay someone else to do the work. Leave it out and the margin looks healthier than it is, because the hours you spend are counted as free. Alicia Grosso’s experience is that most soapmakers make no profit at their first market, and many not at their second: the takings often cover only the materials. Curing takes weeks but no hands; what it costs is shelf space, which is overhead. The example batch takes 90 minutes at 15.00 an hour: 22.50.

Overhead

Rent, insurance, market pitch fees, the website, the electricity, the stick blender that wore out. The simplest honest way to carry these is as a percentage of the direct costs: divide last year’s overhead by last year’s spending on ingredients, packaging and labour, and add that share to each batch. It is a simplification, only as good as the year it was measured over, and it shifts when you make more or less soap. The example uses 10 %.

Divide by the bars you will sell

The last number is the easiest to flatter. Divide by the bars you will actually sell, not the bars the mould holds: leave out the trimmed ends, the bar you keep back as a sample of the batch, and the one you test in your own shower. The example batch sells 10.

The same batch in the cost calculator. Half of what this bar costs is the maker’s time, so a price that covers the oils and the wrap pays nothing for making the soap.

Margin and markup

A price turns the cost into profit, and there are two ways to state that profit as a percentage. They describe the same sale against different bases, and mixing them up is an easy way to underprice.

• Margin is the profit as a share of the price.
• Markup is the profit as a share of the cost.

Sell the example bar at 6.00 and the profit is 1.57. As a share of the 6.00 price that is a margin of 26.2 %; as a share of the 4.43 cost it is a markup of 35.5 %. One sale, two numbers.

The trap works like this. Decide you want a 50 % margin, add 50 % to the cost, and the price comes out at 6.64. That is a 50 % markup, which is a margin of only 33 %, and the profit is 2.21 a bar instead of the 4.43 you planned: half as much. To set a price from a target margin, divide the cost by one minus the margin. For a 50 % margin that is 4.43 ÷ (1 − 0.50) = 8.86.

Markup = margin ÷ (1 − margin). Past 50 % the markup runs away from the margin, which is why the two words must never be swapped.

The French terms run the other way

French business vocabulary mirrors the English and trips up anyone who works in both. The taux de marge divides the margin (the profit, in money) by the cost price, so it is what English calls the markup. The taux de marque divides it by the selling price before VAT, so it is the English margin. A French supplier quoting « un taux de marge de 100 % » is doubling the cost, which in English is a 50 % margin.

Whatever the language, work margins on prices without VAT or sales tax. The tax on a sale is collected for the government, and none of it is profit.

Wholesale, retail and the doubling habit

A retail price is what the person who uses the soap pays. A wholesale price is what a shop pays you for bars it will sell on at its own price. (Consignment, where the shop pays you only when a bar sells and keeps a commission, is covered in the selling guide.)

The rule of thumb that goes round is to double the cost to get the wholesale price, and double the wholesale price to get the retail price, so retail is four times the cost. In margin terms that is two 50 % margins in a row, one for you and one for the shop. It is a statement about how the two of you split the profit. It says nothing about what your bars cost to make or what anyone will pay for them, and those are the two numbers that decide whether it works.

For the example bar, doubling twice gives 8.86 wholesale and 17.72 retail. Suppose buyers at your market pay 6.00 for a bar like it. Then the formula’s retail price is out of reach, and selling to a shop at half of 6.00 would lose 1.43 on every bar. Run the arithmetic backwards to see what wholesale needs: to keep a 30 % margin yourself while the shop keeps 50 %, this bar has to retail at 12.65 or more.

Grosso gives a rougher rule still, and offers it only as “a ‘family’ price” for friends and relations: double the cost of the materials, add your labour, then the wrapping. For the example bar that is 2 × 1.18 + 2.25 + 0.60 = 5.21, just 0.78 above the full cost of 4.43, a 15 % margin, because only the ingredients are doubled and the overhead is left out. It suits gifts; it won’t carry a business.

So the doubling habit can mislead in both directions. With a high cost it produces a price nobody pays; with a cost that leaves out your time, it produces a price that looks fine and pays you nothing. Price from both ends instead. The cost sets the floor. The ceiling is what customers will pay for a bar like yours, which you learn from the market itself and from the prices of the soaps sold beside yours.

What moves the cost

Labour was half the example bar’s cost, and labour is where scale helps most, because much of a batch’s hands-on time is the same whatever its size: setting out, weighing, cleaning down. Suppose a batch three times the size, 3 kg of oils making 30 bars, takes two hours instead of ninety minutes. At the same prices the cost falls from 4.43 a bar to 3.05, with labour down from 2.25 a bar to 1.00, and at 6.00 the margin rises from 26 % to 49 %. Even so, doubling twice would ask 12.22 at retail, and selling wholesale at half of 6.00 would still lose 0.05 a bar.

The calculator also shows each ingredient’s price per kilogram, which is the fair way to compare suppliers and pack sizes, and each line’s share of the ingredient cost, which shows where a saving is worth chasing. In the example, 30 g of essential oil costs more than 300 g of coconut oil. Recipes built to be cheap start from that line: our supermarket oils bar uses only oils from the grocery shelf, and the old-fashioned lard bar is unscented. Waste belongs here too, whether a failed batch or bars too marked by soda ash to sell: each one is a cost the saleable bars have to carry.

Fees that come off the price

A fee charged as a percentage of the sale comes straight out of your margin, because it grows with the price. Card readers, online marketplaces and shops taking a commission all work this way. Etsy, for example, charges a transaction fee of 6.5 % of the price plus whatever you charge for shipping and gift wrap, a listing fee of 0.20 US dollars for each item listed, and a payment processing fee that varies by country. On a 6.00 bar the transaction fee alone is 0.39.

Many fairs and bazaars work the same way, taking a share of your takings as well as, or instead of, a table fee, as Grosso notes; that share comes off the price like a card fee. A fixed cost of a channel, such as the pitch fee at a fair, is overhead: spread it over the bars you expect to sell there, and a fair that sells twenty bars carries its fee very differently from one that sells two hundred.

Keeping the numbers honest

Costs drift. Re-cost a recipe when a supplier’s price changes, and work out the overhead percentage again once a year. The cost calculator keeps the prices you enter in your browser, so an oil priced once is priced in every batch after it. From the Maker plan the costing is joined to your stock: each delivery moves an average cost per gram, and a batch logged from the lye calculator takes what it used. On the Business plan the products page works out what one of each product costs from its recipe and its packaging, with the margin on your retail and wholesale prices.

What to charge stays your decision, and it should be made with both numbers in front of you. The selling guide covers the channels those prices are for, and the labelling guide what has to be on the bar before any of them will take it.