Shopify is a great platform and allows you to sell products easily but there are parts of the platform which can be hard to decipher.
One of these is “Cost Per Item” which is a field on the product page that allows you to enter how much the product costs you as a store.
Do you know if you are calculating your product costs correctly? Are you including external costs which just don’t include how much you pay for the item?
In this guide, we explain how you can work out your cost per item for the products you sell more accurately, so you have a better idea of how much profit you are making on each sale, plus what your margins are for each item in your store.
Calculating your product costs
What is True Cost
At the most basic level true cost is the cost of just how much the product will cost you to make. If you buy your product from a supplier this will be the bare minimum they charge you.
It’s worked out as the following:
Total Manufacturing Cost / Number of Units = True Cost (Cost of the product itself)
Remember most suppliers will have a Minimum Order Quantity (MOQ). So it might only cost £1 to make a product but you need to buy 1000 before they will sell to you.
Why? This is because of their labour and business costs. They need to make money just like you and to cover simple costs from the material, paying staff and even turning on the machine these MOQs are in place.
Work out the “Landed Cost”
The cost of the product never includes other costs outside of making it. You also need to account for costs getting it to you in a sellable form such as shipping it to you, storing it, print costs for packaging.
Total landed costs will be different for all businesses but these are the things to factor into the cost of your product:
- Manufacturing cost (labouring and materials)
- Shipping costs (plus customs costs)
- Packaging costs
- Variable costs (prices that can change, like bulk discounts etc)
Product A costs £1 to manufacture with the Minimum Order Quantity (MOQ) of 1000.
You then spend 11p per product on the packaging. This might include artwork/printing costs or might not so remember to check.
To keep it simple, our product costs 11p total per product for the box materials and printing.
It then costs £50 to ship the 1000 units to our warehouse. This means per product it is £0.05.
The total price of the product will then be:
1 + 0.11 + 0.05 = £1.16
Product A‘s total cost will then be £1.16 which is the actual landed cost to get the product ready, packaged and shipped for you to then sell.
Product Profit Margin
Now you have your landed cost for your product this is the “Cost per item” that you would use in Shopify.
After this, you can the landed cost to work back the selling price for the profit margin you’d like.