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The Flaws in Paying Yourself Hourly

There are several ways that soap & bath product makers determine pricing for their products. One of them involves taking the cost of supplies, adding in an hourly rate cost (based on how long it takes to produce a product) and multiplying that by 2 or 3.

This is FLAWED, and I caution you from using this method from determining pricing.

Flaw #1: Business owners do not get paid hourly. Have you ever worked at a large, successful business? Do you think the CEO gets paid by the hour? No, absolutely not. He or she gets paid a salary + a bonus based on performance of the business.

Eventually, you should pay yourself the same way, but when you are just starting out and growing quickly, your best compensation structure will be based on commission (you get a percentage of revenue).

Flaw #2: The hourly rate set is arbitrary in most cases. Soapers who use hourly rate in pricing will try to find a “fair” hourly rate. How does one decide what is “fair”?

How do you get a salary raise in this model? If you do a fantastic job running your business are you going to give yourself a raise from $20 / hour to $25 / hour? When does that happen? Are you going to have to increase your wholesale prices every time you get a raise?

If you don’t give yourself raises, what incentive will you have to push yourself outside your comfort zone (required to become a higher caliber of business owner than you are now)?

Flaw #3: Your business can’t afford you. If my business actually paid me for every hour that I worked, my business would probably go bankrupt. It is not because the business is not earning enough, it is because I work a LOT.

I am continually thinking of new ideas for marketing, working on my professional skills & trying to solve problems in the business. I do those things while driving around, cooking dinner, showering & working out. That time is immensely valuable to my company. Am I supposed to keep a timecard for every moment I focus my attention on how to make my business better?

Flaw #4: How you think about yourself has a HUGE impact on the success of your business. If you consider yourself an hourly employee, you will act like an hourly employee.

If you consider yourself CEO & EVP of Sales, you will act like the CEO & EVP of sales. You will look for ways to become a better leader, a more effective sales person and someone that other people look up to.

This starts with how your business pays you.

Flaw #5: Your business has other expenses. If you are interested in building a financially healthy & thriving business, you will inevitably have expenses other than cost of supplies & you. Eventually you will have the expenses of commercial space (overhead) , labor (staff to help you make products). You also should put aside money for income tax, and you should alway generate profit.

Effective product pricing should take ALL of those expenses into account. Even though you may not have staff or commercial space YET, you should plan for that in pricing NOW. One of the biggest mistakes I made in my business early on was not accounting for those expenses BEFORE I had them. Because once I did have them, there was not enough margin on some legacy products to pay for those expenses, and that was a problem.

How do you calculate all of the expenses?

  1. You can take the easy route – I put together a very affordable online course that teaches you how to do this in an easy to understand way
  2. You can work out this methodology on your own. First thing is to read Profit First (you can get it on Amazon), and take the concept that they teach about managing your expenses and apply it to product pricing (that is how I figured it out).
  3. You need to create a list of the monthly expenses for your business (you have to estimate future expenses if you don’t already have overhead & labor). In the beginning you will decide what you need to earn, and what you want to set as a profit percentage, and plug those numbers in to see what that looks like. I had to do this many times before I came up with the percentages that worked for me, and my business. But, I have only had to change them once (I was putting aside more for taxes than I needed so I adjusted that %)

If you have any questions to ask me, feel free to do so in the comments.

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