Here’s Why (and How) to Calculate the True Costs of Your Retail Products

by Dhiren Bhatia / September 22, 2018

Most retailers know that a product’s wholesale price tag never tells the whole story of its final cost.

There are plenty of costs required just to get the product from its point of origin into your store. Then there are the costs to process it, label it, and sell it. And as it turns out, those costs are just the tip of the iceberg.

Getting a handle on the true costs of your products is key to profitability. Without accurate pricing knowledge, business owners can’t leverage valuable data on which products are a great value — and which are a big drain.

If you get detailed enough about these costs, you can even pinpoint WHY any given product has become unprofitable and fix the problem at its source.

Tracking these costs isn’t exactly simple, but it can be much easier with the right tools. By the end of this article, you’ll know what all goes into your products’ “real” costs and how you can track them without dedicating hours to the task each day.

Cost Factors

Here are all of the factors that go into how much a business actually pays for its products.

Logistical Costs

Perhaps the most obvious “hidden” cost of your inventory is the cost to physically move it to your business location.

Shipping and freight costs are usually the primary expenses in this category. If the products are crossing international borders, though, there will also be customs duties to pay. You’ll also have to pay import taxes in some cases.

Logistics expenses don’t end once the products arrive. Someone has to be paid to receive them, unload them, unpack them, and inspect them — jobs that may even require special equipment and materials with their own costs.

Order Processing Costs

Your staff also must to be paid for their time researching product options, making orders, and following up on those orders until the products are stocked on your shelves. This category also includes any costs for software or equipment that’s necessary in that process.

There will also be financial fees to pay, from working with an accountant to maintaining a bank account and paying fees to process payments.

Assembly Costs

Some products may require a little extra work before they’re ready ready to sell. Don’t forget to factor in any labor and equipment costs associated with the effort.

Storage Costs

These costs include the rent, utilities, and maintenance for any warehouses or storage space required to keep your inventory safe and out of harm’s way.

It also includes any payments to the staff who help to stock and warehouse your products, as well as any equipment and software required to manage and handle the stored inventory.

Other storage costs might include a security staff or equipment, such as a surveillance system or specialized locks.

Risk Mitigation Costs

There are many ways your inventory can be lost or rendered worthless. Your pricing needs to reflect some of the risk for those potential losses, or they could potentially deal a huge blow to your company.

Risks to your inventory include things like damage, theft, exposure, or the products simply expiring. Pricing to achieve a healthy profit margin can go a long way toward hedging some of these risks, but insurance also plays an essential role. The cost of insurance also factors into your products’ final cost.

Costs From Returns

Inevitably, you’ll need to return some product to suppliers. The costs to ship the items back, the labor required to process the returns, and any interruption to your business that results can all incur extra costs.

You’ll also need to account for returns from customers, including the associated labor to process the returns, update the inventory, and restock the returned items.

Shortage Costs

Running out of a crucial product can also prove to be very expensive. Rush orders cost extra money and incur additional fees, and scrambling to fix these kinds of emergencies can hurt productivity and interrupt business operations.

In the worst-case scenarios, shortages can also result in missed deadlines and damaged relationships with clients.

Opportunity Cost

Although this one is a little trickier to calculate, many companies recognize that by tying up their cash in inventory, they’re missing out on other things that that the money could be used for.

Namely, the money could be earning interest in some way or be invested in other projects that could deliver a bigger return on investment than the inventory does. That’s why keeping a close eye on the actual demand for and turnover of your products is so important.

How to Get a Handle on These Costs

We just went over a wide variety of factors that all influence the true cost of your inventory.

Now, let’s talk about how to assess those factors to get valuable data that will help you calculate your company’s worth, estimate taxes more accurately, and make better strategic decisions for your company.

Some of these costs are fairly easy to estimate. Monthly software costs, or costs for equipment such as a security camera or packing material, might not vary much from month to month.

Other costs, however, may fluctuate wildly based on ever-changing factors such as the size of your orders, the type of inventory you’re handling (how perishable it is, for example, or what kind of journey it takes through your supply chain), and the way you choose to run your business (such as what kind of pay and benefits your employees receive for various jobs).

Things such as extreme weather events, natural disasters, or changes in trade agreements can significantly change the costs of your products from one week to the next.

Plus, even the more predictable costs of doing business must be spread across inventory in different ways. Each type of products’ size, shape, volume, and weight will affect how much it costs to ship and store, for example.

Calculating true costs manually is a near-impossible task. Thankfully, inventory software makes it manageable.

Robust reporting systems allow administrators to run custom reports that draw data from all locations and can help them optimize their inventory processes and pricing procedures.

Plus, today’s inventory software solutions are often cloud-based, which means there are lower upfront costs that make even the most advanced features accessible to businesses — even those just starting out.

Critically, many cloud-based inventory systems integrate with cloud-based accounting software and cloud-based point of sale software to create completely comprehensive systems.

To learn more about how these combined solutions can help your business, please contact us at Cloudscape Technologies. We are a Certified Unleashed Implementation Partner and specialize in empowering business owners to find the best software for their business needs.

It can take a lot of time and energy to find and implement the best cloud-based software systems for managing inventory, processing sales, running reports, and processing transactions. Our goal is to unchain you from this tedious process, lending our expertise so you can continue to focus on the big picture of your business.

To learn more, contact Cloudscape Technologies today.

Tags: Retail tips Small business tips
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