We are ‘in it’ to make money. Right. Tell that to the pricing demon that smacks you down whenever you are trying to price your products for profit.
So, then, how do you price your items to make money? Read this part 1 of 2 part series to find out how. Grab something to drink and let’s get down to this important issue on pricing – a tough challenge for any handmade business owner.
How much do I charge?
You work hard to perfect your skill and spend hours hammering out the details of your craft. You undo the stitches and resew the seam that just doesn’t look perfect. And you retouch the background color of your painting that just doesn’t seem to ‘pop’. By now, you’ve spent way too much time on making it perfect. But that’s the joy of handmade. That’s what makes handmade so incredibly valuable and unique.
But how do you price it so it will sell for a profit?
To put it simply, you follow an industry formula. I know. I know. You are saying, “But handmade is not like the ‘industry’ and there is no “formula” for handmade.” “It’s One Of A Kind!” “It’s impossible to put a price on it!”
But still, you want to make money, right? Unfortunately, it’s not as easy as just slapping on an arbitrary number when you fill out your listing just because it looks like a good number. There is a formula you have to use in order to make all that work worthwhile. It’s still a business, after all.
But before you break out into a sweat, let’s look at the formula.
[Material Cost (MC) + Labor Cost (LC) + Overhead (OH) + Profit] X 2.5 = Wholesale Price (WP)
Then, the next part of the equation is taking your wholesale price and making it into a retail price so that your shop operates like a retailer.
Here is that formula.
Wholesale Price (WP) x 2 = Retail Price (RP)
And RP is the price you have to list your item for sale in your shop.
I know they look like gobbledegook but it’s really not that hard to understand once you define what each term means. And in order to make a consistent cost analysis, figure out what your monthly cost is first, and then, average what each piece cost is afterwards. More on that later.
What does each term mean?
Image used with permission from 3 Princesses Engraving
Material Cost (MC)
Face it, you bought all your materials with your hard earned money, right? So that’s a no brainer – you have to pass that onto your customer to recoup that cost. Figure out how much supplies you used to make one necklace or figure out how much supplies you bought for a month and divide by the number of necklaces you made in one month. Either way, you need to find out what your material cost is per item.
But what if you are using destashed material, you know, that button that fell off of your pants or from your boy friend’s shirt that you were going to throw out anyway? Well, you still need to put down the “cost” for that, as if you had to buy it. What about paper, ink, canvas, fabric, yarn, or glue? Even if you were talented enough to make your own glue you would still need ingredients to make it so you’d have to write down the cost of each ingredient.
The bottom line is, nothing appears out of thin air. You BOUGHT that material to use one way or another. That’s your material cost, MC.
Labor Cost (LC)
You thought determining the price of old vintage button was tricky, finding out how much YOU are worth is even tougher. Labor cost is essentially calculating YOUR worth per item. How much is your time worth? Your skill? Your knowledge?
This. is. tough. Right?
But it really shouldn’t be. Let’s think about how much it took to make YOU, regardless whether your shop is your hobby or income earning full-time business.
You paid to go to school or took a class to learn your skill. You bought books to learn and practiced to fine tune your craft, right? Even if you are self-taught, like some of you are, you took the time to read, research it, spent time practicing and practiced some more. Your time is money. (Where have you heard that before?) You have a skill that no one does. That’s valuable.
But wait. Now that you are using that perfected skill to make products to sell, it gets even more involved. Now, you design the item, make it, photograph it, list it, package it and ship it. How much is your fair wage to do all that? You deserve to be compensated, don’t you think? After all, your shop is not a charity. Even a non-profit organizations have to pay their employees.
But how do you determine your pay? Well, put it simply, how much money do you want to make? Too stupid simple? Maybe. But think about how you’d answer that question if someone told you, you’d make that amount. Would you say, a minimum wage? $1,000,000? $50,000?
What salary will you be satisfied for working?
You need to know this information in order to find out the labor cost (LC) per item.
Let’s say you answered, $50,000 a year.
Then, figure out how many items you can make in a year. So, let’s say, on the average, if you can make 4 necklaces a day, 5 days a week, that means you’ll make about 20 necklaces a week. That mean in one year, you’ll make 1040 necklaces a year [20 x 52 weeks = 1040].
Then, divide $50,000 by 1040 necklaces and that’s about $48 per necklace.
That means, the labor cost (LC) is $48 to make one necklace. This also means, you are making $24 an hour as your hourly wage, before taxes. ($48×4 = $192 per day –> $24/hr)
Now, if you think you’d want to make more or less than $50,000 a year, then, you can adjust that amount and do the same calculation above to determine the labor cost. If you want the LC to be lower but you still want to make $50,000 per year, you’ll have to make more than 4 necklaces a day. Maybe you need to work faster or streamline your production. Or maybe you need to design a simpler necklace that doesn’t take as long.
What if you want to hire an assistant?
If you get really busy and things are flying out of your shop, you may want to hire someone to help you. More kudos to you for being too busy and not being able to handle your business by yourself. But before you hire someone, think about the labor costs since you’ll have to add her/his hourly wage to this cost as well. So if you have to pay your assistant $10 an hour, that means, the labor cost for both of you would be $24 + $10 = $34 an hour. So, $34 x 8 hrs = $272 per day. So with help, let’s say, you are now able to make 6 necklaces a day, then, labor cost for each necklace would be about $45 and you are able to produce more pieces for sale. Of course, that cost would be lower if you a hire part time help.
Image used with permission by Electric Light Era
How are we doing? I think we need a break to digest all of this, don’t you think?
Tomorrow will be the Part 2 of the Pricing series. The next two terms, overhead and profit are easier to figure out but I’ll tell you what hidden costs there are that you might not have thought of before.
And I will also tell you about a couple of websites that you can use to calculate all of these costs so you don’t have to use a calculator.
Until then, read this fascinating article on the psychology of “Pricing experiments you might not know but can learn from”
So now that you had a partial glimpse of what it takes to price your items, what do you think about pricing? Not scary, right? I didn’t think so. If you have any comments or questions, please leave them in the comment box below. Someone else might have the same question.
First image: Dewey Decimal Necklace by ecokaren