Flip the sign of your crafty business to OPEN! One of the trickiest steps to starting your own business is learning how to price a product, but our easy formula can help. Let’s get down to the nitty gritty of pricing your creative makes.
When crafting is just a hobby, you probably don’t worry too much about the cost of your materials. When it’s a business, however, keeping control of your costs is paramount – and until you know exactly what your costs are, you can’t work out how much to sell your products for. Find out how to price a product by reading our info and pricing formula below.
Working Out Your Cost Price
Your cost price is how much it costs you to make one item in your range. There are a number of elements to consider.
List absolutely everything you use to make each item, from rolls of fabric right down to the tiniest snap fastener or scrap of ribbon.
This is the thing that makers seem to struggle with most. How long does it take you to make one item and how much are you going to charge for your time? Say, for example, you can make two necklaces in an hour and you want to pay yourself £15 an hour, then the labour cost for each necklace is £7.50.
In accounting jargon, both raw materials and the labour costs of making your goods are known as ‘variable costs’ – because the amount will go up or down depending on how many items you create. You may also see this figure referred to as COGS or ‘cost of goods sold’.
You also have to consider your overheads – things like rent on your workshop or studio, any equipment you need, phone and Broadband, the cost of electricity and other utilities, insurance, marketing materials, labelling and packaging and so on. You need to cover all these costs to ensure that you are not operating at a loss. These are known as ‘fixed costs’ – they remain the same, no matter how many or how few items you sell.
Calculating your costs
Divide your fixed costs by the number of units you expect to create and sell over the same period of time. Add that figure to your variable costs, or COGS, and you know the true cost price for one item.
For example, say your raw materials and labour costs for one item come to £5.70 and you think you can make and sell 300 items in one month. Your fixed costs (overheads) come to £800 per month. Divide £800 by 300 and you get £2.66. Add £5.70 and £2.66 – this comes to £8.36.
This covers all your costs (assuming you sell all 300 items) – but all you’ve done is break even. To make a profit you have to add a mark-up to each item.
Setting A Price
How much more should you charge over and above your cost price? You might come up with one price that works when you’re selling for cash at a local craft fair. Sell the same item via an online portal such as Folksy or Etsy (see page 115, Mollie Makes Making It!) or from your website using PayPal, and you will also have to pay a small transaction fee on each item – so you make slightly less profit. Shops and galleries have to make their own profits, so they will buy from you at considerably less than the price you charge when you sell direct to customers.
Generally, you should aim for at least a 100% mark-up – that is, double the cost price. Ideally, multiply the cost price by 2.4 or 2.5. Shops vary, but most will work on the principle of a x 2.4 or x 2.5 times mark-up on what they pay you – so if you sell to them at £10, they will sell the item on at £24 or £25. (Bear in mind that the extra £14 or £15 is not pure profit for the shop: they have their own overheads – premises rental, staff costs etc. – to cover.)
Another approach is to work out what you think you can sell the product for and work backwards to see whether that gives you the profit margin you need – but you still need to know your costs in order to work out if you’re making enough.
Allowing shops to order from you in bulk means you may sell more but at a slightly lower price per unit. Weigh up how much profit you’re set to make and look at setting up a minimum order, whether it’s for ten items or 100.
Make this work for you and don’t be afraid to negotiate with the buyer – it’s important to ask yourself if you feel it could be the start of an ongoing relationship or whether you foresee it as a one-off. Larger stores with a more established reputation may wish to place a small, introductory order to test the waters – if you’re happy with this and feel it will benefit your business, don’t be afraid to give it a go!
In addition to your cost price, looking at what your competitors charge is essential and a useful exercise to see where your brand sits in the wider world. However, you don’t want to pitch your price too high and price yourself out of the market; equally, there is no benefit in undercutting a competitor’s price if you end up selling more but making less profit. Much of this comes back to your original market research and your product’s USP (see page 13, Mollie Makes Making It!). Customers who buy handmade products expect quality and this should be reflected in your prices: a premium product will justify a premium price tag. Price something too low and your customers may feel that it is not of the finest quality or craftsmanship.
Ongoing Pricing Considerations
Once you’ve got your cost, retail and trade prices set, you’ll have a much better idea of how to plan ahead and know exactly how much you need to sell to make your target profit. Monitor these regularly. In particular, keep your eye on the cost of your raw materials, as this is a key cost that must be accounted for if you are to grow your business year on year.
Try for yourself
Select one item from your range and work out the cost price. How much are you currently selling it for? Taking into consideration the time it takes you to make it, are you making a sensible profit? One of the most common mistakes people make – especially when they’re just starting out and selling occasional pieces to fund their hobby – is to underprice their work. We’re just so thrilled that someone – anyone! – actually likes our work enough to buy it. Do you need to adjust your own pricing structure?
Make pricing work for you
• Develop a pricing formula that works for you and stick to it.
• Be aware of price changes – both in the cost of your raw materials and in the wider economy. These will both have an impact on your profit and loss.
• Your pricing must always reflect your quality. If you make any products that are less than perfect, be sure to declare it. It is perfectly acceptable to sell these as ‘seconds’ at open studio events, for example.
Craft pricing calculator
Here is an example of a pricing formula used by crafters:
Supplies + Your time = Item cost
Item cost x 2.2 (up to 2.5, depending on how much you want to mark up) = Wholesale price
Wholesale price x 2.2 = Retail price