You've made your products and you now want to start selling - how do you figure out how much to charge? We show you how!
This is often one of the hardest parts of running a craft business - once you have made your product, how do you know what to charge for it? If you set the price too low, you might be actually losing money by the time you factor in all costs of production - so this is really one of the most important things to get right.
Calculate your Production Cost
This is often one of the most tedious tasks to do and requires good bookkeeping practice, so many professional craftspeople unfortunately often choose to ignore this method. However, calculating exactly how much it cost you to make the item puts you in a much better position to know how much to charge for the end finished product as you will know the minimum possible price you can charge before you will make a loss on your product.
The key formula you'll need to use to calculate your prices is:
Total Material Costs + Labor Costs + Advertising Fees + Postage + Misc. Other Expenditure = Base Production Cost
Calculate your Manufacture Costs
First, make a list of every consumable material that you have used to produce the item - let's call this your "recipe". For each material in your recipe, calculate your manufacturing unit price for each: this can be calculated by averaging all your purchase history for the material and converting it to a suitable unit of measurement (e.g pounds to ounces).
Tip: Don't forget to include "hidden" costs like shipping and taxes that you paid for the material into your unit prices, or you will be underestimating your costs of production.
Once you have your average material unit price, calculate exactly how much you used up in producing your product and multiply this by your manufacturing unit price.
Tip: Don't want to do all these calculations yourself? Craftybase handmade inventory software allows you to enter in your complete expense history and recipes, and will automatically tally this calculation for each of the products you sell.
Calculate your Labor
One of the biggest mistakes craftspeople make in figuring out this cost is to ignore their own labour costs - it's very important to include the costs of you making your product, so set an hourly rate that you would like to be paid as part of the figure. Alternatively, you can leave this out and calculate a profit margin on top of your production cost that equals what you would like to be "paid".
Once you have your base production cost, you can now determine what sort of markup you would like to add to your item. Markup is defined as the amount added to your cost price to arrive at a selling price and is a commonly used technique to use in determining how much to charge for your products.
Markup can be typically be defined as a percentage – a markup of 100% would be cost price x 2, for example. The best way to illustrate how pricing markups work is with via an example:
Jane makes a scarf and it costs her $29 in manufacturing costs (materials and labour). She would like to add a markup of 150% in order to arrive at her final selling price. Applying the markup percentage results in $72.50 as the suggested selling price ($29 × 2.5 = $72.50).
It is important that you use profit margin and markup properly – a markup of 150% does not work out to be a profit margin of 150%. In the example above, the profit margin would be 72% ($43.50 / $72.70 = 60% profit margin)
Tip: If you sell on Etsy, our handy Etsy Pricing Calculator will calculate your suggested price based on the markup you select and will also factor all fees payable on the transaction.
Do your research!
One of the last things to do is to look at your competitors that sell similar items - what are they charging? Is your item better made or a better quality than theirs? You might be able to charge a premium over their price for this. Have you created something unique and different? This is another opportunity to sell your products at a higher rate.
Experiment & Tweak
Don't be afraid to experiment with your pricing - if you feel that it might be too high and your sales are slow, you can always adjust and see if sales pick up (just remember not to go under your Base Production Cost as you will be losing money on each sale!).
Likewise, if you notice that your prices are significantly under your competitors - try increasing them. Studies have shown that many people tend to equate quality with price and are thus prepared to pay more.
Don't be afraid to experiment until you find prices that work for you!