In part one of my Professional Pricing article I covered how to calculate your wages, how to determine your annual overheads and how to come up with a mark up percentage to cover these costs in your product prices.
If you've missed that part of the article go to Professional Pricing for Craft and Design (part 1).
Part 2 will cover: putting what you've learned into practice, what to do if your resulting prices are too high and how to refine and adjust into the future
If you're ready to finalise your pricing formula and put it into practice, then read the continuation from that article below
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3. Putting this into practice:
This can all seem a bit daunting but in practice it's really not, provided you're willing to spend the time on setting it up to get it right.
The hardest part is getting the figures worked out to begin with and from there it's a matter of putting it all into practice and updating it as needed (ideally annually).
Best of all, you can be confident that your pricing is reflecting the true costs of running your business and the true income you need it to bring in.
It’s a great idea to set up a spreadsheet to help you with calculating pricing - and learn how to do so if you don’t know already. You’ll find it will make your life considerably easier.
Step one: Determine your product costs
You need a way to keep track of the costs of your materials and time for every item you make, whether finished pieces or components. Remember that your labour rate is determined by the calculations in the previous article and you should multiply this rate by the time spent to create each product.
You don't have to redo your product costs calculation each time you make something if you make the same designs repeatedly. Just try to keep your figures up to date with changes to your costs as time moves on.
Add your materials and chargeable labour together for one item you make and you have your base cost for that particular item. Rinse and repeat.
Step two: Add in the mark up margin
You then need to add on the mark up margin percentage you have decided upon in part 1 of this article to come up with your wholesale prices.
From there you need to add the additional margin you've worked out for your retail price.
Don't forget to add any sales tax or GST you need to collect if appropriate. Also don’t forget to also take into account any other costs which are not paid for separately such as selling fees, etc..
These sums will give you your minimum selling price for both wholesale and retail for each individual product you sell.
Step three: Finalising your prices
Once you have your minimum price for a product you can make a judgement about what people will actually pay for each item or 'what the market will bear'.
Ideally this should be no less than the minimum figures you have come up with, unless you think lost margin on one item will be made up for by other items which you can sell for a higher margin than your minimum (these items are called 'loss leaders'). Flexibility is always good!
It’s also a great idea to round out your figures to whole dollar amounts to make them more attractive and easier to manage, especially for retail prices.
4. OMG - the prices are too high!
If you believe that the market won't bear the prices you've come up with based on the above method, then some serious thinking is required:
- Have you gone back through all of your calculations to make sure they're correct and you haven't missed anything?
- Are you being realistic? Maybe the market really will pay what your item is worth. Make sure it's not just you who is under-valuing your work.
- Is there any way you can streamline your costs and labour without being worse off?
- Is wholesaling not a realistic prospect for your business and should you take the extra margin out?
If you're still finding that either your average retail price is always too high or the volume of sales you need to make is too high, then you need to take a big step back and consider whether you have a much bigger problem.
Perhaps the market for your product simply isn't strong enough for it to work or perhaps your business needs to be a lot more scaleable than it is to make enough products.
If your price model is indicating these sorts of problems exist in your business, then under-pricing and hoping it will work out in the end isn't the right strategy. You need to have a big re-think about what you're doing.
Choosing to make an initial loss
If you decide that initially you're happy (and can afford) to make a loss while you establish your business, then that's fine - many businesses consciously start in this way.
But you should always intend to up your prices to where they need to be as soon as you can or your business will most likely fail. By using a professional pricing method you'll always know where you need to be taking your prices in future even if you're not ready to yet.
5. Making adjustments:
Continuing to adjust and refine your pricing is a very important thing to do. Prices change, your business needs change, your products change - you need to keep an eye on these things and factor them in as needed.
Do your best to keep track of key changes and you can then go back at any time to revisit and adjust your calculations. Don't spend too much time obsessing over this as minor fluctuations probably won't make a lot of difference, but do keep an eye on it.
It’s a great idea to schedule time to do this at least once a year to make sure you’re still on track. I always do this work in January or February when my business is quiet.
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You might also be interested in reading more about why pricing matters in this article: What it means to truly support indie designers.
A short version of this article was first published in Filings, the quarterly newsletter of the Jewellers and Metalsmiths Group of Australia - NSW (JMGA-NSW) in July 2007.