Professionally pricing your handmade jewellery, craft or independent design products isn't easy: I know all about it! It can take a lot of learning, testing, agonising and refinement to get it right. And it most likely will involve groaning, sighing, teeth gnashing and eye-rolling along the way.
As an Australian jewellery designer I've spent over 25 years in the business of designing, making and selling silver jewellery and gold jewellery. I've put in a huge amount of time when it comes to pricing handmade craft and independently designed products. I've made plenty of mistakes along the way and it took quite a few years before I hit on a professional pricing method that actually works.
It frustrates me when I see other artisans and designers who seem to be struggling to get it right. I truly believe that it's in all of our interests that people running small and/or handmade businesses are able to thrive and continue doing what they do. And that's why I've written this article.
Let me help you
If you're stuck trying to professionally price your work, I'm here to help. In this article I'll be sharing step-by-step some of what I've learned about the process of establishing a robust and professional pricing method.
It's a bit involved and will take effort on your part, but as my husband says, "If it was easy, everybody would be doing it". If you put in the hard work up front and spend time figuring out what will work for you, then it's a method that will reward you for years to come.
Why pricing matters
Emerging artisans and designers (and plenty of established ones) often find pricing their work to be daunting. Lots of emotion gets tied up when it comes to selling things we have created ourselves - and that's not always a good thing.
This often results in emotion-based guesswork or resorting to overly simple pricing methods that get touted around the place. Basic formulas such as 'materials + labour x 2', will result in you operating in the dark, hoping for the best and probably coming nowhere near what you need to be earning to continue doing what you love.
Poor pricing cannot be overcome by selling more: that will just send you broke faster. However, making enough money does also mean selling enough products at the right price. That's all down to whether there are buyers for what you do, how you go about marketing, where you sell and other issues, which are a whole other discussion. I encourage you to do your research on them.
If you're an established designer, you know your products are good and you feel you're selling well, but you're still struggling to make ends meet no matter how hard you work, then your pricing is almost certainly the problem: and it's time to do something about it.
If you're just getting started, then having a good pricing framework in place up front will save you a world of pain later. So spend time on setting up a suitable method, tweak it as needed and then get on with creating excellent products and marketing them to people who will want to buy them.
A note about ethics:
If you're making things to sell purely as a hobby and don't need to be making a profit, then keep in mind the ethics of undercutting the prices of people who do need to make a living from similar work. This includes artisans and designers whose work you love and who you would miss if their businesses weren't around in future.
Rather than training customers to expect handmade or independently designed products to be sold for prices that aren't sustainable, I encourage you to still make the effort to price your products professionally. If you don't need the money, then you can always donate any profit to a good cause.
By the way, if you're generally interested in running an ethical small business, here's a handy ethics guide from an organisation I worked for in a past life.
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Let's get started ...
I strongly recommend using a spreadsheet application to help with this process and spending time to learn how to use it if needed. If you don't have a spreadsheet app, I highly recommend OpenOffice or Google Sheets, both of which are free (we use both in our business every day). Be sure to save your spreadsheets so you can find them later as you're likely to want to revisit them and finesse them over time.
1. Paying yourself:
You might not be able to do this right now, but ultimately your business needs to account for paying you a realistic wage which reflects the amount of time you spend working in it, including covering tax and related costs.
If this makes you uncomfortable, think about how much you would need to pay someone else to do the work you do in your business. Also think about how much you’d expect to be paid if you were employed by someone else doing the same work.
Remember: you're just as entitled to earn a living wage from what you do as anyone else. Just because you love what you do, doesn't mean you shouldn't earn a viable income from it.
Actually extracting a wage from your business can be complicated. Sometimes you'll be able to afford it and other times it will be harder, especially if you're starting out or if you're experiencing growth and need cashflow. You might also be making a loss in your business and be in a position where you can offset the loss against other income. These are matters that only you can work out for yourself and your specific business situation (perhaps with the help of an accountant).
However, to build a sustainable business in the long term you must factor labour into your pricing or you'll come unstuck. If you start out accounting for your time - even if you don't take the money initially - you'll be pricing your work much more appropriately from the outset.
How do you work this out? Here are the steps ...
Step 1: Calculate your initial hourly rate
There's a very simple method to determine what your basic hourly rate should be, but this is just a starting point: if you follow the steps below you'll most likely decide to adjust it later in the process. If you're not sure about any of these numbers, just take a stab at them to get started. You can always go back and reassess.
Now get out your spreadsheet or just pen and paper:
- Enter the gross annual personal income that you'd like to generate from your business (or that you think it should generate for the time you intend to spend).
- Enter how many weeks a year you intend to work in your business (allowing time for holidays, etc.).
- Estimate how many hours a week you expect to spend working in all aspects of your business (not just making things).
- Divide the annual income figure by the number of weeks.
- Divide that figure by the number of hours per week.
- That's your starting point for your hourly rate: make note of it.
Have a think about whether your initial hourly rate looks appropriate. As an extreme example, let's say you really want to make $500,000 a year in personal income but you only intend to work 5 hours a week for 48 weeks a year. The calculation looks like this:
- $500,000 / 48 weeks = $10,416 a week
- $10,416 / 5 hours a week = $2,083 per hour (ouch!)
If the above was my initial hourly rate calculation, I'd be having a bit of a rethink before proceeding.
I'd be doing the same if my hourly rate came out too low: lower than minimum wage is a clear sign that you're seriously undervaluing your time - and that of the other designers who do similar work.
Step 2: Determine your 'non-chargeable' time
This is a key component of pricing, but it's entirely missed by most simple pricing methods, which generally only look at the amount of time spent to create a finished product.
I've been in this business for many years and I can tell you that I spend a very large amount of my time doing all sorts of other work which isn't about creating products for sale. This work is absolutely essential and it still needs to be accounted for.
Your 'non-chargeable' labour is all of the general work done in your business: it's not time you've directly spent making an individual product to sell. This is labour that can't be directly charged within an individual product price, which is why it's called 'non-chargeable'.
This type of work includes things like: marketing, bookkeeping, customer service, photography, designing, research, website updating, sourcing components, selling at markets, packing and posting, etc..
To calculate it, simply estimate how much of the time you've allotted for your business each week that you'll spend doing this sort of work. This will probably vary over the course of a year, but calculate it out to an average number of hours per week.
Make a note of this figure. Again, just take a stab at this if you aren't sure and come back and adjust it later.
Step 3: Determine your 'chargeable' time
Your chargeable labour is the work involved in producing each finished product that you create to sell: it's the time spent on a piece to the point that it's ready to sell. It doesn't include initial design work unless you make one of a kind products.
This labour can be directly charged within the price for each individual product and it will vary from one product to the next, which is why it's considered 'chargeable'.
Go back to the number of hours you expect to be working in your business per week. Take out the number of hours you estimated above that you'll spend on 'non-chargeable' work. The remainder should be how much time you expect to spend creating individual products for sale in your business. Again, average it out over a year if your workload varies over time.
Adjust your two numbers if they don't look right, then make a note of them. If you've found that your initial time estimate per week is way off, then change it and recalculate.
Now you have your estimated chargeable and non-chargeable hours per week, which should add up to the total number of hours you expect to spend in your business weekly.
Step 4: Determine your final hourly rates
Now go back to the basic hourly rate you calculated above and think about the two components of your labour:
- Is the initial hourly rate a good fit for the type of work you do in the non-chargeable time you spend in your business? How much would you expect to be paid if doing this work for someone else? How much (gross) would you pay someone else to do it for you?
- How does the hourly rate look in relation to the labour involved in finishing a product to sell? Do you value your expertise more highly than the rate reflects? How much would you need to pay someone else to do that work?
- Adjust the hourly rate for each of the two components of your work until the balance feels right.
- Be sure to check your figures so that the hourly rates x hours worked per week in each area still add up at least to the gross income you're hoping to make (if they add up to more and you think that level of income is achievable, then adjust that figure and go for it).
Of course you can adjust your hourly rates at any time: this is just a method to help you come up with realistic amounts, based on your own life and current circumstances. I suggest revisiting them annually.
For now, make a note of the hourly rates you have determined for both chargeable and non-chargeable work: they're important and you'll be needing them again later.
2. Break-even analysis:
A major step towards professional pricing is to do a 'break-even analysis' for your business. This is a critical step that many simple pricing methods miss entirely or get wrong. I'm sure there are a lot of ways to do this, but below is what works for me.
What on earth is a break-even analysis?
Your business must cover all of its costs: not just materials and labour, but its overheads as well. Every tool you use, every advertisement you pay for, every business card you have printed, your internet use, electricity, etc. must ultimately be paid for by your business turnover.
A break-even analysis will help you figure out at what point your business will be able to cover all of its costs (ie. break even) and start to make a profit, which is what you need to be aiming for over time.
Even if your business isn't profitable now, you need to work towards it or your business won't be sustainable. To do this you need to have a good idea of what your costs are, how they should be incorporated into your pricing and at what point you'll become profitable. And that means doing a break-even analysis.
It's not an easy process, but it will reward you if you put the work in.
Let's get started ...
Step 1: Calculate your annual non-chargeable wage
Take the non-chargeable hourly rate that you calculated above and multiply it by the number of hours you've estimate you'll spend on this work each week. Then multiply that by the number of weeks you plan to work per year.
Here's a basic example:
- 10 hours per week x $30 per hour = $300
- $300 x 48 weeks = $14,400 per year
That total amount is the first of your overhead figures, which you'll finalise in the next step.
Step 2: List your overhead expenses
Make a list of all of the overhead expenses which must be covered by your business.
These should not include anything relating to the costs for individual products sold (also known as cost of goods sold or COGS): your chargeable labour, shipping costs for sending orders, cost of components or manufacturing, etc. should not be included in your overheads.
Instead your overheads are all the other costs that cannot easily be accounted for in pricing for individual items. To give you an idea, the following would be included:
- Non-chargeable wages (the figure calculated in step 1 above)
- Rent/mortgage (perhaps a portion if you are working from home)
- Office supplies
- Internet connection
- Business travel and vehicle expenses
- Replacement costs of tools & equipment (eg. if you expect to replace your computer every 4 years, put in a quarter of its replacement value annually)
- Accounting costs
- Fees for running an online shop
- Consumables (for a jeweller that could include flux, solder, pickle, etc.)
- Estimated tax on any profit
- … and every other business overhead you can think of
Step 3: Calculate your annual overheads figure:
I recommend setting up a spreadsheet for this step and save it so you can update it as needed. Put your list of overheads into the first column. Label the next 4 columns: weekly, monthly, quarterly and annually.
Then enter the amounts of money each overhead costs at whatever the relevant interval is. If you pay your online store fee monthly, put the amount into the monthly column. If you pay your accountant once a year, that goes into the annual column. Make sure the non-chargeable wage figure you calculated above is included in the annual column.
You're likely to need to estimate many of these costs, but that's fine: just try to be realistic and remember that you can adjust the figures at any time. The aim is simply to get yourself a reasonably reliable number to work with when pricing your products.
Once you're done, add up each column of numbers and on the next row multiply each figure out to be an annual amount (so weekly x 52, monthly x 12, quarterly x 4, annually x 1).
Finally add up all of the annualised figures into a grand total: that's your overheads cost for each year. Make note of it.
Step 4: Decide on a profit/contingency amount
Profit (beyond the wages you've already calculated) is an important element of growing your business. I recommend coming up with a figure to add in to your calculations.
It doesn't have to be a large amount if you're not ready for that. If nothing else, a profit figure will give you a buffer if anything goes wrong, so you can also think of it as a contingency. It could go towards covering missing deliveries, breakages, theft, unexpected fees, illness, economic downturn, your figures not quite panning out as expected, etc.. We all need some room to move when things go wrong or change and even a modest profit figure will help.
It could also be an amount you would like to have in your business in order to grow it. This is a complex issue to think about and it goes beyond the scope of this article, but it's something that's worth looking into as your business grows.
Come up with an amount that you would like to make as a minimum profit and/or contingency for the year. You could also come up with figures for both profit and contingency if you prefer.
Also make note of this figure.
Step 5: Add the profit to the overheads figure
This is the simplest step of all: get your annual overheads figure and add your annual profit/contingency figure.
This final number is the amount of money you need to make each year on top of your direct costs of goods sold in order to break even and make the amount of profit/contingency you've decided you need. This is a key number, so make note of it.
Step 6: Determine a suitable margin percentage
Now we're getting into the nitty-gritty of your break-even analysis - and it's complex, but it will pay off if you invest some time and thought into it.
Again, this is a key part of pricing that simple methods completely miss. If you don't factor it in, there's no way you'll be covering your basic operating costs, let alone making any profit. So it really is important.
To earn enough to pay for your business overheads plus the profit/contingency figure, you need to determine a margin percentage to add to the costs of goods sold (eg. labour + materials) of every item you sell. The margin is where you aim to break even and start making a profit.
You'll use the overheads and profit/contingency figures you've calculated above, along with an average product cost to decide on a margin percentage.
Let's get into it ...
a. Work out the average cost of your products:
Hopefully you've already set up a spreadsheet to keep track of the costs of your products as this will make it easier to work out the average cost for each. Otherwise just do your best to estimate what this is likely to be based on what you know now. You can always revisit these figures and adjust them.
These costs include your materials, any processes you use, your chargeable labour and any other costs that you directly include in the price when you sell each item.
I'll cover setting up a pricing spreadsheet (or improving it if you have one) in part 2 of this article, so stay tuned.
When doing this I add up the total costs of a decent cross-section of products our business sells fairly often. I then divide that total by the number of products I've included in the calculation. This is my average cost price per unit. It doesn't need to be perfect: it's to give you a ballpark figure to work with.
b. Factor in a margin percentage:
To get started, let's use a low margin of 40% and an average per product cost price of $10.00. To calculate your 40% margin on your cost price:
- Write 40% in decimal form: 0.4
- Subtract 0.4 from 1 = 0.6
- Divide your average cost price ($10.00) by 0.6
- Minimum selling price = $16.67
- Selling price less cost price = $6.67 profit
So if a 40% margin is what you're using, then you should sell a product with an average cost of $10.00 for no less than $16.67 (before taxes). This leaves $6.67 to cover your profit and overheads.
These calculations might seem a bit like Voodoo, but they do spit out a baseline average price for your products that you can work with. That decimalised version of your margin (0.6 in the above example) will be a very key number in your pricing structure.
Before putting the number into your pricing spreadsheet, you need to look at how it pans out in your business and if this margin is going to work for you - chances are that it won't. So, onto the next step ...
c. Work out the number of sales needed in this scenario
This is likely to be the point where you realise that the 40% margin you've started with really isn't going to be high enough.
- Get your total overheads + profit/contingency figure.
- Divide it by the profit dollar amount you calculated above.
- This number tells you the volume of units you have to sell each year at the average minimum selling price in order to cover your costs, break even and start making a profit.
- Annual overheads + profit = $30,000
- Average per product profit = $6.67
- $30,000 divided by $6.67 = 4,498 units per year
Does the figure of 4,498 units per year look do-able to you? That's about 87 individual products made, sold, packed and shipped every single week in order to break even and start making a modest profit.
Of course your specific product types, overheads + profit and your average cost per item might make these figures look fine. But assuming they don't then it's time to ...
d. Go back to your margin percentage and adjust it
This is the point at which you can (finally!) have some fun with your figures to see what will work for you. It's where your hard work getting to this point starts to pay off. So here's the deal ...
I work with a spreadsheet and have a column for each percentage scenario I want to look at. I might start at 70% and go all the way up to 99% (the maximum which will work for a margin percentage). I calculate out the retail prices at different margins and figure out how many units at that average price I'd need to sell in a year to break even.
Don't forget to do the bit of Voodoo above to get a decimal representative of your margin percentage: for example, 72% would be 0.28, which is the number you'll divide your average cost by.
To make this even easier, you might prefer to use this online margin calculator, which is a very useful tool. Here are some ways to use it:
- You can enter your average cost and the margin percentage you're testing to see what the retail price and profit look like.
- Or you can enter an average cost and your preferred retail price to see what the margin percentage and profit come out as.
- Alternatively, enter your average cost and the amount of profit in dollars you'd like to make to determine the margin percentage and retail price.
You'll then need to use the profit dollar amount to work out how many units you need to sell per year to break even for any given margin:
Overheads + profit / profit dollar amount = number of units
The trick is to balance what you think looks right as the minimum selling price for your product with how many units you would need to sell to make enough money from this average price to break even. Don't forget that you might need to add sales tax, VAT or GST to your minimum price and you may also need to factor in wholesale (more on that below).
Once you've found a sweet spot, that's your final margin percentage which you'll use to mark up each product after you've calculated the chargeable costs. Again, you can always go back and adjust it later.
Make note of this important number as it will need to go into your pricing spreadsheet (more on that in part 2 of this article). You'll divide your total costs by the decimal version of this number to factor in your margin for each product.
If some of your products cost considerably more to make than others, you might want to have two or more different margins. For instance, we make products in solid gold, which is a very expensive metal: we use a smaller margin for those products. If you're in a similar position, you need to do the calculations, estimate what you'll sell of different types of products and make sure your margins will work to cover your overheads and other costs.
Step 7: Wholesale vs retail pricing
Once you’ve settled on a margin percentage that you’re happy with, you'll use this margin to determine the minimum price you will sell each product for. But you still have more thinking to do if you wholesale your products.
If you sell your work at wholesale and make a fair bit of your income this way, then this minimum selling price is likely to be your wholesale price. From there you would most likely double the price (or whatever works for your business) to reach your minimum retail price for selling directly to customers.
This might seem scary, but if wholesale is a big part of your business, then it is realistic: your wholesale prices must still contribute to your overheads, profit/contingency, labour and materials. And your retail prices should generally be about double the wholesale price so that there is room for your retailers to make a profit too.
If wholesale is a small part of your business, then you might like to come up with a smaller margin for wholesale which covers a smaller proportion of your overheads + profit, while having a larger margin for retail. As long as you've done the calculations and fee confident that you're likely to make enough money over the course of a year to break even, then it's all good.
If you really don't like what you're seeing in these figures, then maybe it's time to reconsider if wholesale is a viable option for your business. More on that in part 2.
Go to part 2
That's the end of part one of this article. Go over to Professional pricing for craft and design (part 2) to continue. It covers:
- Putting this into practice with a pricing spreadsheet
- What to do if your prices look too high
- How to refine, adjust and evolve into the future