Pricing your handmade craft or design work can be very complex to get right. It can take years of learning, testing and refinement. You'll find it probably involves a lot of groaning, sighing and eye-rolling: I feel your pain.
As a jewellery designer I've spent over 20 years in the business of designing, creating and selling handmade jewellery, so I've certainly put in lots of that time (and I've done plenty of the sighing).
Let me help you
In this article I'm going to share 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 some effort to get right, but it's worth it. And as my husband always says, "If it was easy, everybody would be doing it".
It's certainly a lot better than using a simple pricing formulas such as materials + labour x 2, hoping for the best and almost certainly coming nowhere near what you need to be earning.
This is part one of this article: don't forget to check out Professional pricing for craft & design (part 2).
PS. If you get something out of this article then please do us a favour and share it with your networks.
Why pricing matters
Emerging designers (and plenty of experienced ones too) find pricing their work to be daunting and may have little idea of how to get it right.
Designers can also be led astray by overly simple pricing methods that will ultimately send them broke. If you feel like your prices are okay but you're struggling to make ends meet even when you're selling well, this is probably you.
A poor pricing formula cannot be overcome by selling more volume of poorly priced products. Of course making enough money does also mean selling enough and that's all down to whether enough people want what you create, marketing, distribution and other issues, which is a whole other discussion.
How can you fix this?
It's all a matter of educating yourself and taking the time to get pricing right. The more time you spend getting pricing right the more chance you have of building a sustainable and successful business. And the more indie designers who get their pricing right, the better off our field will be overall.
So let's get started.
It's a great idea to have a spreadsheet application to help with this process, but it can all be done with pen, paper and a calculator if you prefer.
1. Paying yourself a wage:
Yes, your business ultimately must pay you a realistic wage for the amount of time you spend working in it, including covering tax and other costs.
If this makes you feel uncomfortable, think about how much you would need to pay someone else to do the work that you do. Also think about how much you’d want to be paid if you were employed doing the same work you do in your business.
You are just as entitled to earn a living wage from what you do as anyone - even if you love your work. Read about what it means to truly support indie designers.
Extracting a wage from your business is complicated and sometimes you'll be able to afford it and other times it will be harder - especially early on. But for a sustainable business in the long term you must factor your wage into the equation or you'll come unstuck.
How do you work this out?
Step one: calculate your 'chargeable' wages
This might be an area you already know a bit about: working out how to charge for your labour for each item you make. Even if so, read on as you might well learn something new which you can add to your processes.
Your chargeable wage is the income generated by the labour rate included in the price of each each item you make to sell. Every piece you make should have your labour factored into it. It doesn't have to be timed down to the last second - I make an educated guess as to what a piece will take me to finish on average once I have it in production.
Get started on figuring out your labour rate:
- Calculate the annual personal income (on top of the above non-chargeable figure you worked out above) that you need or would like to be earning from your business.
- Determine how many weeks a year you'll work in your business (allowing time for holidays, etc - 48 weeks works for me).
- Estimate how many hours a week you expect to work specifically on making items which you intend to sell. Remember to allow time for all of those other business-related things you need to do - and don’t forget you need to have a life, as well.
Once you've figured those things out, now it's time for some more calculations.
- Divide the annual amount you want to earn from your labour by the number of weeks you intend to work per year.
- Divide that figure by the number of hours per week you estimate you’ll spend actually making work to sell
- The figure you come up with is your hourly rate - or at least a start on it.
As an outrageous example, let's say you want to make $500,000 a year in wages and you only intend to work 5 hours a week making what you sell. The calculation looks like this:
- $500,000 divided by 48 weeks = $10,416 a week
- $10,416 divided by 5 hours a week = $2083 per hour (!)
If the hourly figure you've calculated looks unreasonably low or high (like the example above), then take a step back to the big picture and reassess. Keep doing this until you have a figure you're happy with.
Of course you can always adjust your labour rate at any time: this is just a method to help you come up with a realistic amount, based on your own life and circumstances. Generally I round the final labour rate figure up to a nice round number to make it easier to work with.
Use your final hourly rate figure to calculate costs for your time for everything you make and include it in your spreadsheet or whatever method you are using to add up your direct cost of sales (such as materials and processes for each piece) - see below for how to put this into practice.
Note that this chargeable wage figure does not get added to your overheads (see below). Instead it's factored into your costs for each item you make to sell, so make a note of your hourly rate wherever you do those calculations.
Step two: Calculate your 'non-chargeable' wages
Often designers don't get past their labour rate, but charging for the labour involved in making a piece is just part of the wages puzzle.
Consider the time you spend in your business over the course of a year which is not directly 'chargeable' as part of creating an item.
This might include time spent photographing, marketing, admin work, researching, designing, sourcing materials, packing and posting orders, etc.. All of this time needs to be paid for somehow too - just as it would be in a regular job.
Here's the step-by-step method:
Process for calculating your non-chargeable wages:
- Estimate the number of hours on average per week or per month you think you'll spend specifically on making items to sell.
- Determine an appropriate hourly rate for this work. Asking 'what would I need to pay someone else to do it for me?' is a great starting point.
- Calculate your time estimate and hourly rate into an annual figure based on the number of weeks you operate your business each year (you're entitled to time off too!).
- 10 hours per week x $25 per hour = $250
- $250 x 48 weeks = $12,000 per year
Keep this annual ‘non-chargeable wage’ figure handy as you'll need it for the next stage.
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.
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, etc. must ultimately be paid for by your business turnover.
A break-even analysis will help you figure out when your business will be able to cover all of its costs and start to make a profit (ie. break even), which is what you need to be aiming for.
Even if your business isn't doing this as you get established, you must plan for this to happen in the longer term or your business won't be sustainable.
To do this you need to have a good idea of what these costs are and how they should be impacting upon your pricing into the future.
Let's get started.
Step one: determine your overheads
Make a list of all of the overhead expenses which must be covered by your business.
These should not include items relating to the cost of individual sales (such as materials, your labour making your work, shipping costs you charge to customers, etc.). 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 could be included:
- Non-chargeable wages (see above - this is where you use the figure you came up with earlier)
- Rent/mortgage (perhaps a portion if you are working from home)
- Office supplies
- Internet connection
- Phone charges
- Business-related travel and fuel
- Depreciation of tools & equipment (eg. if you need to replace your computer every 3 years, put in a third of its replacement value)
- Accounting costs
- Estimated tax on your earnings
- … and every other business overhead you can think of
Calculating an annual overheads figure:
If you don't have definite amounts for each overhead then do your best to estimate. You can always return to this calculation and adjust it as needed - in fact it's a very good idea to do so.
I calculate my overheads in a spreadsheet with columns for weekly, monthly, quarterly and yearly as different expenses come in at different times and with different frequency.
Each timeframe column is added up and then multiplied to come up with an annual figure (so: weekly costs x 52 weeks, for instance). I add up the annualised totals for each column and that gives me my total overhead costs for the year.
- Monthly costs total = $500
- $500 x 12 months = $6000 per year
Let's say your total annual overheads figure is $15,000. Set this figure aside for now.
Step 2: decide on a profit or contingency amount
Profit - beyond the wages you have already calculated - is an important element of growing your business. I strongly recommend coming up with a figure to add in to your calculations.
Why is profit important?
A profit figure will also give you a buffer if anything goes wrong or if your calculations are a bit out, so you can also think of this figure as a contingency.
It could go towards covering missing deliveries, breakages, theft, unexpected fees, etc.. We all need some room to move when things go wrong or change, so be sure to factor this in.
Come up with an amount that you would like to make as a minimum profit and/or contingency for the year - or you could come up with a figure for each of these if you prefer.
Let's say you'd like to make $5000 profit/contingency. Also set this figure aside for now.
Step 3: Determine a suitable mark up margin
Now we're getting into some hard stuff, but again, it will pay off if you invest the time and energy into it.
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 chargeable costs (labour plus materials) of every item you sell. This is your mark up percentage.
You'll use the overheads and profit/contingency figures you've calculated above, along with your sales costs to decide on a mark up percentage margin to add to your products so you can break even.
If you don’t add this margin then there’s no way you'll be covering even your basic operating costs, let alone making any extra profit.
Let's get into the nitty gritty.
a. Work out the average cost per item of your products:
Hopefully you're using 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 do your best to estimate it.
The costs include your materials, your labour charges and any other costs that you directly include in the price when you sell each item.
I add up the total costs of a decent cross-section of my products and then divide the total by the number of products I've included. This is my average cost price per unit.
Let's say this figure is $10.00 per unit.
b. Factor in a mark up percentage:
- Just to get your calculations started, give yourself a low mark up margin of 50% - you'll very likely settle on a higher percentage later when you see how this works out.
- Divide your average cost per item by this break-even percentage.
- The answer tells you the average baseline price you must sell your products for in order to cover all of your costs and make some profit.
- Average item cost: $10.00
- Break-even margin: 50%
- $10.00 divided by 50% = $20.00 selling price
- $20.00 price - $10.00 costs = $10.00 overheads/profit
In the above example $20.00 is the average lowest price you should sell each item for in order to cover your chargeable costs, your overheads and make some profit.
The $10.00 overheads/profit figure at the end is the amount you're left with from each sale to go towards paying for overheads and profit. This requires that you sell enough volume of the products to cover the total overheads/profit amount.
c. Work out the number of sales needed in this scenario
This is likely to be the point where you realise that the 50% margin you've started with simply isn't going to be high enough.
- Get your total overheads + profit/contingency figure.
- Divide it by your per sale overheads + profit figure worked out above.
- This tells you the number of units you have to sell each year at the average lowest price in order to cover your costs and break even.
- Annual overheads + profit = $20,000
- Per sale overheads + profit = $10.00
- $20,000 divided by $10.00 = 2000 units per year
Does the figure of 2000 units per year look do-able to you? That's about 38 products sold per week.
Depending on what they make and their market, I think many designers who make what they sell might find selling 2000 units a year a struggle without getting some help to make their products, which will add further costs. And that's provided you could be sure to sell that many to customers.
d. Go back to your break-even margin percentage and raise it
This is the point at which you can 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.
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).
As you increase the mark up margin percentage you'll see your average selling price go up and your units per year go down.
The trick is to balance what you think customers are likely to pay as the lowest price for your product with how many units you would need to sell to make enough money from this price.
Once you've found a sweet spot, that's your final mark up percentage which you'll use to mark up your products after you've calculated the chargeable costs of them.
Step 4 - wholesale vs retail pricing
Once you’ve settled on a mark up margin that you’re happy with, you should then consider this margin as the lowest you will sell for.
If you wholesale your work, then this should be your minimum wholesale margin. From there you should factor in another 50% of margin (or whatever works for you) to reach your minimum retail price for selling directly to end customers.
This might seem scary, but it is realistic: your wholesale prices must still cover 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 the retailer to make a profit too.
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 what you've learned above into practice
- What to do if your resulting prices look too high
- How to refine and adjust into the future
Share this article
If you got something out of this article, then please do us a favour and share it with your networks.
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.