This is part 25 of our series: 31 DAYS of Setting Up Shop! You can find the entire list of days, in order, on our Setting Up Shop Index Page. I'll add each new entry to this list as it is published.
Pricing is something that many creative business types have the hardest time with. You have to value the time you spend on your work, but you also have to present your customers with a product that is affordable.
There is a formula floating around the internet that looks like this:
I tried to find the original source for this, but could not.
I have to say, I do not like this over-simplified formula. For most handmade items, this formula makes your items way too expensive, and here's why.
The average person is not going to be able to make enough product at a low enough cost to wholesale it to a retail company. That's because most of us are paying retail for our supplies. Our materials are too expensive for this formula.
The other thing I don't like about this, is that you are calculating your time twice. If you value your time, and calculate a decent worth for it, you shouldn't need to double it to find your retail price. I find that generally, materials x2 plus time is a good place to start.
But that's just your starting point. You need to know the market for the item you are selling. If you are selling greeting cards for example, there is a definite cap on the amount that someone will pay for it. There are not many customers who walk in off the street that will pay more than $4-5 for a handmade card. Also think about what you personally would pay for your item. I love to give my customers really great prices, so I like to see how I can cut the materials cost or the time spent in order to lower the price, or create a bigger margin.
Oh, what's a margin? A profit margin is how much you make on an item, compared to how much it costs to produce it. If you sell an item for $10, but it costs $7 to make it, that's a 30% margin. Not that great.
But if you figure out how to make that same item for $2, and people are still eager to pay $10 for it, you have yourself an 80% margin. That's amazing. For me, anything better than 50% is awesome. I won't make or sell items with lower margins than that, unless I just really need it to round out a product line.
How to cut the time spent: The last thing you want to do to your product is cut corners to make a "cheaper" item. But I have noticed that the best designs are simple and elegant. So think through your design, and see if there is any way to streamline it.
The second way to cut time cost is to create a production line. It takes me about 2 hours to make a single burlap bunting like this one:
There are a lot of steps...cut the burlap, sew around the edges, pick the letter fabric, cut them out, iron them on, assemble and sew to the string...
But if I make 6 at once, I noticed that it only takes me about 4 hours. By making several at a time, even if they say different things, I'm able to cut the time from 120 minutes apiece to 40! That saves me time, and it helps lower the cost for my customers.
How to cut cost of materials: This is probably my favorite part. It is worth your time to brainstorm about materials and how to source them at more reasonable places. When I started shopping thrift stores for fabric to use in tote bags, my costs plummeted, and my designs got better. It takes more creativity to work with unconventional resources.
Also, if you have a product that is already generating interest and sales, look around the internet to see if you can buy at least part of the materials in bulk.
Lastly, having a production line is yet another way to reduce price of materials. For example, I make these sweater wreaths:
In order to get the best color variation for these, I use between 12 and 16 sweaters in each wreath. Even at used sweater prices, making just one of these would be really expensive. But if I make 4 or 6 of them, the time spent on each is reduced, and the materials cost is spread out over several wreaths. This is one of those items that actually costs less to buy from me ($40) than to make it yourself. I love that!
So what happens if you streamline your time and materials so much that even the above pricing formula shows your price way under market value? This, friend, is the sweet spot. This is your ulimate goal! Find out what others are selling it for, beat their price considerably, and enjoy the big fat profit margin you've created for yourself. It's a win, win, win.