Pricing craft items

Having a system for pricing your goods is a vital part of a crafts business or any business in general. Questions on how to price properly are very common. Sadly, too often the tips on pricing that are offered are either wrong or too general to be called a system.

So in this article I will briefly explain how to price your craft items systematically and hopefully make this subject more manageable. The method presented will work for full time crafters and those looking to supplement their life with some extra income.
Naturally, there is always more to be learned, so picking up a business book or two will complement what you are about to read. Talking to an accountant can also be of great value. Investing in your knowledge always pays for itself sooner than you might think!

Why bother?

So, why even invest time into setting up a pricing system? Why not spend the time sourcing suppliers, making items, marketing and a ton of other things that are vital to a business?
If you don’t set the proper prices that will sustain you and your business then it is not worth it to sell anything.
That might sound harsh, but you can only determine if you are productive in your craft if you can confirm that you are realizing enough revenue to cover your costs.
In my opinion without a system of pricing that is flexible, yet simple, all is for naught. While some work will have to be done, doing it is the grown up thing to do.

 

If you don’t set the proper prices that will sustain you and your business then it is not worth it to sell anything.

When it comes to responsibility, you have quite a few!

There are probably a ton more motivating factors for you to find, but the bottom line is this: If your business survives, you get do it. So, you have a responsibility to make a sustainable business model that will ensure you are not wasting time, money and effort.

 

If your business survives, you get do it.

I hate math!

Well, that hurts maths feelings. But you need to make up, you make a great couple!
I promise that we are not going to look at anything that you can not solve. Addition, multiplication and division is all you need!
Sometimes doing something you don’t like is a must, so you can keep doing what you like to do. Business is that way. Some say you only get to enjoy 20% of an activity. The rest is what is needed to do it. So 80% work, 20% play. It does not matter if you are employed or self employed, CEO or an investor, you probably do not enjoy 100% of what you do. If everything was enjoyable- it would be normal and nothing to write home about.
So, just make sure that 20% is what you are passionate about and that you are willing to work to keep doing it.

Bad practices

Before we begin tackling a sustainable pricing model, I’d like to state a few bad ways of pricing! These may or may not work, using them is honestly nothing more than gambling. So these are a few examples of limited models of pricing:

• the price is cost of materials + 50% (or any other percentage)
• the price is cost of materials + your wage (time * hourly wage)
• the price is determined by your competition
• the price is determined by how much customers are willing to pay

Any of these models and many more are there because they are easy to say. But these are not the responsible ways of making business decisions.

We gonna do it right!

So, enough talking about the problem, let’s talk solutions!
First off, let’s talk some basics. I assume that you either craft part time, full time or as a part of a small company. As such, what you need out of your business is a steady income, a salary.
Consider the three main parts of a business:

So, if you want a steady income, where can you find it? None of these three parts are called „income“ or “salary”. You may be inclined to say: „the profit is my income!“. You are in most cases wrong.
Your income is actually found in the costs part of the business! Your work is a cost to your business! Indeed, you and your business are not the same entity.
So, your wage (work) is a cost to your business, but it flows into your wallet and you can spend it.
So what is profit then? It is any extra funds that are left from your revenue after paying all your costs. It is nice to have, but you can run a small business with 0% profit! Your wage is your income and that is all you need to survive. To thrive though, a profit, even a modest one should be considered.
Profit is nice to have for many reasons, but usually it is investors in the business who worry about the profits. As an employee of your business, you care about your pay check!
Now you may also be an investor in your business in which case you will either want a profit margin big enough to repay your initial investment (a 5% yearly profit after inflation would repay your investment in 20 years- usually not that great). Or you can just look at your initial investment into your business as buying a job. You pay in and you get to create an income for yourself.

More doing, less talking!

So, with all that covered, let’s try to make sense of it all.
Since we are not looking for profit, but a wage, which is included in the costs, we can say that:
The price of the item= costs to make it
By covering the costs alone, you have a sustainable business model! Add a profit margin on top of it (if you want) and you are golden!
The price of an item with a profit margin= costs to make it+profit margin
And here comes the point of this article: the better you define the costs, the more accurate your prices are going to be! Determining actual costs is the most important part of pricing. And also dangerous ground if you fail to account for a cost. So, let’s break down your costs in some detail.

Costs, the setters of prices

Some costs are obvious. Some are not. It is not a bad idea to write down the costs you predict for your business before moving on to our list. Just so you check how well you already know your costs.
In general, costs are divided into variable and fixed costs. The names already imply what they are!

Variable costs

Variable costs are costs of making an item. These should be calculated for each item you make. So, if you make a chair, you have a certain cost to make it. For a table, the costs are going to be different.
The trick to recognizing variable costs is this: „If I don’t make anything, these costs do not exist (they are zero)“. So, if you do not produce any items, you do not have any variable costs.
So, what are some examples of variable costs?

• materials (supplies, shipping for the supplies, import taxes, etc.)
• electricity, gas, water used (while some costs for utilities are usually fixed on a per month basis, the variable parts of these bills are variable costs)
• transportation costs, gas for your car
• replacing tools after they get worn out
• office supplies (printer cartridges, paper, labels etc.)

When you make an item several times you will get data you need. The exact supplies you need, the average time to make the item and so on.

Fixed costs

These costs are often way higher than the costs to actually produce an item (variable costs). Fixed costs are costs that you have, even if you produce zero items.
The list of these costs can be quite long and you really need to think about these and be honest with yourself. Fixed costs can be monthly, quarterly or annual costs. Still, it is best to express them in a per month basis. A few examples:

• rent (office, workspace or storage)
• your salary as an employee of the business- you need your wage every month
• utilities (the fixed part of the utilities- so the part that you pay even if you do not use the utility. These include the water, electricity, sanitation, internet and a bunch of other bills)
• taxes (from property taxes to many other forms of theft- ooops I mean taxes!)
• insurance (health plan, dental plan, business insurance are just a few. In some countries these are mandated by the state)
• pension plan (in some countries you have mandatory pension plans, in others it is just a good idea to plan for it yourself)
• accounting (you can do it yourself, or pay someone to do it. But you need to keep things in order to avoid legal issues- taxes are no joke!)
• legal fees (annual fees for incorporating, doing business)
• car fees (registration, leasing, maintenance)
• sick leave fund (when sick or injured this fund will keep your head above water- calculate this one based on the average number of sick leave days for your country/area)
• vacation fund (if you really want to have a peaceful vacation, then you need this fund. It will ensure you can take a few days off and not work. If you don’t have this cost factored in you will feel as if you are wasting time on your vacation when you should be working. Again I would base this one on the average number of vacation days in your country/area)
• loan payments (needed start up money? Well, you need to pay it off someday!)
• and lastly depreciation- this is a hidden cost many overlook- depreciation is the loss of value of your tools, real estate, car etc. Although rarely looked at by many, depreciation can easily become a big cost (for example in car ownership, depreciation is often higher than any other cost)

Where’s my money? Income!

So, we have covered the costs pretty well and you can now begin a spreadsheet and fill it out.
Where the problem arises is when you try to determine your salary. So how much you should you get paid each month?
The short answer is…it depends. It really does. How much do you need? What is the average salary in your area?
With your rate you need to cover all of your personal expenses (from rent, food, utilities, kids, insurance, travelling, taxes, savings etc.). So what do you do?
Simply calculate your yearly personal expenses and express them in a per month basis (so divide by 12). So that is your monthly rate/salary. Now decide how many hours you are going to work (taking the average in your area is again a good bet). Finally, divide the monthly total with the number of work hours you will work to get an hourly rate- this one is just so you know how much each hour of work is worth to you as an employee.
Yay! We now know the following:

Bringing it together

So, now in a few simple steps we are going to get the final price for your item.

Firstly determine the monthly fixed costs:
Express your fixed costs in an hourly format:
Hourly fixed costs= fixed costs/number of monthly work hours

Secondly determine the cost to make an item (so the variable cost):
Variable costs= materials, transportation

Thirdly, determine the time needed to make and process an item.

The price of an item you make will therefore be:
Price of an item= (hourly fixed costs*time needed to make an item)+variable costs to make an item

Calculating the costs in practice

While the above equations should be simple enough, it is best to see a practical example.
So, let’s use a detailed list of data to determine the cost of making a…let’s say a paracord bracelet.

Variable costs

The variable costs are the costs related to producing an item.
Let’s say these are the variable costs:

• materials (paracord, buckles)
• tools (scissors, lighter, jig)
• packaging and label

Let’s say these are 2$ total.

Fixed costs

The fixed costs are the costs that you have even if you do not produce any items, usually annual, quarterly, or monthly costs.

• rent (workspace)
• your salary
• utilities (electricity, water, internet)
• taxes (property tax, payroll taxes etc.)
• insurance (business insurance)
• pension plan
• legal fees (incorporation and other fees related to operating a business)
• car fees (registration, leasing, maintenance)
• accounting (an outside accountant)
• sick leave fund
• vacation fund
• loan payments

For your salary let’s say you are a modest person and can get by with a 1500$ monthly salary and that the rest of the fixed costs run at about 2000$. You calculated that by gathering all of your expenses you predict each month (even those that do not occur each month).

Time

We now calculate the time to gather the supplies, make the item, package it, label it and send it out. Let’s say it takes us half an hour for one item, our bracelet- 30 minutes.
We also calculate that we should work 180 hours each month based on the average work hours in our area (later on we can modify this number).

Calculating the price

So, now the moment of truth. How much should a paracord bracelet cost?

First our total monthly fixed costs:
Fixed costs= 1500 (salary)+2000 (other fixed costs)
Fixed costs=3500

Then our monthly fixed costs expressed on a per hour basis:
Hourly fixed costs= Fixed costs/hours worked per month
Hourly fixed costs= 3500/180
Hourly fixed costs= 19,44$

We know that our variable costs (materials, packaging, label) come out at 2$ and that we need 30 minutes (0.5 hour) to make an item. Therefore:

Price of an item= (hourly fixed costs*time needed to make an item)+variable costs to make an item
Price of an item=(19,44$*0,5)+2$
Price of an item= 11,72$

So, at 11,72$ for our paracord bracelet, we have covered all costs and our wage. Our business is operating on a 0% profit margin. If you want, let’s say a 20% profit for your business you would add 20% on top of our price.
Price of an item with a 20% profit margin= price of an item*1.2
Price of an item with a 20% profit margin= 14,064$

In conclusion

While there is always more to be said, this model should give you a clearer idea of how to calculate the prices of your craft items in a sustainable way. Give yourself and your family a break and do your homework so that you can ease any stress coming from your financial situation.
And what if you find out the price of the item is too high and the competition can do it cheaper or that the customers can’t afford that? Either reduce the price by reducing your costs or focus on making another item with a better chance of a sale.
Other than that, dedicate some time each month to reading literature regarding business. I can personally recommend the Rich dad series of books by Robert Kiyosaki, they are a great way to begin tackling various aspects of business. You can never read too many books, as long as you do it after work :).