How to price your craft items? This is such a common question in the community that it deserves to be covered in a separate article.
I wrote a tiny bit on underselling before, but this time we are going to take a look at how to properly set a price.
So what we are going to do is take a bunch of commonly and less commonly used pricing models and break them down. We are going to take a look at the pros and cons of each, making your decision making a bit easier. I love talking about economics and I encourage you to read this article dilligently and with interest. It is important and it is not about math. It is about making a living.
But first, let’s talk about a few must know terms.
The costs are one of the most misunderstood terms out there.
Often the costs are thought to be the cost of materials used. This is wrong. Wrong, wrong, wrong.
Without taking a serious, honest look at the costs, your life may be very hard.
The actual cost of making an item includes:
- materials used
- work (wage)
- health insurance
- pension plan (if you have one)
- other operating costs (office, internet, electricity)
In fact that is not all. You also need to account for sick leave and vacation. And that cost needs to be included in the products you sell.
Profit is what is left over after you have paid your costs.
Profit= total value of sales – total cost of sales
If working alone, you could call your wage a profit and be done with it, or include the wage into costs and add a profit after that.
Whatever floats your boat, but at least cover your bills and put food on the table :).
Now let’s see a few methods you can use to set an actual price. Note that the terms “cost” and “profit” are as defined in the previous section.
Pricing your goods on the a percentage of the cost
This pricing model is quite commonly reffered to.
When determining the price of the product you take the cost of the product and add a percentage or sum that will be your profit.
As an example, for a 40% profit, you would multiply the cost with 1.4. In practice this would mean:
(10$ cost) times 1.4 would mean the final price is 14$. A 4$ profit.
Pricing your goods in regards to competition
When pricing an item, it is a good idea to take a look at the state of the market you are embarking on. You get the feel for the prices and get the idea of how others do it.
So if your competition sells something at a price, you may want to match that and you are set.
But there is a catch! Two people working on an item have different costs for making the item. These include the materials, but also work time, transportation, insurance, etc.
In short, while one person will be doing ok with a certain price, another will be making a loss!
This is a good way to price when your prices are lower than the competition in order to make extra profit.
Pricing by hourly or daily wage
This is a common way to set a price of a product.
You take the cost of making an item and add the time you used to make an item (expressed in currency). If you work 8 hours for example, you will always earn the same amount.
As you may have seen in the basic terminology section, this view may be a bit limited, depending on what “cost” means to you.
Pricing based on your customers
This pricing model is based on the budget and acceptable pricing in regards to your customers. Basically you are asking “how much are they willing to pay?” and then pricing accordingly.
To make this pricing strategy work, you then need to adapt your costs to the price you are getting. This means you will need to organize everything from the cost of materials and time you have to make an item to reach a price. If you are not able to match the price customers are willing to pay, you can not sell that item.
This is a common sense approach and it works, although it is not seen as often.
Pricing in regards to profit
So, you want to raise a specific sum of money? You have a limited number of items to sell and you know the cost.
Simply divide the desired profit with the number of items you have and add that to your costs. Price achieved!
Finally you can save up for that genetically engineered unicorn! (Sorry, imagination runs wild sometimes.)
Desired profit: 100$
Cost per item: 5$
Number of tems: 20
Price per item= (profit/number of items)+cost per item
Price per item is therefore 10$.
Volume based pricing
Another model that exists, although it may not be applicable in the crafts is to price by volume. Basically, this is usually used by wholesale companies which profit on selling a large volume of a product. This way your total profit is high, but not because of the price, but because of the quantity you sold.
So if you want to supply a retailer or profit from selling a lot, this is a good option to consider.
These are the pricing models that make sense to me. They all work, you just need to stick with one and make it work. As long as you understand the actual costs, setting a price is a piece of cake!
When setting prices, also remember that prices change. Costs change. Nothing is set in stone. But by having a nice, worked out costs sheet you can easily adapt your price when something in the equation changes.
I hope this article helped you, I wish you well,
A quick note on ethics
Although I have talked a lot about profit, I feel that I left a big issue out. Ethics. Ethical pricing means that you take a profit that is socially responsible.
This is something that we overlook too often, for we live in a very materialistic system. But there are numerous examples in philosophy, economy and even religion, that point to the problem of “taking too much”.
We need to be kind to one another and make the world better than what is in our nature (to want more and more). I’ll leave you with that and make of it what you will.