Pricing 101

This is the sheet I handed out at a recent pricing workshop, I wanted to share some ideas about pricing craft products as part of running a crafty business. There are dozens of different systems to use for pricing, but I wanted to share an overview of the process behind setting your numbers!

There are several important aspects of determining your price, your cost basis, your market, and the value of your items. Cost basis is the easiest to determine, and usually a large portion of the price. Your market and perceived value depend on the type of item you make, and your branding.

Cost

Has three main components - Materials, labor, business expenses. The addition of all these things creates your cost, charging less than cost means you are losing money! Here's an example worksheet

Yarn prices, per batch. (For this example it's a batch of 5 2oz. 100yd. skeins)

Cost of fiber - $2.00 per ounce. For 10 ounce batch__________ $20.00.

Cost of dyes and materials - three dye baths, $.50 each ________$1.50

Labor - $7.50 per hour. 2.66 hours spinning, 3 hours dying _____$42.45

Total $64.00 (yes, I rounded)

Divide that by 5, and each skein has a cost basis of $12.80

But wait! What about other business cost?

I have a spinning wheel, dye pots, skills and experience, electricity and other utilities at my studio space (also known as the living room). And that's just the cost of making stuff. You can build these cost into your cost basis using complected algorithms, or you can be like most small business owners and estimate. Often people use a added percentage (cost x 1.25, or adding %25), but depending on the materials cost this may not be accurate. If you do have a studio space, or equipment that you rent, you can determine how many hours you use them for each item, and add the cost that way.

Note, we still haven't touched the other parts of your business!

As small business owners we are doing many other things besides creating. We package and present our products, often taking photos and/or modeling them. We market and promote, this may be just talking our items up around town, it might be buying advertising. We seek out venues for our product, and often staff craft fair booths or retail co-ops. These are hours we spend selling our products, and we need to be paid for them. There are also the cost of packaging, labeling, storing etc.

The price you came up with in your cost basis, is generally going to be your wholesale price. And most people double that to determine their retail price. If I determine my cost basis to be $15.00, then my yarn should be retailing for $30.00.

WHAT!?

No really, that's the math. If you don't believe it, count it a different way. Keep track of all the time you spend in a week working on your business. Figure out how much you actually produced in that same week. Now determine your cost in a way that adds that in. For example, If I made only yarn, and had made only that one batch of yarn in a week, but I spent an hour a day doing some kind of business activity, that's $52.50. If you think you couldn't spend an hour a day trying to sell 5 measly skeins of yarn...

So we've done that math, and our cost basis is $127.50 that's $25.50 per skein. Not too far off. Depending on your overhead and promotions you might find that way of calculating gives you a bigger number!

Reality Check

Now the question must be asked, is anyone going to buy that yarn for $30? or $25.50? Would I buy that yarn for that much? Now we have the issues of market, and perceived value. One thing to remember - Not everyone is a crafter. We have the bad habit of undervaluing our work, because "hey, I could make that". If you make something, and it's amazing, and it's well made from quality materials, there are people who are willing to pay what it is really worth.

But the yarn? In my pricing I've had to be mindful of other crafters and my market. I am not interested in being the cheapest yarn out there, there are too may people undervaluing themselves for that. I'm not interested in being the most expensive either, for some brands and products that's the goal, but not mine. When balancing the cost and value, I settled on selling my yarn for slightly above cost basis. Not because I don't like money, but because that's the most that many people are willing to pay for it.

That leads to the last aspect, Value.

Value is different that cost. Cost is concrete, based on the amount you pay for materials, and the amount of labor. Value is created by branding, promotion, packaging, utility, beauty etc. When a certain person finds a certain item, and it resonates with them - Price becomes no object. Sadly we do not have dozens of these people clamoring for our good at all times, so we must create a price that is with the range of perceived value for our target market. If your market is wealthy fashionistas, they will see an increased price as increased value. If your market is young mothers they will be more concerned with the utility to price ratio. If you don't think your market will buy your product, you need to try and raise the value of it in their eyes.

Or, reduce your cost.

If you find yourself doing these calculations and you're getting numbers that seem totally untenable, try to adjust the input numbers. For my example, I can try to source wool roving for cheaper. I can try to do larger batches so that the dying time is split amongst more product. I can try to spin faster. Note that I came up with a hourly labor cost, the amount I pay myself. It's somewhat arbitrary, but it's what I was making at most of the jobs I had before I started my business. I didn't think it seemed right to pay myself less than other people had paid me (even if I have the perk of working for an amazing boss).

*Can your materials be sourced for less without sacrificing quality?

*Can you make things in a more efficient manner?

*Can you outsource something?

*Is your labor cost realistic?

*Can you make a simpler product?

Do not, ever, for any reason, sell your goods under cost. This is tough, but if you lose money doing something it's a hobby not a business. You may find that your price doesn't cover all the hours you spend on your business, work to decrease your cost, or to do more with less time. Don't make a business plan that involves selling hundreds of items to turn a profit, let Walmart do that. Some of your items may be break evens, and some may be very profitable, but you should not price with the intention of it being profitable "someday".