Cost Formulas

Cost Formulas. Love them or hate them, they are an essential part of any handcrafted business.

Now I'm sorry to tell all of you who hated the dreaded story problems in Math class, that owning your own business requires you to embrace those story problems if you want to price your work correctly. Your bank balance will thank you later on!

There are many schools of thought regarding how to price your work. One common formula goes like this:

Add up the cost of all your materials.
Decide how much per hour you want to get paid (more on this later).
Add up how many minutes / hours you spent on the project.
Decide on an overhead cost. (again, more on this later)
Add up your costs for packaging supplies, postage (if you are going to include "free" shipping), and fees, like Etsy fees, Paypal fees, etc.

Now here is the formula:
(materials x 2) + (hours * hourly rate) * overhead rate + fees = base rate.

Here is an example. Let's say you have knitted a scarf. Your materials include just yarn and the amount you used was $2.00. You have decided that because you are an experienced knitter, your hourly rate should be $15 per hour. Let's say the scarf took you 2 hours to complete (include your design decision time here also!). A common overhead rate is 1.2 (don't ask me why, but most of the formulas I've found use this figure).

You decide your preferred method to ship is to neatly fold the scarf and wrap it in non-acidic tissue paper, then place carefully into an appropriate sized zip-lock baggie. You then use a box that is the right dimensions which you have purchased in bulk and got for a cost of $.35. You enclose a business card and an invoice. The cost of your shipping supplies (tissue paper + zip-lock bag + box)

Let's look at what we have so far.
(materials x 2) + (hours * hourly rate) x overhead rate + fees = base rate.
(2 x 2) + (2 x 15) x 1.2 + fees = base rate.
4 + 30 = 34. 34 x 1.2 = 40.80 + fees = base rate.

Now, you need to determine what your approximate fees will be.
If your item sells outside the US, your paypal fee is going to be $.50. Inside the U.S. it is $.40. So we use the higher amount. In addition to this fee, you are charged 3.5% of the price. Etsy also charges you 3.5% so if you add these two together you get 7%.

We will take the 40.80 + Etsy listing fee + Paypal base fee x 7%.
So 40.80 + $.20 + $.50 + ( 40.80 x .07)
equals $41.50 + $2.86 = $44.10

Now you add in your packaging supplies which are $.50, this added to the $44.10 = $44.60. Now you can decide whether you want to list it for $44 or $45.

Now, for those of you who balk at that price, remember, this is a handcrafted item. It is a one of a kind item. It was made with care and you deserve to be paid for your time!

Another popular pricing formula would be to take your cost of materials, which in this case is $2.00 and take them times 4. This would make the scarf only $8.00.

I do not advocate using the former formula as I believe you are not going to be covering all your costs and paying yourself for your work. If like most crafters, you will be getting your supplies at a wholesale rate anyway, and by simply taking your materials cost x 4, you are not being paid for your craft what you deserve!

Let's talk a little bit about your hourly rate. If you are just starting out, and your skills are still a little junior, then it would stand to reason that you should charge a smaller hourly rate than if you have been doing your craft for 10 or 15 years. This is a very subjective topic. The general rule of thumb that I have seen is for beginners your hourly rate should probably be about $10. As you gain more experience you can increase this rate to $15, $20, and higher as your skills become more advanced. You must decide for yourself where you fall.

Lastly, let's talk about overhead. So what is it? It is all the other things that go into the creating of your product from start to finish to delivery. These include, but are not limited to things like:
- the cost of the lights and heat for your studio
- the cost of your camera equipment
- the cost of your computer equipment
- the cost of your business cards and printer paper
- the cost of gas to drive to the post office and supply shops
- the cost of your phone to place calls related to your business

This is just a few items that do cost you as a business person. If you don't include them as part of your pricing formula, you are losing money, and that is not why you are in business!

The figure used is usually 10% or 15%. This again depends on your individual situation. Let's say you live 50 miles to the nearest post office vs 1 mile. Let's say you create pottery and you have a kiln which uses a lot of extra electricity. Or for instance, you produce photo prints and require a very expensive printer, ink and paper. These would all be indicative of an overhead that is higher, maybe even 20%.

The reverse is true. Again, this is subjective and something that many a crafter never takes the time to think about.

These two pricing formulas are not set in stone. They may not work for every craft. You as the designer must know your own market and know what price your item sells best at. The purpose for establishing a formula is so that you can eliminate over-charging or under charging and make a good profit for yourself.

By insuring you make a worthwhile profit, we as crafters can afford to continue doing that which we love to do - give the world a little bit of ourselves and share are beautiful works!