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 These are 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!

Pricing Part II - Underpricing

In the last post I talked about the subject of overpricing. Now I move onto underpricing your work.

I actually think that in the crafting world, this is done more often than overpricing. When we as handcrafted artisans under price our work, we are not only under-pricing ourselves, but all the rest of the artisans we represent. Now, I know, for many of you, this may seem like it's just my own opinion, but I think I am in good company on this issue. Let me explain.

For some artists, an idea or design is formed in an instant; for others, some pondering may occur, and for many more, the design is done once, then twice, and sometimes even more before the artist is truly satisfied with the results. Once the design has been fabricated, the idea is realized in the form of the finished product. There is so much more that goes into a piece than just the cost of the materials. The amount of time the artisan spends from start to finish, including the design, can be a matter of minutes, hours, sometimes even years. It is this intangible piece of the pricing puzzle that I believe, many artists and also buyers forget about.

I believe that any good pricing formula must take the designing of an item into account before reaching the final price. One thing that I have seen on Etsy many times, are artists who will sell a pair of earrings, for example, for a mere $5. Yes, you heard it $5! For a pair of handcrafted, uniquely designed earrings! The designs vary from very unique to simple, but, I do not believe that the designer is doing themselves justice!

Let me put this into perspective, and I invite all of you to visit a store near you. It can be a store department store at the mall, Walmart/Target/Kmart, boutiques, flea markets. Pay attention to what you see and what the prices are. Then pay attention to the quality, the craftsmanship, the uniqueness of the item. When you look at those knitted scarves, for example, chances are they are made in China/Japan/Hong Kong/Mexico sometimes the USA. They are all alike, mass produced. Sometimes they are made using labor costs of less than $5 per week by very hard working people who deserve so much more. Most are made by a machine. After your purchase, your friends can admire your purchase and go get one for themselves, one exactly the same!

Now, if you want the scarf in a different color or a bit shorter or longer, do you think you can just ask the sales clerk to honor your request? The answer is almost always going to be NO! But, find an item from a handcrafted artisan, and you will almost always be able to get your item made exactly to you color and size specifications!

If you are a fellow Etsian selling $5 earrings, and you feel you are doing fine because your cost was only $3, and you are just doing this to cover your costs because it's your hobby, nobody can tell you to charge more. But I am here to tell you, that if ALL handmade crafts people charged what their items were REALLY worth, and in the case of the $5 earrings, you should be able to easily get at LEAST $15, it would help the entire handmade community. We owe it to ourselves not to undervalue our work.

There is another piece, which I touched on before, sometimes, when you find yourself asking the question "why aren't my items selling?" It could be, because, you have priced your items TOO LOW! There is the perceived value of an item. Again, I invite you to put yourself in the shoes of the buyer. Pretend, for a minute, you are at the mall. There are two shops, both very similar in decor. One has every pair of earrings in the $50 - $150 range. The other, selling very similar items are priced $5 - $30. As a buyer, you are definitely going to assume, that the higher priced shop's items are somehow "worth" more. But are they?

Now let's say for the sake of argument, they were all purchased from the same vendor, the merchandise is exactly the same! Yet, for some, the cheaper items will be passed over, because the perceived value is "cheap". When you pay the higher prices, you expect more, you expect quality, and THAT is EXACTLY what you get when you buy a handcrafted item!

I'm going to end this with one last thought. Not all handcrafted items are of high quality. We all have our learning curves, the learning and honing of our skills. This is why I highly encourage all of us in the handmade, handcrafted business to be sure and only place for sale items for which we hold in the highest regard, those items that we are truly proud, and then charge what we are worth!

Let's make it a vow -- we will not undersell ourselves!

Pricing Your Handmade Creations - Overpricing

Pricing.

This is a topic which has been explored in the Etsy forums at great length. Here is the dilemma, if you charge too much, maybe nobody will purchase your items. If you charge too little, not only do you de-value your work and your craft, you will probably lose money and have to stop selling altogether.

I'm going to explore both of these situations so that you may better understand the importance in pricing your work correctly. I am going to talk first about overpricing.

In part II I will address underpricing and the consequences. Then finally in part III I will speak of what I believe to be a fair pricing structure and formula for the general artisan selling handmade products.

Let's start with overpricing your work. The definition is simple really, it means that an item costs more than it is thought to be worth. This is so very subjective. In all honesty, you can truly charge whatever you think somebody is willing to pay for something. Think of some of the junk you have seen at a garage sale. A particular item may be totally worthless to one person and yet another just has to have it. In the case of handmade items and art, I truly believe that if you can convince your prospective buyer that the item is worth what you are charging, he/she will pay your price.

A common question in the Etsy Forums is "Are my items overpriced?"

Most of the time the reason for asking is due to a lack of sales. The simple answer to that question is "it depends". Would you pay $200 for a screw? Your first inclination would be to say "no way!". Now what if the screw were 500 years old and you are a collector of old screws, and there are a limited number to be known in existence, then your answer would surely change.

Each Etsy artisian needs to evaluate their work. Is it unique? Is it rare? Is it something that nobody else is creating? Does it "look" homemade? Ask yourself this question - "If I saw this in a store (knowing it was handmade), what would I pay for it?" If you cannot be objective, ask a good friend, family member, co-worker etc.

There are some obvious drawbacks to overpricing, the first of which is that it may take you a very long time, maybe never, to sell your item. I'm going to use the housing market as an example. There are many home owners out there, that when it comes time to place their home up for sale, they overprice their home. Two things usually happen, either the house has some quality that buyers just have to have, that a bidding war takes place and they get what they ask (maybe more), or everyone looks away and says "no way, not at that price!" But what is the more likely scenario, if an item is overpriced, it will stay for sale for a very long time.

Most businesses cannot afford to wait for the "right" buyer to come along for an overpriced item. This is especially true for the handmade artisan. The phrase "don't quit your day job" comes to mind. Many of us starting out expect to earn top dollar to cover our expenses and indeed want to quit our day job. Well, I'm hear to tell you, that unless you've uncovered a unique niche to fill, you'd better hold onto that day job.

So why do artisans overprice their work? There could be a number of reasons. If the creator is new to selling, it is most likely because they just simply don't know how to correctly price their work. I'll discuss a good reasonable pricing structure in part III, stay tuned!

The opposite can be said for he artisan who has been selling for many years and is very successful. Ego. Yes, an artisan can get a big head. And sometimes it's because they have earned it, sometimes because of a little luck, and sometimes its just one of those unexplained things, right place at the right time. They've sold many an item, have made a name for themselves, and now are selling based on that reputation and name. Is the item worth this price? Maybe. When you or I get to that point, we won't be wasting our time reading blog entries about pricing our work!

Then there is the in between artisan. This is the one who has had a moderate level of success and decides to raise prices. This can cause a decrease in the number of sales, but at the same time an increase in the total amount of sales. This is where good customer service can make or break you (another topic for another post). When you get to the point where you have regular sales, I would caution you to raise prices slowly at first, to test "your market".

From a psychological point of view, two things happen when potential customers see high prices (sometimes, not always, overpriced)..
The first is that "if it costs THAT much, it must be worth it, I just HAVE to have it"

Another reaction is "no way would I pay THAT amount for THAT!"

And yet another reaction is "That price seems fair considering it is a handmade item. Boy, I really wish I could afford that. Maybe another time (next week, next month, never!)

I would love to hear your opinions on this post. I'm sure there are many other aspects to overpricing that I've missed. Let me know!

Next post - The issue of underpricing your work.