When I started my first business I had no idea how to calculate the cost of my products. I wasn’t even keeping track of how long it took me to make my goods or the cost of my supplies. I just made some stuff and slapped an arbitrary price tag on it. This is a horrible way to price products but in all fairness I started that first business (selling handmade ‘stationary’ that I created from scrap paper and collaging junk mail) when I was eight so I try not to beat myself up too much about it. By the time I started my second business (selling homemade candy outside my dad’s barbershop) I was a little bit older. With all the wisdom of a whole 12 years on this planet and the realization that instead of using ‘trash’ to make my products I actually had to purchase candy molds and ingredients I knew that I had to figure out a way to price my candy so that I covered not only my costs and labor but also made a profit. My candy business was fairly successful in that I ended up covering all my expenses and even managed to deposit my $100 profit (which seemed like an insane amount of money back then) into my savings account.
Every year at our Craftcation: Business + Makers Conference I host a roundtable where attendees can ask me questions about pricing and every single year there’s a least one person at the table who uses the same pricing tactics as I did with my stationary business, in other words they guess what their products should cost or try to figure out how much they think someone would pay for it. It’s all I can do to not jump on the table and shout, “Pricing is not a guessing game! It’s a simple mathematic formula.” Pricing is so important that I dedicated an entire chapter (in which I go into great detail and have several downloadable worksheets) to it in my online workshop Craft Show Success. If you’re just starting out or feel like you could use some pricing and financial know-how I urge you to check out the workshop.
Figuring out what to charge for your product is not a guessing game. It’s not about what you think someone may pay for your product or how much you feel it’s worth. Determining your pricing is about numbers, not feelings. There’s a pretty simple pricing formula that you plug your specific costs into to figure out what to charge for what you make.
Labor + Materials x 2 = wholesale price
Wholesale price x 2 (for overhead and surplus) = retail price
Seems pretty basic, right? It is and it isn’t. Finding and sticking to the cost of your labor and materials is what tends to be problematic for makers. Please note that this is the pricing formula that I use and other makers may have slight variations like multiplying the wholesale price by 2.5 or 3 instead of 2.
As I mentioned I have an entire chapter on this so I’m just going to cover a small portion of it here: materials.
Makers often overlook hidden costs when determining what they pay for materials. Using shirts as our product example, you can’t just say a shirt costs you $5 to buy so your materials cost $5. You have to consider EVERYTHING you need to make that shirt, like screen printing ink, screen printing screens, care label, your label, hangtag, thread to sew labels, etc. There may be other hidden costs for your product as well. Examine every item you use to make the finished product and don’t leave ANYTHING out! Don’t fall prey to the notion that you only use a tiny bit of thread for each shirt and not add thread to the materials list. Don’t fail to add in shipping costs of getting the shirts to you, or your time, gas and mileage to pick up materials. It all adds up!
Materials cost for one shirt:
-Care label .25
-Shipping costs .60
-Gas, mileage and time picking up materials .40
Materials cost = $7
Once you determine your REAL materials cost you may be a bit shocked at how fast the tiny things add up. The good news is that there are ways to cut your materials costs. Cutting materials costs is sometimes easier than cutting labor costs but requires some research.
If you create your hangtags or labels yourself, it might be cheaper to outsource them to a company that creates custom labels or hangtags. Get creative and think of alternative options for hangtags like making your hangtags out of business cards and having them printed in bulk. Just be sure that these changes fit within your branding.
Buying your materials wholesale is absolutely essential to keep your prices competitive. Buying wholesale isn’t as difficult as it might seem. Yes you’ll need to get a resale permit and set up accounts with the wholesale company but in the end you’ll be saving money. Using a large distributor like Darice (if you were at Craftcation 2016 you may remember them since they supplied almost all the materials for our craft classes) helps save time because they offer so many different types of craft supplies. Instead of setting up multiple accounts with several different manufacturers you can set up one account with them and buy your supplies all at once. This doesn’t just save time but also saves money on shipping costs.
Many wholesale companies have minimums (one of the things I love about Darice is that their minimums are low). If you can’t meet a company’s minimums, consider reaching out to your network and combining your order with theirs. If the company you order your materials from is near you, it may be cheaper to pick up your order instead of having it shipped. Some companies offer alternative shipping programs. Darice has a freight-included program that they designed specifically for small businesses and independent crafters, which is a great to eliminate unexpected shipping costs. If you’re resourceful and research diligently, you’ll likely be able to cut your materials costs. For more on pricing check out these blog posts: Four benchmarks for wholesaling and How to asses and pitch the value of your creative products or my online workshop Craft Show Success.
TO ENTER THE GIVEAWAY:
The contest is now closed. Congrats to our winner Samantha!
To enter to win a $100 Michaels gift card courtesy of our friends at Darice just leave a comment on this blog post below by August 11th letting us know about one of your biggest struggles when it comes to pricing your products, sourcing materials or running your business. We’ll pick one lucky winner to a $100 gift card to Michaels.