Pricing Essentials: How to price your craft
Many people spend money on handicrafts which means you can make money online selling your products. Before you can make a sale however, you do need to address one specific issue that a lot of people seem to have trouble figuring out. How to put a price tag on your handiwork.
Deciding on the right price can be a little more challenging if you have labored on the product yourself. Putting a monetary value is not easy since there are plenty of factors at play here. There are subjective qualities of a craft that cannot be completely monetized. So how do you come up with a reasonable selling price so you can make money and earn a living from your craft?
Variable Cost versus Fixed Cost
Kartikeya Sharma stresses on this point that before we start computing, it is important to lay down the basics first. On one hand, variable costs refer to the expenses of making a product. This includes the cost of raw materials as well as the labor cost. For example, if you make crafty quilled earrings, you need a quilling set to make one. Your variable cost may go up and down depending on the market supply and demand.
On the other hand, fixed costs refer to the expenses you incur regardless of sales. This includes start-up business costs like utilities, equipment, rent, etc. To make money from your craft business, you have to factor in both costs as you determine your price.
There are different equations different people uses. Let’s focus on the most basic first.
Materials + Labor + Profit = Price
To make your craft goods, you need raw materials and these materials cost money. If you make beautiful quilled earrings for instance, your raw materials include quilling paper, glue, jump ring and earring wire. If you can buy a quilling paper set for $30 and you can make 100 pair earrings out of it then the cost of each pair you make is $0.3. Note that this is just the cost of quilling paper per pair of earrings. A 2-ounce glue may cost $6 but you only need a few drops to make each pair of earrings. This means you have to estimate how many pairs you can make for every $6 bottle of glue.
Most of these raw materials are bought in bulk. In which case, you have to determine the cost of each raw material per pair. Taking the example of quilled earrings, here’s a breakdown for the cost of raw materials.
|Quilling Paper||$30/ 100 pairs||$0.3|
|Glue||$6/ 100 pairs||$0.06|
|Gold Plated Jump Ring||$14/ 100 pairs||$0.14|
|Gold Plated Earring Wire||$32/ 100 pairs||$0.32|
|Cost of raw materials/ pair $0.78|
$0.78 is only the cost of buying the raw materials. You have to take into account other expenses too related to the purchase of these materials. Did you have to order your supplies online? If so, you need to include your shipping or transportation costs as well. Treat these costs as you would your raw materials. If you spent $10 extra for obtaining the supplies, calculate your cost by determining how many items you make from that amount of money spent. Add it to your cost of materials.
For example, you were able to obtain your quilling materials with an additional cost of $10 for transportation or shipping and you were able to make 100 pairs of earrings from these expenses. So that’s an additional $1 for each pair.
If you plan to sell your craft goods online to make money, you have to factor in other expenses like packaging and shipping the products to your clients. Think about how you would like to present your handiwork and how much that presentation will cost you. For instance, craft packaging and shipping cost for each pair is at $10.
Your computation will now look like this.
|Quilling Paper||$30 make 100 pairs||$0.3|
|Glue||$6 make 100 pairs||$0.06|
|Gold Plated Jump Ring||$14 make 100 pairs||$0.14|
|Gold Plated Earring Wire||$32 make 100 pairs||$0.32|
|Transportation||$10 for 100 pairs||$1|
|Total cost of Raw Materials $ 11.78|
Labor Cost (Hourly Rate x Number of Hours Spent per Item)
Next, you have to decide on your hourly rate. Do not take an amount out of thin air. You have to be fair to yourself. Time is a valuable item. Never make the mistake of undervaluing your worth. Everybody needs to make a living. You are no exception. You need money to live so you need to make money.
You can start by asking yourself how much money you would make if you were working at a 9-5 job? Let’s say you have determined your hourly rate at $50. Now how much time do you spend on making one of your craft goods? This will vary depending on the complexity of the item. If a pair of paper quilled earrings takes an hour to make then your labor cost is $50.
Based on the example above, your subtotal is now at $61.78 per pair. This is the amount of money you need to make for each pair in order to break-even. So how much profit do you hope to make for each pair?
$ 11. 78 (Materials) + $50 (Labor Cost) +? Profit =? Price
Having a good idea about the cost of creating your craft products is a good thing but will you really make money from selling your handiwork? There are different approaches to setting a price, ultimately determining profits. We’ll look into them one by one.
Multiply by Two
Most start up craft businesses use this formula. It is the simplest one. After all, you only need to multiply your variable costs by two. In the case of quilled earrings, that’s $61.78 (cost of making each pair) x 2 = $123.56. You get $61.78 worth of profits for each pair.
Based Supply and Demand
Others look into the market first before assigning a price to their craft goods. This is to make sure they price competitively. It does make sense since to check out the competition first. You would not want to price your products to high than customers are willing to pay for. Otherwise, you are less likely to make money from your craft business.
For example, a pair of beautifully quilled earrings is sold online for $90 to $110. You would consider pricing your items at this range too. Let’s say, you decided to take the median price, $100 (= $90 + $110 / 2). At this price, your profit for each pair is at $38.22 (= $100 – $ 61.78).
Craft businesses start at this level. As their exposure grows and demand for their goods increases, they increase their prices as well.
Based on Perceived Value
Pricing is a marketing tool. While most craft businesses may think they can make money by pricing their goods lower than the competition, customers may actually think more of higher priced products. More often than not, customers decide on the perceived value of the product based on the price tag. In which case, selling for less does not necessarily mean more sales. Lower price may send the wrong message to potential customers.
Remember, there’s a lot of work you put into making your handcraft goods. It would be unfair to underestimate the value of your craftsmanship. However, if you decide to set your price higher than the competition, you have to work on your business image as well. This means you have to pay attention to packaging and branding.
Ultimately, you have to address this question: what image do you want to create for your craft business? You have to decide on this before you set up shop online. This must be carefully laid out in your business plan. For more information on pricing strategies, check out this video:
Let’s now apply this to the quilled earrings example. If your competition sells their products between $90 and $110, you probably can sell yours for a bit higher, say at $130.
Now let’s take a look at the prices we set using the different approaches.
1. Multiply by Two
$123.56 = $61.78 (cost of making each pair) x 2
2. Median Price based on current supply and demand
$100 (= $90 + $110 / 2)
3. Perceived Value
Which pricing approach makes the most sense?
Remember, there are variable costs and fixed costs. So far, we’ve covered variable costs but there are other things you spend on. For instance, what equipment do you need to make your craft goods? You made an investment in these tools so you have to take them into account as well. In the case of quilled earrings, you need a slotted quilling tool, a quilling mini mold, a crimper tool, a quilling comb, quilling form, cutter, scissors, plier, etc. List them all down.
In addition, you also need to take into account other business expenses such as rent, utilities, marketing costs, etc. In a 9 to 5 job, your monthly wage covers living expenses like rent and utilities. If you hope to make money selling your craft, these expenses must be included as well but using a different computation approach. Most of your business expenses are paid for on a monthly basis. Let’s say your total monthly business expenses amount to $1000.
How many craft items can you make a month? For instance, you spend 8 hours a day and 5 days a week making craft earrings. Each pair takes an hour to make. In total, you can make 40 earrings a month.
No. of craft items made per month x Variable Cost + Fixed Cost
40 x $61.78 = $2471.2 (variable cost) + $1000 (fixed cost) = $3471.2
This means you have to make at least $3471.2 every month in order to make money successfully from your business venture.
So what price did you arrive at? Which one can really make you a living? Learn more pricing lessons from this video,