Along with knowing who you aiming to serve in your business (your target customer), your pricing strategy is vitally important to the health and sustainability of your business.I see people making the mistake of undervaluing their work over and over. This can be due to a few different reasons. Often it is down to self-confidence issues – the maker doesn’t feel as if their work is good enough to price higher, or feels that people won’t pay a lot for handmade makes. Sometimes the maker just doesn’t have a full grasp on pricing and the need to ensure you are factoring in time and other business related costs. Occasionally the ‘business’ (using the term lightly here) is run as more of a hobby and the maker just wants to cover their materials costs so they can continue to afford their enjoyable craft. All of these things are a recipe for disaster in the long term, and here’s why. A low pricing strategy can lead to:
- Prices too low sends a message to buyers that your items are poor quality. We are programmed to believe that the higher the price, the better quality the product right?
- Low prices devalue the handmade market. If your prices are so low that you are only just covering your costs and not receiving a profit, you aren’t valuing the concept of bespoke and handcrafted pieces. If your prices in any way put your business inline to compete with the mass produced bargain import market, you are seriously at risk of damaging the value of handmade as a whole.
- It isn’t a sustainable practice for long term business success and growth. How will you cover the costs of everything involved in running a business AND be able to afford to expand? How will you be able to pay for advertising? A bigger workspace? Better equipment? Take on help? Build a website? Etc.
In reality, there isn’t a one-size-fits-all strategy when it comes to pricing.
I know that that’s not what you want to hear.
You are reading this to find an answer and hoping that I can offer a magical formula so you know exactly what to be charging. But, I know for sure that if you were to ask 10 successful handmade sellers, you would receive a variety of different pricing formulas that they themselves use successfully for pricing their products.
But let’s analyse a couple of suggested ‘formula’s’ found on the internet.
One popular formula often presented as helpful is:
Easy to understand? Yes, absolutely.
But what about the time it takes to make your product – that’s got to be worth something too right? If you are looking at selling a product wholesale that costs £10 for you to make, by this formula you are charging £20. Ok – but what if it takes you 6 hours to make? Are you happy with earning £20 for 6 hours of work – and only getting £10 after supply costs?!
What about all of your other business related costs?
So how about this one?
It’s not as bad as the first, but still not good! Of course it’s better because it accounts for the time taken to create your product, but what about your overhead costs such as printing, and utilities? And any ongoing costs such as software?
With that in mind, let’s look at the next popular formula:
Yes, this formula is a bit more complicated, but it’s going to give you a price that is far more accurate in reflecting exactly how much it really costs you to create your product.
Time = Time spent creating your product x hourly wage.
You need to pay yourself! You want this to be a real job don’t you? Decide what you want your hourly rate to be (at least minimum wage!) and work out how long it takes you to make your product.
Don’t estimate (ie – guess!) how long it takes. Crafters are notorious for underestimating how long our crafts take us – we get lost in the sea of creativity and time flies by without us realising.
I recommend that you time yourself creating a minimum of 3 of the same products and then work out the average time taken overall. Make sure this timing takes place with no distractions. Your customers shouldn’t be paying for you to chat with your kids or talk on the phone to your friend.
Ensure you are being efficient and productive during timing to achieve accuracy.
If you want to receive £10 per hour and your item took half an hour to make, you need to pay yourself £5. This doesn’t mean that you physically take £5 from every sale, but it is really important to build a wage into your products so you can afford to pay yourself – and take on help in the future if you need to!
Materials = Cost of all the supplies used to make your product.
Include your packaging supplies such as labels, tags, boxes, envelopes, stickers, etc too.
If you purchase online, don’t forget to add in the postage costs you pay to receive them.
Record supplies as a per unit item, meaning what it costs you per bead, per sticker, per fabric quarter etc.
This will give a much more realistic figure as to how much a product actually costs to make.
To work out this per unit cost, you just simply divide the price by the quantity.
So if a metre of fabric cost you £10, a quarter of a metre would cost you £2.50 ( 10.00 ÷ 4 = 2.50 ).
If a string of 100 beads cost you £5, then each bead would cost you 0.05p ( 5.00 ÷ 100 = 0.05 )
Overheads = These are the expenses directly incurred when creating your product.
But you also need to consider the expenses that indirectly goes into the cost of creating your product, such as tools and machinery, advertising and marketing, website costs, photo props, utilities etc.
One way of calculating what this rate is, is to tally up all of these estimated business expenses for a year to get an overall cost rate.
Then estimate how many products you will be creating or selling this year (it may be easier to work out this as a per week figure, then multiply that to get the yearly one).
Take the cost rate and divide it by the product estimate. This gives you a figure that can be added on to each of your products as an overhead.
It’s surprising how quickly fees can add up without us realising.
An example of annual overhead fees:
- £80 for software.
- £150 for advertising.
- £30 for photo props.
- £600 for Etsy Fees.
- £200 in Paypal Fees.
- £100 towards tools and equipment.
- £120 for Website Hosting and Domain Renewal.
- £30 Utilities.
- £25 Printer Ink.
That’s a huge amount in ‘extras’ if you don’t account for them in your pricing strategy in some way. See how it all adds up?
Even if you are at the stage where you aren’t ready to be thinking about things such as paid advertising – it is worth planning a budget now to enable you to advertise in the future, or you may find yourself stuck without enough in the bank to grow!
These indirect costs are really important as they are the expenses that can eat away at your profit and totally drain your revenue. If you don’t have a way of accounting for them somewhere within your pricing strategy, you can end up with many sales but little money in your account!
So, you’ve worked out all of your costings, you should just multiply that figure by 2, right?
It’s not quite that simple – there is still a thought process to work through.
Introducing the Profit Multiplier
How much you multiply your costs by is known as your profit multiplier.
This sounds complicated I know, so let me try and put it simply.
The profit multiplier adds an important layer of profit to the creation cost of your product.
So all of your costs (mentioned above) multiplied by 2 or whatever works for your particular business.
Costing this correctly means that each and every sale actually generates revenue for your business and stops you from just simply covering your costs.
This ensures that your business will be sustainable in the long term. You will be able to afford advertising and marketing costs, have the ability to scale up your business when the time is right, and allow you to hire in help when you need it as the salary for this will be included in the product price price.
“The profit multiplier adds a layer of profit to the creation cost of your product, meaning your business will be sustainable long term.“
But what is this magic number? Obviously this varies from business to business, which is why the x 2 strategy doesn’t always work. This is where ‘Value Based Pricing’ comes into play – how much is your product and business worth to a customer?
Value Based Pricing
In order to work out the profit margin for your particular product, you should use a value based pricing strategy.
This strategy works out the pricing in relation to what value your product is perceived to provide to your customer.
By now, you should have an idea of who your target customer is, that is, who are you aiming to sell your products to. The answer to this should never be ‘everyone’ by the way!
You should have an idea of what your ideal audience wants, feels, and needs. When you know this, you can create your product and craft the perfect shopping experience for your customers in a way that adds value to your product – simply put – this means you can charge more!
But what affects this perceived value?
- The quality of the materials used when making your product. If you are using wool or felt for example, are you using pure wool or acrylic?
- The attention to detail and finish quality of your product. Your product photography really helps with this one. Do your photographs scream high end product of great quality?
- The uniqueness and bespoke nature of your product. Do you offer personalised details that can’t be bought on the high street?
- Does your product solve a problem for your customer? Fulfil a need or desire?
- Where you are positioned in your particularly market – are you aiming for basic level? Premium? Luxury? What does your branding portray? What about your customer’s journey and service they receive from you?
- What sort of packaging style are your products presented in?
- Your business status – have you received positive press coverage? Won awards? Have a large and active social following? Do you have a related qualification?
So basically, how much do you think your product is worth to your customer?
All of these things are very different for each individual business which is why the often used x 2 strategy just won’t work for all, and in some cases it won’t create enough of a profit margin, leaving you working all the hours day and night with very little financial reward.
The most common multiplier range is between 2.2 and 2.5.
This very much depends on all of the above mentioned variables – or more simply put – the value for your customer, the positioning in the market and the quality of your work.
High quality and high value items often range between 3 and 3.5, or even as much as 4.5, whilst low quality or low value items can be set below 2.
So this pricing formula is far more sustainable in the long term for your business:
You could have the most amazing product, a wonderful brand, the perfect website, and lots of sales – BUT if you haven’t priced your products correctly, you won’t be creating a sustainable business for the long term, and you definitely won’t have a business that can grow.
There are three absolutely necessary rules that you need to apply when setting your prices.
1. Are you covering ALL of your costs?
2. Are you adding enough of a profit margin in order to pay yourself a wage, save for taxes, and re-invest in your business?
3. Do you understand your ideal customer and know what value they perceive in your products?
How much do I need to make from my business so that I can pay the bills / treat the kids / afford a holiday / pay that vets fee / etc?
Will my pricing structure allow me to reach this revenue goal?
If you price your products lower, you will need to gain more sales in order to meet that target. This means more time spent working on production.
Is your pricing realistically set so you don’t have to craft 24/7 to make enough stock for the level of sales you need to achieve that goal?
Can you create more value by way of creating sets of products that you can charge more for?
Can you recreate the product in kit form if this means less creation time is needed?
Can you overhaul your product photography to achieve a more high-end look? Use better quality materials? Redesign your packaging for a more luxury feel?
If you need to, experiment! Try different profit margins or adjust the formula to work for your specific business model – just make sure you are definitely covering ALL of your business costs and making a sustainable profit.
I would love to know what you think about your pricing and if you have any struggles. Send me an email at Jules@growinghandmade.co.uk and let me hear your thoughts.
PS. If you are an Growing Handmade member there is a printable PDF file relating to this with worksheets to help you, and of course I am just a message away.
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