Solve the Pricing Mystery
It's easy for handmade entrepreneurs to get caught up in a pricing quandary. Are my prices too high, too low, and how do I know if they're just right? What's the magic formula? While there is no one perfect answer, there are ways to pick apart the process and build your price from scratch. This analysis is the first step in determining what will work best for you and your business model.
It's completely normal for makers to feel anxious about pricing. Handmade entrepreneur Adrianne Stone says she saw a lot of pricing questions raised in wholesale support groups. "I am a member of a group on Facebook about paying for representative fees, trade show booths, and services like the Indigo Fair, which takes a 18-25 percent commission on sales. So many people were expressing dismay over the idea of paying for these services--and it is primarily because their pricing doesn't accommodate the extra expense. These can be really valuable services for growing your business, but if you've priced yourself out of them, you're going to have a much harder time scaling," she says.
Calculating a solution
Ask Stone what she thinks about the "labor+materials x 2" method of calculating prices for handmade products and she'll tell you, "This formula is commonly provided to makers who are just getting started. Unfortunately, it can leave those who are looking to scale in a bit of a lurch, because it often fails to account for expenses like those for a wholesale representative or trade show booth fees. These fees can eat into profits and handmade businesses are often already operating on thin margins to begin with."
Stone adds that another thing she sees with the labor+materials x 2 formula is that makers "grossly underestimate their labor costs because they often have this mental hang-up about pricing and the value of their time."
She says an additional issue that arises with that formula is when makers only account for the time spent creating their work, and not the time it took them to source materials, develop new designs, market, sell, package, and ship products. "It's really hard to figure out how much of this non-billable time should be lumped in with each individual item," Stone explains.
As a handmade jeweler who began her own side-hustle in 2014 to make extra money while earning her PHd in Translational Biology and Molecular Medicine, she describes herself as "a multi-passionate entrepreneur and scientist."
She says that starting her jewelry business, YIMI Jewelry, has been a "crash course in modern business and marketing." According to the young entrepreneur, her revenues doubled between the first and second year in business. Since her company's inception, Stone has cultivated several national and international wholesale relationships and has experience in selling direct to consumers.
Stone's pricing calculator began as a simple Google spreadsheet that she used to calculate her own prices. "I definitely struggled with pricing, especially with feeling guilt, or whatever that feeling is about pricing my products high--but with the spreadsheet I could justify the prices I needed to charge to myself," she recalls. "I could also evaluate a new product design using it; if the price I calculated was higher than I knew someone would pay, then I wouldn't bother adding it to my line because the numbers didn't work."
To help other entrepreneurs like herself, Stone developed an easy-to-follow pricing calculator for establishing wholesale pricing. "One of my hopes for people using the calculator is that they will be more confident in setting sustainable pricing for their products and feel justified in doing so," Stone says. Here's how her calculator works:
The Adrianne way
"At first, I thought to maybe just share the spreadsheet, but I ultimately decided against it. I know how to code from teaching myself back in the early 2000s when I first started blogging and was too frugal to hire a developer," Stone says. "So, I decided to build the calculator and put it on my website, so anyone could use it. By doing this, I was able to put instructional text to each box, so it was clear what information people should be putting into it."
To begin, you need to establish the time needed to produce the product in question, set a fair hourly wage for yourself, decide whether you employ a wholesale representative, and figure the cost of the materials used. Once these are entered into the calculator, the cost of labor, overhead, and the break-even price is determined. The break-even price is important to keep in mind because you should never sell an item for less than this--otherwise you are losing money.
"Makers often look at their work as their passion or their art, which is great, but they also need to look at it like a business or it will become a hobby."
- Adrianne Stone
You will notice that this calculator will figure an estimate of your overhead costs. Overhead includes costs you incur for rent, shipping, taxes, and other bills. Stone says that allowing 10 percent of the retail price is a conservative estimate. If you operate your own brick-and-mortar store, your overhead expenses will be higher.
Next, you need to decide how much margin you wish to allow for your wholesale prices. Some examples include 20, 30, 40, or 50 percent. Enter that percentage into the box labeled "actual wholesale margin." Above it, the wholesale price will be calculated. This is the price you would offer your wholesale buyers for your handmade items.
Underneath the actual wholesale margin percentage are two boxes; one is the retail keystone price calculation by doubling the wholesale price, and the other triples the wholesale price. These are two options for setting the retail price.
Holy moly, that's expensive!
The first time you use this calculator you may be surprised to learn that you've been pricing your work too low and that the suggested price feels extraordinarily high. These are factors that need to be determined to decide if your products--or some of your products--are appropriate for the wholesale market or not. If you still want to pursue selling wholesale, you may need to speed up your production process, lower your material and overhead costs, or possibly eliminate using a wholesale representative if you employ one. Never, ever eliminate your own wage. Your labor has value; if it wasn't for you crafting your products, there would be no product to sell.
To try out and use the calculator, visit tcr.bz/PricingCalculator.
Users of this calculator might even be a little surprised to see that their break-even price seems higher than expected. This is because Stone incorporates into her formula a 10 percent bump to the cost of goods to balance out lost or wasted materials, broken items, or loose measurements. Stone writes in her blog, "It's a conservative bump to the pricing calculator because living on the edge is good for traveling and mountain goats, but no so much for creative businesses."
Other pricing considerations
While Stone's wholesale pricing technique might be unique and effective for some, there are other examinations to be made. Consider who your target audience is. Do you sell your work at small, local craft fairs or at a fine gallery or a high-end juried art show?
According to the popular online handmade blog, The Spruce, writer Tammy Powley says, "I think most jewelry makers do not ask enough for their jewelry, and I think some of this is connected to self-esteem. We feel intimidated by large stores that import jewelry, but if you really stop and think about it, nine times out of 10, your work is going to be far superior in quality."
Powley also advises, "If you want to make your jewelry business into a serious, viable occupation rather than just a hobby, you need to be a serious business person and that means pricing your jewelry seriously, paying yourself a reasonable wage, covering all of your expenses, and eventually making a profit."
How did you like this resource? Your feedback helps us provide resources that matter to you most.