Using a craft pricing formula is an excellent starting point to determine how much your items should sell for.
To be fair, a formula isn't the only factor you should look at when determining price, but it can really open your eyes to the true costs of doing business, and the approximate price you need to strive for to make a real profit.
You can click the image below to download a free spreadsheet (requires Excel) to apply the formula to your own items, but to get the most out of the spreadsheet, please read on to learn more about how the formula works and how it will help your business be more profitable.
A good craft pricing formula will...
take the guess-work out of assigning a price
help prevent emotions from clouding your judgment
ensure you have factored all of your costs into your prices
give your business room to grow and be truly profitable
help you discover opportunities for increasing profitability and reducing waste
WHY USE A FORMULA?
You might not end up using the exact price the formula calculates once you take other factors into consideration. However, a formula gives you a good, objective place to start to determine price.
There are plenty of factors that cause artisans to under-value their work. It's easy to
forget all of the costs that go into making and selling a piece
or neglect to pay yourself a fair wage for your time
or misjudge the amount of time, start to finish, it takes to create a piece
or let emotions about the value of your work get in the way of making good business decisions
A good craft pricing formula eliminates those problems!
Some people will debate the value of using a formula when pricing crafts because they believe it oversimplifies the complexities of craft pricing issues.
I do agree that if you simply use a craft pricing formula and don't consider other factors, you will not cover all of the issues around pricing.
It would be wise to read more on the topic to ensure you have a deeper understanding of the considerations that go into getting the best price for your handmade items. To develop a broader understanding of the topic, see the links on the right for more articles on the topic of craft pricing.
However, you need to start somewhere, and a formula provides an excellent starting point. So let's not throw out an extremely useful tool just because it addresses some, but not all issues and doesn't completely eliminate the need to think about our pricing decisions.
I believe, in the early days of building your business, when you are still learning the ropes and building confidence, a tool that simplifies the task of setting prices and helps you make a more objective decision is exactly the kind of starting point you need to stay on track.
Once you've applied a formula, you can take into account other issues such as the expectations of your target market and competitors' prices. But the formula will give you a good, object starting point.
YIKES! I'M SUPPOSED TO CHARGE HOW MUCH FOR MY CRAFTS?!
Be warned, when you apply the formula to your work, you might be shocked by the price you come up with. I know I was completely floored the first time I ever used a craft pricing formula.
That's okay. Don't panic!
There's a good chance the price might seem exorbitant to you. It might be well above what you were thinking of charging or what others charge for similar items. That doesn't mean you should completely ignore the results. The results give you some important insights into your business.
The formula gives you an objective estimate of what you need to charge to build a business that is viable and has room to grow. It doesn't tell you anything about your customers' expectations or the current market for your product, or the perceived value of your work.
So, if the price you come up with seems quite high (especially when compared to your competitors' prices), you need to think about a few things:
What is the biggest factor contributing to the high price? (Usually it will be the cost of raw materials, or the time you spend creating each item)
Is there anything you can do to change those factors without reducing the perceived value of your items? (For example, finding a better price for your raw materials, or streamlining your process for creating items)
What can I do to increase the perceived value of my items without greatly increasing my costs or time invested in each piece? Often gorgeous packaging will increase the perceived value, or beautiful photos if you're selling online. There's a lot you can do to affect the perceived value. James Dillehay's book, How to Price Crafts and Things You Make to Sell has some excellent advice on that topic.
In other words, if you come up with a price that seems far too high, don't just react with frustration and ignore the number. Instead, think about how you can bring that number down and still create valued work, or what you can change about your work and the way you sell it to ensure more customers would be willing to pay that price.
For me, when I was shocked by the numbers the formula was giving me, I made a few helpful changes including:
Establishing a wholesale account with a major jewelry supplier to get raw materials at the best prices
Finding ways to streamline my production process to create less labor-intensive items that were still valued
Creating some lower-priced (i.e. quick to make and with less expensive materials) bread-and-butter items that would sell well as impulse purchases to supplement the higher-priced items
Using raw materials with a high perceived value - It might sound counterintuitive to use pricier raw materials, but for me, the labor cost was driving the price up more than anything else, and it takes the same amount of time to make sterling silver, gemstone and Swarovski crystal jewelry (high perceived value) as it does to make base metal and plastic jewelry (low perceived value).
Rethinking where I sold items. People's price expectations vary a lot by venue.
Developing skill with some less common jewelry making techniques so customers wouldn't dismiss items as being something they could make themselves.
In the end, you might not use the exact price shown by the formula. It's not meant to dictate price; it's just there to give you a baseline. The formula will allow you to make some smart choices for your business, and it will push you to avoid under-selling yourself.
HERE'S THE CRAFT PRICING FORMULA
There are a few different formulas that are typically used. The one outlined below is the craft pricing formula that I like, and many professional craft artists seem to like this formula.
Cost of Supplies + Labor + 10-15% Overhead = Total Costs
Total Costs x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price
For example:
Imagine you designed and made an item that used $5.00 worth of materials and took 30 minutes to complete. Assume you paid yourself $20.00 per hour of labor, so the labor cost for the item would be $10 (because it only takes you half an hour to complete each item, and half of $20 is $10).
In that case, the pricing formula would be as follows:
$5.00 (Cost of Supplies) + $10.00 (Labor) = $15.00
Take 10-15% of the combined supply and labor cost to get your overhead
10% of $15.00 is $1.50 ($15.00 x .10)
Total Costs = $15.00 (Cost of Supplies and Labor) + $1.50 (10% Overhead)
Total Costs = $16.50
$16.50 (Total Costs) x 2 = Wholesale Price
Wholesale Price = $33.00
$33.00 (Wholesale Price) x 2 = Retail Price
Retail Price = $66.00
So, in this case, in order to ensure you are making a fair profit and giving your business room to grow, you could sell your item to a retail customer for $66.00, or you could sell several items to a wholesale customer at $33.00 each.
There are a few things to notice in the craft pricing formula:
LABOR COSTS
Notice that the labor was calculated at a rate of $20.00 per hour. Be sure to pay yourself a fair wage for labor.
Many professional crafters use a rate of $12.00 to $20.00 per hour to calculate their labor costs.
When you determine you own labor rate, be sure to use a fair wage that allows you to grow your business and accounts for the skill required to make your product. Your time and skills are valuable. No matter how much you love making your craft, your labor is neither free nor cheap.
I actually once read a suggestion of using $5.00 per hour as the hourly wage for pricing crafts. In my opinion, using a rate like that would be grossly under-pricing the value of your labor.
First, if you are making crafts of a saleable quality, then your skill is worth more than $5.00 per hour. Second, if you only allow $5.00 per hour for labor costs, you would really struggle to pay staff a fair wage and still make a profit yourself if you grow your business to a point where you need to hire a production assistant.
OVERHEAD
Overhead covers expenses like tools and equipment, utilities, business insurance, packaging, office supplies, etc. These are the kind of sneaky, sometimes underestimated business expenses that can really add up.
If they are not accounted for in your craft prices, they can really eat away at your profits and your ability to grow your business.
WHOLESALE PRICE
Notice that the total costs were doubled to arrive at a wholesale price. Doubling the costs builds your profit into your craft prices.
Some people make the mistake of not including profit in the price of their craft because they feel that the labor cost is their profit. Keep in mind that labor is not profit. You may be paying yourself for the labor for production time right now, but your business may not always be structured in that way.
RETAIL PRICE
The retail price is determined by doubling the wholesale price. This step in the formula accounts for a couple of issues. First, by doubling the wholesale price to determine the retail price, you are accounting for any selling costs you encounter such as booth fees at art and craft shows, web hosting fees or third party website fees.
Second, most retail store owners and buyers expect to be able to purchase your product at half of the retail price if they are interested in placing a large wholesale order. By doubling the wholesale price to determine your retail price, you are ensuring that you can afford to sell your work at standard wholesale prices and still make a profit.
You might not be ready to accept wholesale orders yet, but if you don't build that factor into the price of your products, you will not be able to grow your business to a point where you do accept wholesale orders without significantly increasing your retail prices.
GET THE CRAFT PRICING CALCULATOR
I personally really like the idea of using a craft pricing formula as a starting point for pricing your crafts. So many people starting out tend to set their prices too low when they just estimate what they think the retail price should be. Using a formula can give you a solid, objective basis for your decisions. It can also begin to show you where you're losing potential profit, and point you to ways of improving your profit.
Ready to get calculating? Click here to download your own craft pricing formula calculator.
If you have an older version of Excel, the link above might not work. Click here to download a version of the calculator that is compatible for Excel 1997-2004.