As part of our articles series on pricing your handmade products, we’ve discussed formulas to price for profit and how to tweak the formula to fit your business. In our final segment, we’ll answer reader questions.
If you’re new to all this, how do you figure out how much you will sell in a year?
This question relates to how to calculate your overhead rate, part of your pricing formula equation, which requires an estimated number of items sold in one year. If you’re a new business, I’d come up with a very conservative (on the low side) estimate and go from there. After a month or two of business you can always adjust up or down.
Another option that I think is more appropriate for a new business (since sales usually take a while to get going) would be to base your overhead rate on an estimated number of products MADE in one year, rather than sold, since you have more control over that number and it’s easier to estimate. This concept still works because over time, all the products you make will eventually (ideally) sell and that cost will be recouped.
Your overhead rate calculation will always be a work in progress and should be continuously monitored. Remember, the goal is simply to make sure your pricing formula calculates a price that allows you to recover all the expenses your business faces.
“My crocheted items take some time to make and it kills my profit margin, so I’m not sure if there’s a realistic solution for my business other than to try a different craft or only make quick and easy items. For example, I have some small stuffed bears in my shop. They take about 45 minutes each to make and the yarn is $1. Let’s say I’m paying myself $10 an hour. ([$1+$7.50 labor]x2)+$4 overhead=$21 wholesale, $42 retail. No one would pay that much for a little stuffed bear, so it definitely gets discouraging trying to price for profit. It seems easy to use this pricing model on jewelry items and other quicker crafts but difficult on the more time consuming. Do you have any suggestions?”
This is a great question because I’m sure it’s a scenario that a lot of artists face. Certainly don’t give up on a craft or product you feel passionate about and enjoy making just because you aren’t sure how to price it. That being said, you should always strive to price for a profit if your goal is to have a successful business. You want your craft to be both profitable and enjoyable. I have several thoughts and ideas about tackling this.
Here are some questions you can ask yourself about labor-intensive products that seem to be highly priced for your comfort.
- Can I make it more efficiently? First, let’s examine our labor element. $10 an hour seems reasonable; I wouldn’t suggest paying yourself any less for your skilled crocheting. Is there anyway we can improve on 45 minutes per bear? Could we create the product in an “assembly line” way to make several at once in stages? Or will we possibly become more efficient over time, and maybe as we become more experienced we’re able to crochet one bear in 30 minutes? Basically, are there any systems we can implement to reduce our labor time for this product?
- Do I need to re-evaluate my overhead rate? In my original post I discussed defining different categories of overhead. You surely have general business expenses (advertising, website fees, etc.). But do you have any expenses lumped into your overhead rate calculation that maybe apply to one group of products but not all of them? Make that a separate “category” of overhead, with its own rate, and only include it in the pricing formulas for those products. More refined overhead rates can help you more accurately price your products by more accurately knowing how much they truly cost you. Another idea is to compare calculating your overhead rate based on your estimated annual products sold verses your estimated annual products made (as discussed above) and use the rate that makes more sense to you.
- Should I change my profit multiplier? The profit multiplier I recommend in my previous post is x4 for retail and x2 for wholesale. If you feel like this number is consistently over-pricing your items, you could try 3.8 or 3.5, whatever feels comfortable to you. Just make sure you are still leaving plenty of cushion for profit and covering your costs. You might try using different multipliers for different product lines, which leads me to #4…
- Could I shift my costs to other products? If your crocheted bears are your best seller, or your “hook” product bringing viewers into your shop and peaking interest, maybe you should price them a little lower and shift some of that missing cost to another product set that can handle a price increase and still sell. Maybe you’d price your bears at $32 and give a price bump to your crocheted baby blankets. This gets tricky, because depending on how many of each product type you sell, you might still lose out, but it’s another way to think about the issue.
- Tweak and re-think your formula. Remember that this is the formula I suggested in our first post:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
Wholesale Price x 2 = Retail Price
If you really think about this, for your wholesale price, you’re doubling the supplies and labor, and not your overhead, but for the retail price, you are quadrupling your supplies and labor, and doubling your overhead. If it makes more sense to you, and you want more leeway, you could not double your overhead for your retail price.
Have I lost you yet cause I’m losing myself with that statement! What I’m saying is, your formulas would look like this:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price (the same as above)
[(Supplies + Labor) x 4] + Overhead Rate = Retail Price
Both of the methods make sense. Both cover your costs, and both give you cushion for profit. One just gives you a bit more than the other, and is quicker and easier to figure out for retail purposes. If I used this new formula, the crocheted bear would then sell for [$1+$7.50 labor]x4)+$4 overhead = $38, rather than $42.
Finally, you know it’s worth mentioning…are you completely sure $42 is not a reasonable price for your item? When I look at crocheted animals on Etsy, I see prices ranging anywhere from $15 to $100. Just because it feels like it’s priced too high to you doesn’t mean your target audience will feel that way. Remember you are offering more than just a crocheted bear. You’re selling your brand, your awesome customer service, the story behind your amazing little bear, and the whole handcrafted experience, which has emotion and value all on it’s own
Remind yourself of this – if your pricing formula determines what price you really need to sell this bear at to make a livable, decent profit, then that is what you need to sell it at. It’s better to sell fewer bears at a good profit and have a sustainable business, than to sell tons of bears at a loss, and eventually have to shutter your business.
Do you sell an item for the same price both on Etsy and at a craft show?
My answer here depends a lot on your products and your tolerance for tedious tasks.
First, I’ll tell you what I personally do for craft shows. As you may know, I sell handcrafted jewelry. I have a lot of items; I generally end up bringing about 250 or so items to a show with me. Online, I have the luxury of using my pricing formula spreadsheet to individually calculate the price for every item I list for sale. I have a lot of different prices there! A craft show requires physically displaying all my jewelry on one or two tables, and thus I’m faced with the decision to either individually label 250 items with their already-calculated Etsy prices, or group them and make price signs for each group. It’s a lot less time consuming to just make signage to the effect of “all crystal earrings – $24” rather than tying tiny taggies with individual prices on 50 pairs of crystal earrings.
This “grouping” method requires a little bit of math work upfront to calculate the different pricing levels I want to use. I usually categorize my jewelry into different groups – studs, crystal earrings, pendant necklaces, painted earrings, adjustable rings, wire-wrapped rings, etc. I’ll have a list of what those items are priced on on Etsy, then I’ll decide on the best price point for each category. If I have a wide price range in one category, I might make 2 or 3 levels. For example, let’s say I sell crystal earrings on Etsy ranging from $15-$30. If I price all of them at a craft show for $25, my customers might shy away from buying the ones that seem to be way overpriced. So I might break out price points of $18, $22, and $28, or something like that. That helps me make more of the profit I need, encourages sales because things seem fairly priced, and makes the labeling situation a bit less time-consuming.
It takes some time for me to determine my price points, and then I make the signage and set up my display accordingly. But I find this to be a lot less work than keeping the same prices as on Etsy and having to individually label every piece. Plus, it’s a lot easier when I sell something because I’m likely to know the price off the top of my head.
And don’t forget about sales tax. I like to include sales taxes in the price of my goods already (this is ok to do in Texas as long as you have signage stating that you are doing this). This way customers can pay me a flat amount (I don’t like dealing with coins), and there are no additional surprises for them when they pay. This is another reason I don’t price the same at a show as on Etsy.
Finally (again just speaking about what I personally do), jewelry (and many products probably) sells differently at a show than online. I like to offer deals at shows, like buy 2 rings get a 3rd ring free, or buy 2 pairs of studs and get the third pair half off, to encourage people to buy more. These sort of promos are harder to do on Etsy, but are very successful at a show in person.
So, that’s the methodology I use. Your system really depends on your product and how much work you want to put into it. It also depends a lot on how easy your products are to label and tag. Jewelry is difficult, things like prints or cards that just require a sticker are much easier.
If you had fewer products to sell, especially ones that are easier to tag or label, it might be less work for you to just use your Etsy prices, without having to re-invent the wheel and recalculate all your prices or group your products into pricing levels.
That being said, remember what goes into your pricing formula. Do you have costs going into your Etsy pricing formula that don’t apply anymore for craft show items (for example, packaging costs that only apply if you’re shipping your products)? Might you have costs you should include in your formula that apply only to items you sell at the craft show (like the fee to participate)? Remember to price your items to recover all your costs.
As you can see, my answer is pretty complex and pricing is a complex topic. I hope my thought process makes sense to you.
Do you have anymore questions about pricing your handmade goodies? We’d love to hear them! We also want to thank everyone for participating in our pricing series and hope it was helpful to you.