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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.
my early days of practicing my craft show set up. I gathered all my crystal earrings on one tray and labeled them with a single sign, rather than individually tagging each pair.
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.
different price levels of earrings are grouped on different displays, with simple signage to label them
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.
To refresh, here’s the formula we discussed last time: This pricing formula is just a suggestion and can be tailored to meet your business needs, as long as you are leaving room for profit. Remember, you want those profit multipliers to be cushioning for profit, not covering the expenses you forgot to include.
If your price seems too high…
If the price seems too high there are several pieces of the equation you can examine, and then decide to tweak one, some, or all of the parts.
Look at your current supply costs. Is there a way to find less expensive supplies? Can you buy at a discount in bulk? Can you only shop sales or use discount codes? Is there a less expensive supplier around? Have you compared suppliers online vs. locally? Finding the cheapest source of quality supplies is one of the most challenging parts of being a creative entrepreneur, but once you’ve found one, it’s a gold mine that can help you keep costs under control and your prices at a reasonable level.
You can also try refining your overhead rates. Recall that your overhead rate is a little chunk of all the business expenses that aren’t directly traceable to a specific product. You include this in your price formula so that every time you sell something, you get reimbursed for a tiny chunk of those expenses. Sometimes, depending on the product, using multiple overhead rates can help refine your price. For example, with my products, I have a glue overhead rate and a jump-ring overhead rate. These are for expenses I have that I can’t trace the exact amount used to a specific product. Since I don’t use glue and/or jump rings in every product I make, I only need to use these rates in products that use them. I can leave that overhead amount out of my other products to get a more accurate picture of the expenses used to make that product. Another (perhaps better) example – let’s say I build an advertising campaign around one set of products. I might make an overhead rate for just those ad expenses and only apply them to that product group, rather than spread out that cost over all my products.
Think about your pricing in relation to all of the products you sell. You might have different “levels” of products. The market for rosette studs is very saturated. Maybe I want to have a really low price on those earrings to attract viewers and sales, so I am going to adjust by either giving them a lower overhead rate, or using a profit multiplier of 3 instead of 4. To make up for that, I’m going to shift some of those costs to my higher-priced rhinestone necklaces. This might lead to a situation where I’d sell lots of low-priced earrings with a lower profit margin, but also a few necklaces with a higher profit margin to balance it out.
Consider changing your profit multiplier for your retail pricing formula to a slightly lower number. Remember that your labor charge means you’re already paying yourself for your skilled work and time, and then your profit multiplier is (obviously) for profit. How much profit do you want and what are you doing with it? Are you saving for a vacation, or are you reinvesting your profits back into your business for an expansion? If you feel comfortable having a little less profit cushion, you can always multiply your wholesale price by 1.5 or 1.75 (or whatever) rather than 2.
You might also consider tweaking the retail pricing formula to look like this, to more truly mirror the wholesale formula you used:
This way you are just using the x4 multiplier on your supplies and labor, and not your whole overhead rate as well. Make sense? Clear as mud right. Just another suggestion that you can try out to see if it works better for you.
Are you paying yourself enough for your skilled labor and time?
Make sure you’re including all your estimated expenses (did you think of everything?) and be conservative when estimating your annual product sales when calculating your overhead rate.
Don’t be afraid to use a larger profit multiplier. You are the dictator of your prices. If you believe the market will support a higher price, do it. Don’t price your items lower just because that’s what the equation says. Who DOESN’T want more profit?!
Monitoring Your Pricing Strategy
Don’t hesitate to re-examine and re-tweak your pricing formula from time to time. Periodically re-examine the overhead rate you’re using. As you become a more experienced entrepreneur, you’ll have a better idea of the non-product expenses your business incurs every year. Ideally, you’ll be able to calculate a more refined and accurate rate over time. Your business expenses are going to change over time as well. The overhead rate you calculated 2 years ago probably isn’t still a reliable estimate now.
Always be on the look out for ways to save on supplies. If your supply cost for the same product goes down, you then have the enviable decision of keeping your price the same and bagging more profit, or reducing your price and maybe getting some more sales. Your labor rate might also need tweaking. You might want to pay yourself more per hour as you become more experienced, or you might be able to spend less time making one item now that you’re more experienced.
But What about the Competition?
Your product, brand, and shop are unique to you. A lot of your competition is probably under-pricing themselves; this is a chronic problem in the Etsy marketplace and puts pressure on everyone else. Your under-priced competition might be making lots of sales but still losing money at the end of the day. They might not still be in business next year. Don’t worry so much about competing with everybody else. Even if a higher price means fewer sales, you’d rather fewer sales and more bottom line profit than lots of sales but a negative bank account balance.
You want your business to be sustainable, and that means covering your expenses AND still having some money to put in your bank account at the end of the day. Why are you in business? To be able to quit your day job? To finance your supply purchases? To have extra vacation money? It’s likely that you won’t achieve your goals without making some money from this venture.
Think about pricing for your target market, not for the competition. Pricing is also about value, and value can be defined by the qualitative (your brand, customer service, etc.), not the quantitative. Your ideal customer is someone who values your product at the price you’ve calculated. You don’t need to be the Wal Mart of handmade goods. Don’t feel like you need to have the lowest price in town.
Here’s an honest story from my own experience. I sell rosette studs, which sometimes seems like the most common thing sold on Etsy. I sell mine for about $11-$13, which is what I’ve calculated as a profitable sales price for me. I believe that they are worth this price based on not only the inputs of my pricing formula, but also the quality of the materials, the customer service I provide, and the work put into each piece. But I see other Etsy shops selling them for as low as $3. Three dollars! Does it keep me up at night knowing my potential customer might not buy from me when they could get earrings elsewhere for $3? No. You might think I’m crazy, but my rosette studs are still, by far, my best-selling products. I might not sell as many as my competitor selling them at $3 a pop, but I can sell a lot fewer pairs and make the same amount of profit at the end of the day as a competing shop selling more for less. Make sense?
Pricing Too Low – Working Harder for the Same Amount of Money
Am I beating a dead horse yet? I apologize. Let’s use a lovely hand-lettered calligraphy print as a very, very simplified example.
a pretty handlettered calligraphy print by The Lettering Studio on etsy (please note this lovely item has nothing to do with my totally hypothetical example below)
My high-quality archival paper costs me 75 cents per sheet. It takes me 30 minutes to letter one print and I pay myself $12 an hour. My pretty black ink costs me $10 a jar, and the calligraphy pen costs me $20. I have $600 of other business expenses. I’m estimating that I will sell 250 prints this year, giving me an overhead rate of $2.40 ($630/250).
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($.75 + $6) x 2] + $2.40 = $15.19 for my wholesale price, x 2 = $31.80 for my retail price, or $32 flat.
Maybe I feel a bit hesitant to charge $32 for a hand-lettered print. I do an Etsy search and it seems like everybody else is selling their prints for about $20. So, I’m going to try to compete with that and just sell it for my wholesale price of $15, that way I’m even lower than my competition.
What if my goal is to make $1000 in profit this year? Then, this is what I’m going to be dealing with.
Scenario 1– I sell my prints for $15 a pop. After doing a nice little equation ($15x -.75x – $630 = $1000) and solving for x, I’d have to sell about 115 prints this year to make a profit of $1000 (meaning money I get after covering 75 cents of supply expense per item sold, and $630 of overhead expenses).
Scenario 2 – I sell my prints for $32 a pop. To cover same said expenses, I’d have to sell only 53 (that’s less than HALF as many in Scenario 1) prints to make the same $1000 of profit.
[Yes, there are a lot of assumptions and simplifications here (for example, you probably bought your paper in bulk and not by the piece for each sale, so you’d have to cover that bulk purchase regardless of how many items you sold, plus I didn’t include labor in any of this), but the gist of it is still important.]
To sum up that discovery – you can work twice as many hours and make 115 prints that sell for $15 each and make $1000 net income, or you can work for half as many hours and make 53 prints that sell for $32 each, still make $1000 in net income, and have loads more free time to make other products, spend on other business tasks, go the beach, drink tea, whatever. You might be afraid to set your price higher because that might decrease your sales…but you can sell fewer items and still make the same profit as if you had a lower price. You can even sell fewer items and make MORE profit than if you sold more items at a lower price. With the higher price, each piece you sell generates more profit. I’d rather work to make half as many prints, than do twice the work for the same amount of profit, wouldn’t you?
Another Downfall of Under-Pricing…Wholesale
Yet another problem you might face if you’re under-pricing your goods – selling wholesale and remaining profitable will be nearly impossible. At some point in your creative journey, you will hopefully get the opportunity to sell your goods to other retail businesses at wholesale. These other business owners will expect a lower (wholesale) price in exchange for buying in bulk upfront. You might face a similar price ratio if you sell consignment. Wholesale prices are usually around (give or take) 50% of your retail price. If you’re selling at retail on Etsy for less than what you should be, then making a profit at even lower wholesale prices will be a challenge. This is yet another reason why it’s important to start out with well thought out prices to begin with.
Bottom Line – Be Sensible & Find a Formula That Works for YOU.
Obviously, if this formula is giving you a price that you feel uncomfortable about it, then you should adjust it. If you are hesitant to price your item as high as the formula is calculating, make sure you aren’t selling yourself short. Price your product as close to that number as you’re willing to go, and see how customers respond to that price. You might be surprised.
A lot of us under-price and under-value our goods. Don’t let the fear of not making sales due to a higher price and/or trying to compete with other shops keep your prices too low. Remember the reasons why you started your creative business. Chances are, being financially successful was probably on that list. You will feel so much more energized, encouraged, and productive if, at the end of the day, you see that your business is thriving and making money.
Keeping all this in mind, I challenge you today to take a hard look at your pricing strategy. Your prices will determine whether or not your business is able to make a profit, no matter how many sales you’re making. So it’s really important for you to hunker down, examine your expenses, and make sure you’re pricing yourself for profit. Again, please let us know what questions about pricing we can answer for you in our reader Q&A post.
Today we’ll begin to delve into the topic of pricing your products. Pricing your handcrafted products can be one of the most challenging tasks for a creative entrepreneur. You can have an awesome product, a cohesive brand, a great webpage…you can even have amazing sales. But if your product isn’t priced right, you won’t make a profit and it will be hard to keep running your creative biz.
Please note, before you read this post, I suggest you read our articles on tracking expenses and overhead first to better understand the concepts we discuss below.
We could write a whole novel on this topic, so we’ll divide it into a series of posts. Please feel free to comment with any questions! This is a tricky, but important, concept that we owe it to ourselves to get educated about and get it right!
The Unprofitable Pricing Formula
Browsing the interwebs, you’ll frequently see a pricing formula that looks a lot like this:
Supplies x 2 = Wholesale Price Wholesale Price x 2 = Retail Price (or Supplies x 4)
I’m hesitant to even type that one on here because I don’t want you to just see it, use it, and then leave. A pricing formula like this might be simple, but it most likely will not get you a profit. Why? Because it leaves out a whole bunch of other fees and expenses that you’re probably incurring. Sure, the “x2” or “x4” multiplier is probably helping you cover part of that, but it’s better to come up with a more exact measure of all your expenses and include them.
Pricing for Profit – A Better Formula
Here’s what I suggest:
My pricing formula also includes labor and what I’m calling an overhead rate. Yes, my formula is a little more complicated. Let me explain my reasoning by defining each piece of the formula. Then, I’ll give an example of pricing two hypothetical products, a wire-wrapped ring and a pair of stud earrings.
Supplies: As I explained in this post, your supplies expense is the cost of whatever materials went directly into your product. You should always have a record of what you pay for your materials (don’t forget what you paid for shipping too). You should be recording this at the per unit level, unless it is cost-prohibitive (basically, too time-consuming) to do so.
For example, if you bought 100 beads, you should take the price and divide it by 100 to get the price per bead. If you bought a bunch of fabric, you’d calculate the price per foot or yard. This will help you determine how much a product you made with 1 bead or 1 yard of fabric cost you.
Being able to come up with an exact supply cost for a product implies that you are tracking this data somewhere in your bookkeeping system, whether it be some accounting software, a giant shoe box of receipts, an email folder, or a nicely organized spreadsheet. So…I hope you’re doing that!
Labor: Just like with a “real” job, you must pay yourself an hourly rate. Decide what you want your hourly rate to be (please, at least pay yourself more than minimum wage!), and determine how long it took you to make the product. Labor cost should equal Time x Wage, so if you’re paying yourself $10 an hour and it took you half an hour to make it, pay yourself $5 for that product. Keep in mind that you spend lots of time working on your business that isn’t necessarily spent making products, and you don’t get paid for that. When in doubt, I suggest you round up your time to more make sure you’re paying yourself what you’re worth.
Overhead Rate: We’ve previously discussed what overhead is, so check out this article to get the full rundown. Basically, overhead is all the other expenses you have that 1) go into your product, but you can’t get the exact amount per product (the cost of the thread you used in your apron, the ink you used to write the calligraphy, etc.), plus 2) all of the other business expenses you pay that don’t have directly go into a product (advertising costs, a web domain, your crafting tools, etc.).
The best way to include these expenses in your pricing formula is to come up with a rate. You are basically putting a little chunk of these expenses into the price of everything you sell. Please refer to our other article on how to calculate your overhead rate. I suggest calculating your rate based on your estimated products sold in a year.
To refine your formula further, you can even have multiple categories of overhead with their own rates. In my own practice, I don’t have the time or energy to count how many jump rings I have, or how much adhesive went into a specific item, so I just have separate overhead rates for those categories that I use for the applicable products. Then I have a “general business” overhead rate that I use to price all my products.
Don’t forget that your fees should be included in your overhead rate calculation. These are the fees that you pay to Etsy, Paypal, Square, etc. to list and sell your products. Examples include Etsy’s 20 cent listing fee, their percentage of your sale, Paypal’s percentage of your sale, etc. To complicate things further, your total fee might vary based on whether you sell it via Paypal or Etsy’s Direct Checkout. Currently, Paypal fees are 2.9% plus 30 cents. Etsy fees are 3.5% of the sales price (this is their cut no matter which method it sells via), and their Direct Checkout takes a 3% cut and a 25 cents transaction fee. Whew, confusing!
Wait a Minute, What’s That “Multiplier” for?
The “x2” and “x4” is what I shall call your profit multiplier. It’s basically what’s ensuring you a profit at the end of the day. You’re taking your costs, multiplying them by the profit multiplier, and getting your sales price. Your sales price means you are getting paid back enough to first cover all your costs, then actually make some money on top of that.
Supplies – That’s the cost of the wire and the druzy stone. The druzy stone cost me $3. I buy the wire in 30 feet spools. One spool costs me $8. So, I can either measure exactly how much wire I used for this ring, or I can make an estimated cost based on an average for each ring. Let’s say I use an average of 2.5 feet for each ring, so that gets me about 67 cents of wire in 1 ring ($8 per spool / 30 feet = $.267 per foot x 2.5 feet = $.67). Am I confusing you yet? So, my supplies expense for this one ring is $3.67.
Labor – This ring takes me 10 minutes to make, and I want to earn $12 an hour. So 1/6th of an hour x $12 = $2 in labor for this ring
Overhead Rate – In my hypothetical situation, let’s say these are my estimated overhead expenses for the year:
$800 – Etsy fees
$250 – Paypal fees
$250 – Advertising & printing expenses
$300 – Craft show fees
$50 – Photo props
$100 – Editing software
$75 – Tools
$275 – Indirect product costs
$15 – Website costs
Wow! That’s a lot of overhead! These costs add up, that’s why it’s important to include them in your pricing strategy somehow.
I’m going to calculate my overhead rate based on an estimated annual number of products sold. Last year, let’s say I sold 400 items. This year, I’m estimating that I will sell 500 pieces. $2,115 / 500 = $4.23 per item for overhead. So, my formula would look like this:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($3.67 + $2) x 2] + $4.23 = $15.57 for my wholesale price, x 2 = $31.14 for my retail price. If this were me I’d probably do some rounding and sell it for $31 flat.
Remember, there’s several ways you can calculate your overhead rate and incorporate it in your pricing strategy.
Supplies – Let’s say the rosettes cost me 20 cents a pair, 20 cents for the studs, and 5 cents for the earnuts. That means my supply expense is 45 cents.
Labor – I make a bunch of earrings at once, so each pair doesn’t take me too long. Let’s say I pay myself 50 cents for each pair.
Overhead rate – $4.23 as I calculated it in the above example, and you can use that same overhead rate across the board for all your products.
So, my formula would look like this:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($.45 + $.50) x 2] + $4.23 = $6.13 for my wholesale price, x 2 = $12.26 for my retail price. Again, that’d be $12 flat for me.
The Big Picture
Does it seem crazy that a ring that cost you less than $4 to make should be priced at $31? Or a pair of earrings that cost you less than $1 could sell for 12 times that amount? That is why soooo many artisans underprice their goods, or make awesome sales but never turn a profit. It all boils down to two things when coming up with a pricing formula that works:
Covering all of your costs – find a reasonable, doable way to include all your business costs in your pricing formula, not just the obvious ones, whether this is by using an overhead rate, a percentage markup, or something else that works for you.
Making a profit – here’s the kicker. If all your business expenses are represented somewhere in your pricing formula, that little “x2” or “x4” profit multiplier is what will allow you to be profitable (duh!). Too many entrepreneurs forget to include all their true costs in their formula, and profit multiplier that should be giving them a profit is really just covering all those forgotten expenses instead.
Trust me, it’s a lot easier to price your product for a profit now, even if it feels too high, and lower your price later for whatever reason, than to be in business for a while with prices that are too low, realize you aren’t going to have a sustainable business, and have to raise your prices later to stay open.
kraft price tags, from wishdesignstudio on etsy
Next time we’ll continue the conversation about pricing your creative goods and discuss tweaking the formula to fit your business, checking out (or not) your competitors’ prices, and why it’s so important to not under-price yourself. We might even be feeling really generous and include a little downloadable freebie spreadsheet with the pricing formulas already embedded for you!
In the meantime, if there’s any specific things you’d like us to talk about or any pricing questions you may have, feel free to hit us up in the comments.
UPDATE: Check out part 2 of our series, which discusses the pitfalls of under-pricing, tweaking the formula to fit your needs, and competing with other shops, here.
As small business owners, we are swimming in a deep sea of numbers, stats, and financial data on a daily basis (whether you choose to ignore this sea or not is a different story!). Luckily, what you may not know is that Etsy makes it super easy for shop owners to download their sales info in order to calculate their net income in a relatively painless process.
You can download your sales data from Etsy on an annual or monthly basis and quickly export this info to a spreadsheet, where it can be sorted, filtered, summed, and utilized with other data. This is a quick and easy way to calculate all sorts of helpful numbers, including your total sales and shipping, which will be especially helpful for tax time.
Here’s a step-by-step guide on how to download your sales data from Etsy, and what to do with it once you’ve got it (please note that I use Excel for my spreadsheets):
You’ll then see a screen that looks something like this:
There are lots of different things you can do from here. Etsy offers several items for download, including a spreadsheet of the listings you currently have for sale, your orders by item, your orders by total, your direct checkout payments, and your direct checkout deposits. Read the descriptions to see what else you might like to download. For now, we’re going to use the orders download to calculate our total sales.
Etsy also gives you the option of downloading any of these spreadsheets for a specific month of a year, or for an entire year. Right now, we’ll download all of our orders from last year.
Since I’m using Windows, I’m going to open my file in Excel. From here on out I’m going to give you some step-by-step instructions on how to format and set up your sales data in Excel. You can obviously format it however you’d like, this is just what makes sense to me, and may be helpful if you’re an Excel novice.
After you’ve got your file open in Excel (should automatically open if you selected “open” in the previous step), let’s first make the column widths all pretty so we can actually read all this data.
Now we’ll add filters so we can better analyze all this nice data.
Etsy gives you a lot more information here than you probably need, like the names and addresses of all your customers. While the ship state might be helpful to filter for sales tax purposes, we can hide a lot of columns to make our data more manageable. If we decide we need it later, it’s easy to unhide a column.
I like to freeze my top row so that as I scroll down I still can refer to the column header to know what I’m looking at.
Then we format all our financial data to actually look like money rather than just a number.
Now it’s time to use a simple formula to get some great data, like our total sales, total amount we got paid for shipping, sales taxes collected, and credit card fees.
Excel makes it easy to use the filter function to sort by all sorts of things. Here, we can put our sales in chronological order. We could even choose to only look at one month or one quarter’s worth of sales (also helpful for quarterly tax returns or payments). We can use this function to look at only paypal sales, only international sales, only sales over or under a certain dollar amount…the possibilities are endless.
Let the big green letters below represent the following:
Don’t forget that your gross sales on your tax return should include everything you got paid for shipping as well. You’d report A + B as sales on your tax return. E, your credit card processing fees, would be a tax deduction.
You can copy F, your Etsy net sales, to your personal bookkeeping spreadsheet and then add in any other revenue streams and subtract all your other expenses to get your business’ true net income.
So there you go, a step-by-step guide on how to utilize this wonderful asset that Etsy provides for us! If you didn’t know this existed, I hope you found this helpful. You might also want to check out our ongoing Etsy Shop Stats series of articles to get help on another free asset that Etsy provides!
Do you have any questions on how to download and intrepret your Etsy sales spreadsheet?
After nearly 3 years in the business of being Lazy Owl, and also being a CPA, and also BLOGGING about good financial practices for small businesses…
I just now finally opened a business bank account for myself.
Yes yes, throw your stones at me now, I deserve it. Many people agree that opening a separate business checking account for your creative business should be one of the very first things you do when starting out. And I agree. But I didn’t call my business Lazy Owl for no reason people!
Honestly, there’s really nothing wrong (or like, illegal) about using your personal checking account for your business, as long as you’re operating as a sole proprietor. However, there’s (at least) two major benefits of having a separate business account for your Etsy shop or online creative business:Anyway, it’s been on my to-do list for quite some time, and now I’ve checked it off. Here are my thoughts on the process, if you are out there wondering if you need to open a separate bank account for your creative business.
You can accept and deposit checks made out to your business name, write checks in your business name, get a debit and/or credit card in your business name…and just plain do business and what not in your business name.
Your personal and business cash inflows and outflows are not “comingled” for tax & financial purposes.
First, your business checking account can be in yourbusiness’ name obviously. This is something that can’t be done with a personal account (most banks won’t let you at least). So now, if you ever get a check made out to “Lazy Owl Boutique”, you can actually deposit or cash it without the bank being all confused about it, or even worse, rejecting it outright. This means you can also get a debit and/or credit card in your business’ name and checks with your business name on them. Fancy!
Second, trust me when I say, you have to be very diligent and organized if you are operating your business out of your personal bank account when tax time comes around… or even just to do any financial tracking for your business in the meantime. Having only one account means digging through a lot more transactions to figure out what income and expenses belonged to your business versus your personal life. This means a lot more time determining which expenses are deductible and which are not. Having an account dedicated to just your business means you don’t have that problem. You can simply copy or download all of your transactions and call it a day. This is also really good news because it means if your tax return is ever audited by the IRS, you have some really good documentation readily handy.
But really, there are lots of other intangible benefits than just the two above. Here are just a few off the top of my head…
I can save mucho time by downloading bank transaction data directly to my financial spreadsheet (or Quickbooks, Outright, Mint, or other financial software you might be using). With direct data download from my business bank account, Etsy account, and Paypal account, Imagine all that number-crunching analysis I’ll be able to do now without having to type transactions in one at a time!
I spend a lot of time during tax season finally inputting various miscellaneous expenses from the entire year that I can now stay on top of throughout the year. Since I am constantly buying jewelry supplies, having all my expenses in one place without having to filter out my groceries and what not will be splendid.
Here’s a great one – I will have a much better grasp on my day-to-day cash flow and income/loss than I did previously. Now I can simply check the balance of my bank account, rather than take an afternoon to update my profit spreadsheet by entering sales and expenses line-by-line.
I also will finally be able to have a Paypal account and debit card devoted solely to my business. Better expense tracking there as well.
Bottom line…this saves me a lot of time and energy and encourages me to actually deal with my finances, instead of pushing them aside day after day because the work is too time-consuming and tedious. If me, the accountant, has trouble finding the stamina to work on my financial paperwork, I’m sure a lot of artists out there don’t enjoy this task either!
Financial gushing aside, there are some downsides to opening a business checking account that you don’t have with personal checking accounts…mainly, fees. Most banks require a minimum monthly balance or your account will be charged $10-$15 a month. Also, if you have more than a max number of transactions each month (usually around 150-200), you are charged a fee per transaction. If you plan and monitor your account carefully though, you can usually avoid these charges, and I believe the pros outweigh the cons. Trying to avoid these extra fees has a silver lining – it encourages you to monitor your money more frequently and makes you more aware of your finances on a day-to-day basis, something a lot of us creative peeps have trouble with.
I used this helpful tool at nerdwallet.com to find a bank in my area that fit my needs the best (like a phone app for mobile check deposit, yes please!) and charged the lowest fees. I highly recommend it. There are also some online-only small business banks that you can check out, though I couldn’t find any that seemed to have solid positive reviews thus far.
So, there you go. Hopefully this encourages you to bite the bullet if you haven’t already gotten yourself a checking account for your creative business. It’s just another step, and one that’s not too painful, on the road to becoming a thriving creative business and a financial success.
Cue the happy music…it’s the most wonderful tiiiime of the year…do do do. No, not really. It’s tax season! If you have the pleasure of knowing a tax accountant, you probably won’t see them much between now and April 15th.
That’s right ladies and gents, it’s time to do your taxes! As an entrepreneur, you now have the responsibility to not only report your own personal income and expenses (and possibly your family’s), but also the income and expenses of your business.
First and foremost, you and your business are likely responsible for two types of taxes:
Sales taxes paid to your state
Income taxes paid to the federal government, and possibly also your state
When you first go into business, one of the first things you should do is get a state sales tax permit. This process will depend on your state, but it is usually a relatively painless and luckily, free, process. In Texas, it costs no money and you can easily apply online.
This is the gist of sales taxes – every time you sell an item, even if it’s an online sale, to another person in your state, you are responsible for charging them your state (and possibly city/county) sales tax percentage rate. The customer pays that extra tax money over to you, and you hold onto it until it’s time to pass it on to your state government tax agency. You’ll be responsible for paying your sales taxes on either a monthly, quarterly, or annual basis. They aren’t really an expense to you, more so just a “pass through” in and out amount.
Income taxes are a different beast. These are the taxes you’re charged on all the money you make each year, whether it be your personal wages, investment dividends, or small business income.
Now we could talk about business income taxes for days on end (sounds thrilling right?), but today we’ll just leave it to a brief overview to get the wheels turning. First, I’m going to assume that your business is considered a “sole proprietorship”. This means your business is not a corporation, a partnership, an LLC, or any other separate legal entity. If you’ve never filed separate paperwork to incorporate your business (excluding your sales tax permit and your DBA license), chances are you are a sole proprietorship.
Your business’ legal status matters because it determines on which form you are reporting your income and expenses. For a sole proprietorship, you will report your business stuff on a special form called Schedule C, which is attached to your regular personal 1040 return. Some of the data from your Schedule C will actually end up flowing onto page 1 of your 1040.
Here is the IRS webpage for both the Schedule C AND the all important Schedule C instructions.
just a little snippet of the Schedule C from 2011
Above is what part of page 1 of the 2011 Schedule C looked like. On the two pages of the Schedule C, you’ll have space to enter your business info, all your sales, and all the expenses and deductions related to your business. At the bottom of page 1, you will get the final number for your business’ taxable net profit or net loss, and this number then travels over to page 1 of your personal 1040. If you have net profit, that money will increase your taxes owed this year. If you have a net loss, it’s possible this money can decrease the amount of taxes you will owe.
So you can see, it’s really important to track all your expenses and deductions over the year. In reality, you of course want your busy to be profitable and have a net profit, but for tax purposes, the lower your net profit, the smaller the amount of taxes you will owe. That’s why having a good handle on your expenses helps.
Go ahead and take some time to get familiar with both the Schedule C and the Schedule C instructions; these instructions are particularly helpful since they go through each item on both pages of the Schedule C line by line with definitions. Even if you use a program like Turbo Tax to do your taxes, these instructions can offer some extra guidance.
I’d love to hear from you! Are you doing the taxes for your small business this year or consulting a tax professional?
No, I’m not talking about you buying an overhead projector. Overhead is a term used in cost or manufacturing accounting (sounds scary? it is!). Your overhead expenses are all the expenses you incur to design, create, or manufacture your product, but they are not directly traceable to an individual product.
If you were running a giant factory and creating widgets, your overhead expenses would be things like the rent, utilities, wages to pay your factory workers, insurance, marketing fees, advertising, tools, machines, and indirect materials. These are all costs that are vital to keeping your business running. Without them, you would not be in operation, but you can’t exactly trace them to your finished products…like how much of your electricity bill helped generate that one widget? I’m sure with some complicated formula we could figure that out, but we don’t have time for that. We’ve got stuff to make!
expenses_28sept2009_0522 (Photo credit: patrick h. lauke)
Your handcrafted small business has overhead expenses too. You probably spend money on lots of things that keep your business running smoothly, yet these expenses are not directly, easily traceable to every item you create. If you go back to the last post about your business’ expenses, the expense categories like indirect supplies and materials costs, tools, machines and other items used, and all ofthe non-product costs should be considered overhead expenses for your business.
In my humble opinion, one of the biggest mistakes Etsy entrepreneurs make is not taking these overhead expenses into account when pricing their goods. Like we mentioned in the past post, most of these expenses are deductible for tax purposes, but you should also try to recoup a little piece of your overhead expenses in every sale you make. I’m not going to talk about pricing formulas and those specifics today, but the point is you need to be thinking of the most sensible way to include a tiny portion of your overhead expenses in the price of each and every item you list for sale.
How do you go about doing that? Well, I’d start by tallying your estimated overhead expenses, either on a monthly or annual basis, whatever is easiest for you. That includes the following types of expenses:
just a few examples of the overhead expenses your etsy business may incur
Once you get to an annual estimated total of these expenses, you need to find a way to work backwards to include a piece of this total sum in your pricing formula. There are lots of ways to do this. Here are just a few possibilities:
Estimate how many products you will create this year. Take your total overhead expense number and divide it by the number of items. Add that number to the sales price of each item you list for sale. For example, $1000 in annual overhead divided by making 350 items this year means I need to increase the price of each item by $2.85 or so to recoup a chunk of overhead in every sale I make.
Same method as above, but instead of estimating your total items produced, estimate the total number of items you hope to sell this year. That way you are getting closer to truly recouping that overhead expense back with each and every sale.
Instead of adding a flat “fixed” overhead dollar amount to each sale price, you can use a percentage markup instead. Once you know the cost of direct materials and labor that went into creating a specific product, you might multiply that total by a specific overhead percentage (determined based on what feels sensible to you). For example, if these earrings cost me $6 to create and my overhead percentage is 20%, then I’m saying that product required about $1.20 of overhead expense to make, and really cost me $7.20 in total to create.
All overhead methods have their pros and cons. Using a fixed flat overhead rate is easiest, but using the same rate across the board for every product you make might not be best representing your true overhead costs per product. On the other hand, the percentage method allows you to add more overhead costs to your more expensive or time-consuming products, which probably really do use more overhead expenses. It all depends on what makes sense to you. The important thing is that you try to do something to include these costs somewhere in your pricing formula. If you don’t, you are much less likely to ever recover those expenses, and at the end of the day, your business is making less real profit than you might think. So get cracking on thinking about overhead!
I’d love to hear from you! What do you think is the most challenging part about bookkeeping for your handmade business?
Today, let’s talk about what sort of information you should be keeping track of in your new “books”. The rule of thumb is that when it comes to recording your financial info, you basically can’t record too much. Everything is important, whether for tax purposes or for your own calculations.
The biggest category of info that you will spend your time recording will be your business’ expenses. You might not realize it, but your business probably has lots and lots of expenses. Let’s divide our expenses into two categories, product-related and non-product-related.
Direct supplies and material costs – these are the items that directly go into your sellable products. For a sewist, that’d be fabric, elastic, or ribbon. These are probably the most obvious expenses, and not too difficult to keep track of.
Indirect supplies and material costs – these are items that go into making a product, but we can’t necessarily track exactly how much of it goes into each item because it’s either impossible or cost-prohibitive. These are things like glue or thread. I know I used thread to make that purse, but I can’t tell you exactly how many inches or feet went into each one. I know I used glue to make my yarn wreath, but there’s no way for me to be totally sure how many ounces or what-nots of glue went into it.
Tools, machines, and other items used to create your sellable products – they aren’t literally a part of your product, but you couldn’t make it without them. Examples are your sewing machine, scissors, pliers, or a cutting mat.
Expenses related to putting your products up for sale and selling them – all those little fees and charges you pay to list your products online or accept payment for a sale, like Etsy listing fees, Etsy’s cut of your sale, Paypal charges, credit card fees, etc.
Shipping and Packaging costs – including boxes, mailers, labels, envelopes, a postage scale, and decorative packaging items. This also obviously includes the actual price of postage.
Craft show registration fees
Startup and legal fees for licenses, permits, etc.
Display expenses, like jewelry stands, tags, earring cards, racks, tables, pop-up tent, etc.
Photography expenses, like a light box, new camera, props, editing software
Promotional material costs (like printing) for business cards, postcards, stationery, custom stamps, labels, etc.
Design and web development costs for your website, web hosting, logo, banner, etc.
Research and development expenses for product research, prototyping, business education classes or e-courses, consulting services, books, etc.
The cost of gas for driving to the post office, craft store, craft fair, business meeting, etc., and lodging for staying overnight for any of these reasons.
I divide your expenses into these two categories mainly for pricing reasons, which we’ll discuss in the future. Let’s just sum it up by saying all your product-related expenses (and possibly even some of your non-product-related expenses) should be considered when it comes time to price your product. A lot of beginning crafters make the mistake of only considering direct materials expenses when pricing their product and then end up grossly under-pricing themselves; look how many expenses they’re forgetting about!
The main point is that your business can have a lot of different expenses. And you need to be recording them all! Thorough expense-tracking serves two main purposes:
You’ll get a better picture about whether your business is actually making a profit or not, and
You’ll be able to use most of these expenses as deductions when tax time comes around.
About #1, are you really making money at the end of the day? When you make sales, it might feel like you’re raking in the cash. If you’re only subtracting the cost of your supplies from that revenue, you may feel like you’re really successful, and then wonder why your bank account doesn’t reflect that. If you are truly tracking all of your expenses, you can get a good grasp on whether your business is profitable, how much so, and adjust accordingly. You will also get a better idea of where you’re spending too much money and where you can cut back, and whether your pricing formula needs adjusting or not.
As far as #2 goes, the important thing to remember is that you need to keep proof of all your expenses. Save those receipts, yall! Or star your emails and file them away. Just don’t expect the IRS to be cool with hundreds of dollars of expenses with no support.
Whew! That was a lot of ground to cover. You may be left wondering about the best way to organize all these expense types. That answer all depends on what works best for you. An accounting-based program like Quickbooks or Outright.com will sort your expenses into nifty little accounts for you.
If you use the spreadsheet method (like myself), create a tab for each category or subcategory. For example, I have separate tabs for my main jewelry supply components (crystals, beads, buttons, earwires, etc.), a tab just for shipping costs, one for jewelry tools, and the list goes on. I then have a summary tab where I can use formulas to capture all these different expenses in one place, to see my total spending. The easier your system allows you to capture all your expenses in appropriate categories, the better.
That’s enough left-brain for today. Time to take a break and give yourself a pat on the back for paying attention through this entire post. It wasn’t too painful, was it? Check back next time for more accounting tips for creative businesses!
If you found this post helpful, I recommend you read my post about overhead expenses, which can also help you accurately price your goods for profit, and my post about getting your creative business ready for tax season.
I’d love to hear from you! What do you think is the most challenging part about bookkeeping for your handmade business?
Welcome to Lazy Owl’s newest article series, Creative Accounting, brought to you as a (hopefully) weekly feature as part of the Crafting a Business 101 series.
You may or may not know, but by day I am a *gasp*…accountant! A certified public accountant, or a CPA, to be exact. I’ve also been the owner/designer/bookkeeper for a little jewelry shop on Etsy called Lazy Owl Boutique since early 2011. So, I feel pretty okay about talking to you about basic accounting concepts, how they relate to your business, and most importantly, WHY they should matter to you.
To some people, “accounting” is considered a four-letter word, but as a small business owner, it’s important to have a grasp on financial concepts and bookkeeping skills. If you ignore your financial responsibilities it will eventually bite you in the proverbial butt! Don’t be intimidated by spreadsheets, numbers, paperwork, or formulas. It’s time to make your business work for you. If you take the time to sit down and educate yourself and then apply your new knowledge to your business, you will learn all sorts of things – how to save on your taxes, how to properly price your items, whether or not you are actually making a profit, how to increase your profit…the list goes on and on! Mastering your creative business’s finances will take you from crafting as a hobby to owning a bonafide small business.
Let’s ease into this. We’re never going to talk about anything super complex or confusing, so you can exhale now. And I promise you will learn some stuff that you can actually use to make your business run a little bit more smoothly.
I’d like to begin this series by talking about bookkeeping. Call it what you want – record-keeping, tracking expenses, saving receipts. Don’t let the funny term “bookkeeping” confuse you. I’m just talking about recording, in written or electronic form, your expenses (ALL your expenses) and your sales revenue. And I don’t mean stockpiling receipts in a shoebox (of which I may or may not be guilty).
20121121 NCR Class 160 Bookkeeping Machine (Photo credit: Degilbo on flickr)
All good finances begin with good bookkeeping. You cannot possibly get a clear picture of your business’s overall expenses, profit, or just plain ole financial success if you are not recording everything. Can you imagine Apple not knowing if they even made any money in 2012? That is basically what you are doing if you aren’t keeping track of these things.
Check it out – we just began a brand new year 2013! The slate of shoddy financial record keeping has officially been wiped clean for you. Do yourself and your business a favor and come up with a bookkeeping system now that you can use for your business all year. Whether it be a software program, like Quickbooks, an internet-based application like Outright.com, a simple spreadsheet, or even a special bookkeeping paper notebook and a trust calculator, you need to find a method that will do what you need AND that you will actually use right now. That means don’t pay out the wazoo for something with so many bells and whistles that you don’t understand how to enter a simple receipt. Start small if you need to and you can expand your system as needed. To me, the best method to begin with (and honestly the method I still use today) is a simple Excel spreadsheet. So if you’re short on funds or time, just open up a new spreadsheet and get started.
Now’s a fun time (if you are a nerd like myself at least) to ask other Etsy entrepreneurs and small business owners what sort of bookkeeping system they use. You’re creative, right? Think of your bookkeeping system as an extension of the creative “fun” of owning your own business. You can “design” your system to be a reflection of you and your brand. Want a color-coded spreadsheet with fun fonts? Go for it. Want a snazzy painted file cabinet system to sort your receipts and paperwork? Do whatever works to keep you motivated to consistently update your financial records.
Next week, we’ll talk about exactly what you should be recording in your new bookkeeping system. So start savings those receipts and I’ll see you then!