The following information was originally developed by the Craft Sector of the provincial Department of Business, Tourism, Culture and Rural Development. We appreciate the support the BTCRD has provided, especially access to their resource material.
You can use this pricing information to help you determine appropriate pricing for your crafts.
This workshop material came from the initial pricing workshop delivered in March 2015 by distance technology to participants from several regions of Labrador.
The Management Committee plans to deliver this pricing workshop in other parts of Labrador in the future. As well, the pricing workshop will be incorporated into other traditional craft training and development workshops delivered by Craft Labrador.
Pricing is a Balancing Act
If you price your crafts too low you’ll lose money. If you price too high you’ll lose customers. Pricing takes time and experience to master. We like to think of pricing as a balance between math and marketing. Pricing takes personal judgment and that takes experience. The more you practice the better you will get at finding a price that is right for you. We hope the following information will help you.
Taking the time to figure out just how much it costs to make your work will ensure you are being paid properly. It will also give you the confidence to establish a fair price for your work in the marketplace. Keep in mind that there is no magic formula.
Consider these factors when you are pricing your crafts:
- Your costs (that’s the math) including materials, labour, overhead and a profit.
- Your customers and what they’re willing pay (that’s market research).
- Your competition and what they are charging (that’s more research).
Know Your Competition
Before you start, take some time to conduct some market research to help determine who your customers are and what they are willing to pay for the type of products you are creating. In order to determine your customers, you need to find out who your competitors are and what they charge for similar goods. This information is a good starting point.
A craft pricing formula is a starting point. It’s a great tool that minimizes the guesswork and emotional complications of pricing your work. Many people starting a craft business tend to set their prices too low when they just estimate what they think the retail price should be. Using a craft pricing formula can give you a solid, objective basis for your prices. A good craft pricing formula will take away the guesswork and ensure you have factored in all of your costs. While a craft pricing formula can’t possibly factor in all aspects of your business, it does provide an excellent starting point.
|Total primary costs||$30|
Using a pricing formula will help you remember to include all the costs that go into making and selling your work. Without the formula, you might neglect to pay yourself a fair wage or misjudge the amount of time it takes to create your work. The formula will eliminate the emotions that you feel in the value of your work – emotions that sometimes get in the way of making good business decisions.
The pricing formula gives you an objective estimate of what you need to charge to build a business that is viable and has room to grow. In the meantime, if your product will not sell for the price you have calculated, you do have some choices particularly if you are just starting out. The important thing is not to ignore the high cost value you’ve recognized, but to look for ways to bring the number down (if you have to) and still create valued work.
You may be able to reduce expenses in some areas and still cover costs by considering the following:
- What’s the biggest factor contributing to the price? Usually it’s your materials or the time it takes to make your work.
- Is there anything you can do to change those? For example, could you buy your materials at wholesale costs or purchase tools or equipment that will streamline your process?
You can also consider creating another product line that is quicker to make with less expensive materials. This is known as the ‘bread and butter’ item and would complement your higher-end product line.
You may be able to increase the perceived value of your work without greatly increasing your costs. Often gorgeous packaging and marketing materials will increase perceived value. You can develop and improve your skills so you create work that is unique and has a higher perceived value. Try selling at a gallery or shop that sells higher-end products to a different clientele.
At the end of the day the formula is meant to be a guide to allow you to make smart choices for your business and to help you to avoid under-selling your work.
As with anything, the more experience you have the easier it will get. There may be products that you can only retail yourself (through shows and from your own studio or shop) and other products that you can wholesale and produce in greater quantities. The key to success is finding that balance and not being afraid to ask for help.
A Simpler Pricing Model
In Craft Labrador’s workshops we usually include a pricing discussion. We talk about pricing formulas and ways to include overhead costs in the formula. In a recent product development workshop, we learned that one of our participants uses a simple and effective formula. She doubles the cost of materials and adds labour to get a wholesale price: Materials x 2 + Labour = Wholesale.
We used the pricing formula to price products that we made in the workshop. Here is an example:
- If our materials cost $10 and our labour cost is $12, then
- Materials x 2 = $20 + Labour $12 = $32 wholesale price
- The shop we are selling to has a 50% markup
- $32 wholesale price + 50% markup of $16 = $48 retail price
Our workshop participants found that this was a simple way to price their work. By doubling the cost of materials we add something to cover overhead, but the wholesale price is kept at a reasonable amount. Remember that if the craft maker is selling directly to the customer, they would sell at the retail price.
List everything you use to make your products; don’t overlook the small things like thread. Even ‘found’ materials have a cost, like your gas, wear and tear on your vehicle and your time to go collecting.
Try to minimize wastage by cutting carefully, and using scraps in other projects. You can even try selling your scraps/waste in small packages for other crafters to use. Search out your raw materials for the best price possible – buy when materials are on special discount prices when you can. Remember that, depending on the type of materials you work with, your materials can have a huge bearing on your price. Some materials fluctuate in price (silver or gold) with market prices and availability.
You should pay yourself a fair wage for labour and 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 work, your labour should be neither free nor cheap.
Consider if you only allow $5.00 per hour for labour costs – you would really struggle to pay staff a fair wage and still make a profit if you grow your business to a point where you need to hire a production assistant. Please don’t undervalue your time and remember that labour is not profit. You may be paying yourself for the labour for production time right now, but your business may not always be structured in that way.
Keep track of and include all your production time, including time in front of the TV. when you are in your jammies knitting. Include the time you spend on the computer researching competitors or preparing invoices, on the beach looking for glass and shells, or driving to the post office to deliver packages. Look for ways that you can take shortcuts or speed up production to save time and money.
There’s more to consider than your materials and your labour. Overhead includes expenses like utilities, business insurance, packaging, office supplies, etc. These are the kind of sneaky, sometimes under-estimated business expenses that can really add up. If they are not accounted for in your craft prices, they can eat away at your profits and your ability to grow your craft business.
If you have a studio outside your home, overhead costs will be more easily identified. But even if you work in the house, you should consider the following as overhead costs of operating your craft hobby or business. If you are a registered craft business, these costs can be used as a tax deduction.
- Tools and equipment
- Heat and electricity
- Bank charges/bookkeeping
- Marketing materials
- Travel to shows
- Etsy shop fees
- The Square or Paypal fees
Note: Attending wholesale shows is another cost of doing business that should be considered in the pricing formula. For our purposes we are including it in the overhead costs.
What is Profit?
A profit is the surplus of funds after all expenses are paid. In small businesses the profit (less any taxes paid on the profit – Uncle Ottawa always gets their cut) is used primarily for reinvestment into the business to help it grow and succeed. It can be used to purchase new equipment/more equipment but can also be used to pay bonuses to employees. In businesses with a share structure (like incorporated companies) profits can also be used to pay dividends to shareholders. In the case of a sole proprietor – as most craftspeople are – some of their profits could be used as a bonus payment to themselves.
Without a profit, you cannot grow your business. Profit is essential to the survival of your business.
Customers perceive value in a number of ways, and this can influence your profits and the prices you charge. Some people want value for money, while others will pay more for quality materials, or natural fibres. Well-designed products that are finished carefully, and those that have cultural significance, can command higher prices and may increase your profits. The addition of hangtags, and stories about you and the product, will also increase the value, as will carefully-designed packaging and display. All of these elements will impact the amount of profit you should include in your wholesale price.
Always determine a wholesale price. This is the price you quote to a retailer who wants to sell your work in their shop, gallery or web site. This is the price that covers all your expenses and includes a profit.
Using the pricing formula example, the wholesale price is $60. The retailer will buy your products from you and own them. The retailer will generally double the wholesale price and charge $120 for your craft. This is called “Keystone pricing”. More and more often, prices are being tripled, to help cover the rising overhead costs of operating a retail business or gallery.
The retailer might ask you for 30 day credit, but if this is a new client, you can ask for payment on delivery (COD) until you build a stronger business relationship.
The retail price is the price the customer pays at the shop or gallery. In our price formula example, the shop is selling your craft at $120. The retail price is determined by doubling the wholesale price. 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 wholesale order. (Keep in mind, retailers have expenses as well, in fact the cost of doing business is increasing all the time.) 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, 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.
Maybe you also sell your crafts directly to the public at craft sales and farmers markets, or even over the Internet. Remember that there are extra costs of participating in these venues including booth fees, your time away from production, gas for your vehicle, Paypal fees and shipping fees. By doubling the wholesale price to determine the retail price, you are accounting for any selling costs you encounter such as booth fees at craft shows, web hosting fees or third party website fees. Whenever you sell directly to the public, you should also sell at this retail price of $120. You should never undercut your retailer, or the retailer may stop buying from you.
- Cost of Supplies + Labour + Overhead = Total Costs
- Total Costs x 2 = Wholesale Price
- Wholesale Price x 2 = Retail Price
Consignment Selling – The Other Option
An alternative to wholesaling is consignment selling. This is an agreement between you and the retailer that establishes price and other terms.
When the store accepts your work on consignment, the item remains your property until sold to a customer. When the item is sold, the customer pays the retailer who then remits your portion of the sale to you. Even though the price the consumer pays is still the retail price of $120, you (the craft producer) will receive a higher % of the retail price. It is a common practice to break down the retail price as 2/3 for the craftsperson and 1/3 for the retailer. In our example, the consignment price that you will receive is $80, based on that 2/3 formula. It is very important to get a written contract that protects both you and the shop owner. We have provided an example here.
There are several benefits to selling on consignment. You have the opportunity to make your product available to a wider range of potential customers, and your profits margins will be higher than if you wholesale. The retailer does not have so much cash tied up in inventory.
There are also disadvantages to consignment selling. Even though the price you get will be higher than wholesale, you may have to wait for a long time for the items to sell and to be paid. Although your craft work remains your property, it will be in someone else’s care. Items might be broken or get dirty from handling and those items will be returned to you with no payment.
When you enter a consignment agreement with a retailer, be sure to specify the following:
- The length of the agreement. Most agreements are renewed yearly.
- Who can change the agreement? Generally, the craftsperson OR the retailer can amend the agreement with sufficient notice and with the consent of the other party.
- A method to keep track of your crafts. The agreement should spell out each item in detail: never sign any form which does not specify your merchandise. You should keep a signed and dated copy for yourself, and so should the retailer.
- When you can request the return of unsold items.
- Who is responsible for product delivery and pickup (to the retailer and to the customer)? If it is a large piece of furniture, do you want to be responsible for delivery/set up?
- What happens if you cannot pick up unsold items? Is there a time limit? Does the store inherit any remaining articles?
- Who is responsible for damage or theft to the product while in transit, or in the store, or during delivery to the customer? Not all stores carry insurance for consigned items; you may want to carry your own insurance.
- What percentage of the retail price will you receive for your product? Generally, you specify the retail price for your item, and the percentage you want to receive from the retailer. The retailer should never reduce the price without consulting you first.
- Exactly when you will receive payment for your product? Most retailers pay monthly. If you can’t wait at least a month, consignment may not be for you.
Tip: Always stay in touch with your retailer so he/she can let you know if your stock is running low.
Pricing Structures Summary
- Wholesale $60 – this is your base or minimum price that you will receive from the retailer immediately.
- Retail $120 – this is the price the consumer pays.
- Consignment $80 – this is the price you will receive from the retailer only after the goods are sold.
Things to Remember
If you can’t make the product and be paid properly, then you should ask yourself if you really can afford to make this product. Be aware of who your customer is – do your homework! Never ever undercut your retailer. Don’t undervalue your work: you are a skilled crafts person making wonderful unique craft items that are highly desired. Be proud! Be confident!