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Look no further if you’re after the best pricing guide and calculator for handmade and digital products! This guide will help you determine how to price your products to make a profit while still providing value to your customers. We’ll also provide a handy calculator to quickly figure out your costs and profits.
Why is pricing important?
Pricing is an integral part of running a business. But when we talk about handmade or digital goods, it is too easy to undervalue your product and your time.
Without an appropriate pricing strategy, you don’t know how much money you will make from selling them.
But it’s not just about profit and money.
Pricing is also about communication. If you price your products too high, customers expect something of higher value. If you price low, customers don’t expect as much or think it’s cheap and not worth the money.
Finding the right pricing strategy is challenging, and finding that sweet spot is an ongoing battle.
Two things you must remember when setting your pricing are:
- you can always change them later and
- you are not basing them on what YOU would pay for them.
Remember, you are biased because you know how much it costs to make them and have the skills. You are basing your pricing on someone who doesn’t have the skills, the materials or the time to make it. And all these factors provide value to your customer that is more than just cost.
How to price handmade products
If numbers scare you, you could just take the price of your competitor’s product and add 10% to it. However, I’m sure you can do better than that. No rule says your product has to be priced exactly the same as other products in your niche. It just needs to be competitively priced so that people will buy it and you make a profit. This is why pricing handmade products require more effort than a mass-produced product.
Let me walk you through my pricing guide. It will give you a repeatable formula that will mean you can set your prices consistently and know they are justified and reasonable.
1. Work out your material costs.
The first thing you need to do is work out what your material costs are. This is the cost of all the materials you have used to make your product(s). It can be calculated by adding up all your material costs and dividing by how many items you made. This gives you a per-item material cost.
In this pricing guide, I will work through the formula using an example of making a quilt.
First, you must determine how much material, wadding, etc., you use.
If you bought the material in bulk and only used part of it for the product, work out the proportion you used. For example, if you purchased a 5 metre roll of fabric for £10 (including shipping).
The cost per metre = (Total price / number of units) = £10 / 5 = £2 per metre.
You only need 1.5 metres per quilt, which means the cost of the fabric per quilt (unit cost) = (quantity used x cost per metre) = 1.5 x£2 = £3.
Calculate this unit cost for everything that goes into making your product.
Remember, different sized products will use different amounts of material, so their cost will differ.
The sum of all the unit costs is the Material Cost.
Let’s say, for this example, your material cost for each quilt is £20.
2. Work out your overhead costs.
Material costs are not the only costs associated with making your product. For example, you have to pay for the space you rent (if you run your business from outside your home), and you have to pay for any necessary equipment, such as sewing machines. In addition, you have to pay for electricity and water, insurance, wages and so on.
You need all these items to produce your quilt, but they don’t disappear once the quilt is made. They are used across all your quilts.
These costs are your overhead costs.
They are slightly tricker to calculate, but if you don’t, you will be out of pocket by the end of the year.
To include them in your product pricing, you need to be a bit of a fortune-teller.
Firstly you need to guess (forecast) the number of products you think you will sell over the coming year. Base this on your previous year’s sales, or choose something that seems realistic if you are just starting out.
It’s essential to be realistic because the higher the number, the smaller the overhead rate. And if you don’t sell that number, you won’t cover your costs.
For example, if your total overhead costs are £350 per year and you expect to sell 60 quilts a year, then the overhead cost will be split over all 60 quilts. So £350 / 60 = £5.83.
This means you have to add £5.83 to the cost of every quilt.
So the cost of a quilt is now :
For this example, we have £20 + £5.83 = £25.83.
3. Work out how long it takes you
This is where it shows how much you value your time.
Work out how long it takes to make your product. Remember to include the time it takes for you to take photos, process them and create the listing on your shop. You should also include the time you will spend on marketing the product.
Let’s say it takes you 8 hours to make each quilt in this example.
The tricky part is how much you should charge for your time.
You must value your time if you want to make a living from your shop. Think about how much you would be willing to pay someone else to take over from you. There is no right or wrong answer to how much you value your time. Just make sure you value it enough to pay yourself at least the minimum wage.
In this example, we will say the cost per hour is £15.
So the Labour Cost is (time x rate) 8 x £15 = £120
The cost of a quilt is now :
For this example it’s now £20 + £5.83 + £120 = £145.83.
4. What about other costs
Before we go any further, remember there are costs, or fees, attributed to selling a product online. Ensure you have accounted for these fees in your pricing. Make sure you include these in the overall cost.
The cost of a quilt is now :
For this example it’s £20 + £5.83 + £120 + £13.72 = £159.55.
At this point, we have the breakeven price.
This means that if you sell a product at this price, you can pay yourself for your time and all your costs, and you shouldn’t lose money. But charging this price does not give you any wiggle room to offer discounts, bonuses, etc. So you need to add some profit to the equation.
5. Add in your profit
You are probably thinking, I’ve covered my costs, and I’ve paid myself something, why do I need to add anything else in? And this part is the most challenging part to justify with yourself.
But you are running a business, and profit is key to running a business. It means you can invest in more tools, people, resources, and who knows what else. Without it, you are relegating yourself to always just getting by.
There are a couple ways you can work out what to charge for your profit:
- You could determine how much profit you want to make in the year. Divide this by the number of sales you think you can make, and then add this to every item (like the overhead cost). This works, but it’s a bit like hitting it with a sledgehammer. You must first guess how many sales you will make and then add the same cost to everything. Depending on how varied your product prices are, this may be unreasonable to add on to some of your cheaper products.
- You could add a percentage of the price back on for your profit. For example, add a 50% profit markup. So £159.75 x 0.5 = £79.78. Add this amount to the breakeven price, giving a total price of £239.33.
The above formula works for retail shops, but they have economies of scale that help reduce the cost of production. This is where handmade goods become more complex.
The resultant figure for our example quilt might seem too high. This is because the profit has been added to your time and all the other costs. An alternative way to calculate profit for handmade goods is to use the profit markup against the cost of materials.
=(£20×0.5) + £20+£5.83 + £120+ £13.72 = £169.55.
This might seem a more palatable amount for your customers. However, only you know what is reasonable for your customers, but decide on a consistent pricing method and stick to it.
What is the difference between pricing for wholesale and retail?
You need to have wholesale and retail prices if you plan on selling wholesale.
Remember, wholesale sellers expect a lower price than your retail price as they also need room to make a profit.
When looking at the profit markup rate, you should be in the region of 50% for wholesale and 100% for retail.
The final pricing guide formula is as follows:If this pricing guide seems overly complicated, then download our free homemande pricing calculator. It will walk you through the steps included in this pricing guide, automatically calculating each cost. Once you feed in your expenses, it will automatically calculate the final wholesale and retail prices.
Conclusion: the importance of having a sound pricing guide for your handmade products
The importance of having a good pricing strategy for your handmade goods cannot be overstated. It will help you price your products to attract the right kind of customer while not undercutting yourself or your business.
So make sure you are using a pricing guide that is detailed and accurate, and avoid using arbitrary averages. Doing so will ensure your pricing strategy is sound and that you are not being taken advantage of.
A clear pricing strategy is an essential aspect of your business, regardless of whether you do wholesale or retail.