Costs –> Pricing
One of the most frequent questions about selling items you’ve made is:
How do I set my price?
The answer no one wants to hear:
There is no one-size fits all pricing strategy.
Resources
Here’s a graphic (click to enlarge) that summarizes the pricing flow I use and expand upon below.
And below are some linked resources you can read in addition to what comes here later. I suggest you read them all, and take the bits and pieces that make sense to you and your pricing needs.
- Art – Quantifying Creativity How Any Artist Can Price Their Art for Sale
- Ceramics – 13 Things to Consider While Pricing Pots
- Metalsmith Society – What to Consider When Pricing Your Jewelry Line
- Saoirse Leather Guild – How Much Should I Sell It For? I’ve Got Your Magic Formula
Wholesale vs. Retail
Many artisans do not ever want to get into wholesale. If that’s you, you could certainly look at the suggested wholesale pricing as your retail and ignore the retail pricing suggestions entirely. Go on and skip to the next section.
Still here? Ok, then I’ll presume you’re open to the idea of (now or in the future) producing quantities of one or more of your products for someone who will then — with your full knowledge and permission — turn around and sell it to make their own profit from it.
Let’s start by getting familiar with the supply and delivery chain gymnastics graphic (click to enlarge).
Go ahead, I’ll wait.
As you can see, it gets kind of twisted once you start adding other Vendors — be they Distributors, Wholesalers, Retails, or Consignment Shops — between you and the End Consumer. You might even want to set your prices differently for the different possibilities.
Every layer added also adds to the price the End Consumer will pay. Each Vendor step in the supply chain typically sets their product price to at least (at least!) twice what they paid their upline Vendor.
For our pricing strategy purposes here we’re only looking at Wholesale and Retail, and where Retail is specifically YOU selling directly to the End Consumer. We’re ignoring Distributors and Retailers completely.
So we’ll set our Wholesale price then double it for our Retail price.
And might I suggest you consider charging the Retail price, even if you’re not selling to Wholesalers. That way you’re set-up for the future and your products won’t have a huge price jump if you elect match what your future Wholesalers will then be charging.
And why shouldn’t you? If they can get a higher price for your products, why can’t you do so and put that increased profit back into your own business and/or wallet instead of theirs?
Assumptions
Here are the assumptions made in these examples:
- Made the Product
- You kept track of and have
- known costs — inclusive of landing costs — associated with the materials used to make the product.
- an hourly or flat rate or per piece rate or something associated with the time spent making the product.
- You kept track of and have
- Priced the Product
- You want to recoup
- overhead costs to help keep the business going.
- material costs to cover what you used.
- labor costs, your time is not free!
- any sales channel costs associated with the sale.
- any payment gateway costs associated with the sale.
- You want to make a profit after all those expenses are paid.
- You do not want to offer “free” shipping, since we all know shipping is not free. Learn More
- You set your list price in a manner that considers the expenses incurred (directly or indirectly) and which suits your target Customer, market conditions, and your own profit needs.
- You want to recoup
- Made the Sale
- Someone bought your product at whatever price you set. Yay!
- Product sold via a 3rd party sales channel, e.g. Etsy, Amazon, etc..
- The sales channel in question does not include payment gateway fees in their fees.
- Product sale was paid for via a payment gateway, e.g. Stripe, Square, PayPal, etc..
- Customer paid shipping costs as a separate line item.
We throw some of these assumptions out the window once we get to the pricing strategies section at the end. But up to that point, these are the assumptions in place.
Choose Your Example
What follows are a series of steps going from costs to pricing strategies. I created these examples with actual items I’ve purchased, their prices at the time, and the things I include in the costs at the time of creating them. These are just to get you thinking about what you want, or do not want, to deal with when you’re formulating your own pricing strategy. Enjoy?!
Ask questions if you have them and I’ll try my best to answer them.
I’m happy to add additional examples if you have something you’d like to see, just let me know.
Select an example to be displayed. This will change the data tables to match.
[wpdatatable id=37]Materials and Labor
Please note that the “running total” shown here is for materials and labor only. If I were to charge this for the end product, I would not make any money, and would LOSE money because of overhead costs, sale costs, and sold costs, profit margin, etc., etc., etc. that have not yet been incorporated. See sections that follow for more on that.
Click any row to see additional details.
All Expenses
Let’s take our Material and Labor expenses total and add to that overhead, cost of sale, and cost of sold. (Check out the terms page if you don’t know what those mean; you might even want to have it open in a separate window for ease of reference.)
Pricing Strategies
Here are some commonly thrown about formulas, with their resultant suggested List Prices and Profit or Loss values based on the expenses outlined above.
Profit or Loss is determined simplistically by [List Price] – [Total Expenses].
* “ignore” below means do not consider when setting the List Price; it is still included in terms of the total expenses paid out.
Click any row to see additional details.
Base
The base strategy is charging for “just this” or “just that”. Think about the times someone said of a family member, friend, or sad-eyed poor- woe-is-me Customer: “I’ll just charge them for materials.” Or “I’ll just charge for labor”. Or even “I’ll charge what it cost me” to include materials, labor, and overhead. So no markup for profit.
Anyhoot, here’s what some of those options that might look like.
NOTE: if one is doing something like outline above, they most likely are also not using a sales channel or a payment gateway. So given that our example adds those — and materials and labor and overhead — into the Total Expenses which we subtract from the List Price, Profit/Loss is skewed downward.
Markup Labor, with Variations
Markup the labor cost only, ignore* all other expenses. Then shown are variations on the markup labor theme.
Markup of labor is less common than markup of matierals, but it has been thrown about as a viable option for some.
Markup Materials, with Variations
Markup the materials cost only, ignore* all other expenses. Then shown are variations on the markup materials theme.
Markup of materials then adding all other costs is a pretty common method for pricing. Markup of materials alone or with only some of the other expenses is also pretty common, though often once has to go to a much higher multiple to recoup all expenses. Unless, of course, the materials are very expensive and the rest of the costs are negligible in comparison.
Markup Total Expenses
Markup the total expenses.
This one accounts for all expenses and markups the total as a whole. In doing so, it markups some costs that are just being passed through to 3rd parties, such as Cost of Sold, etc., which I personally do not feel should be marked up. Doing so or not is, certainly, a personal preference and thus up to the individual doing the pricing.
Total Expenses, Add Profit Margin
Include all expenses, add a percentage for a profit margin.
This one, like the prior example of Markup Total Expenses, starts with accounting for all costs. Then it adds on a percentage of that total, and that amount equals the amount of profit anticipated.
Something to Think About
The take away here is that there IS NO MAGIC FORMULA! You have to be aware of your costs, your desired profit, the market, and your target consumers and price each product accordingly.
Hopefully this has been helpful in getting you to think about all the things (all? no, I probably didn’t cover ALL!) that you should think about when pricing your products. Take a little of this, a little of that, and make a strategy that works for YOU.