Professional pricing for craftspeople and designers

By Simone Walsh

In March around 150 craft artists, designers and home-based small business people working in the arts industry attended the Pricing for Profit workshop in Sydney which was hosted by the NSW Department of State and Regional Development. Simone attended the workshop and provides a summary of what she learnt on the day, combined with other tips gleaned over the years.

Many established makers will have their own detailed methods of determining prices for their work which they’ve developed from years of creating production and commission work. However, many emerging makers particularly may find pricing their work to be a very daunting prospect and may have no idea of where to even start.

Calculating wages:

Your business should pay you a realistic wage for the amount of time you spend working in the business, including tax.

If this makes you feel uncomfortable, think about how much you might need to pay other people to do the work that you do. Also think about how much you’d want to be paid if you were employed doing the work you do for your business.

You are just as entitled to earn at least a basic living wage from what you do as anyone else is - even if you love what you do!

Calculating non-chargeable wages:

Most makers are at least aware of incorporating a labour rate into their pricing for the items they make to sell. However, wages shouldn’t usually end there.

Consider the time you spend in your business over the course of a year which is not chargeable as part of creating an item. This might include time spent photographing, promoting, doing admin work, researching, sourcing materials, etc..

Start by estimating the number of hours per week or per month you think are required for this type of non-chargeable work. Then determine an appropriate hourly rate for this work. Calculate the time and wage out into an annual figure, including estimated tax.

This ‘non-chargeable wage’ figure should then be included in your overheads calculation (see below).

Calculating chargeable wages:

Your chargeable wage is the income generated by the labour rate charged for each each item you make to sell.

To help you figure out what this should be, think about the annual amount of income on top of the above non-chargeable figure which you need or want to be earning from your business.

Then determine how many weeks a year you will work in your business (allowing time for holidays, illness, etc.) and then how many hours a week you estimate you’ll work specifically on making items which you will be selling. Remember to allow time for all of those other business-related things you need to do - and don’t forget you need to have a life, as well!

Divide the annual amount you wish to earn from your labour by the number of weeks you intend to work per year. Then divide that figure by the number of hours per week you estimate you’ll spend actually making work to sell.

That gives you your basic hourly labour rate. Use this figure to calculate costs for your time in everything you make. This figure does not get added to your overheads above.

Of course it’s entirely up to you as to the final figure you decide upon and you can always adjust it at any point. If it looks unreasonably low or high, then take a step back to the big picture and reassess.

Breakeven analysis:

A major step towards realistic and professional pricing is to do a ‘breakeven analysis’ for your business. This will give you a big picture view as to how you need to price your work in order to make ends meet - and hopefully more.

Step one - overheads

Make a list of all of the overhead costs which must be covered by your business, and calculate them out into annual figures. These should not include costs relating to the cost of individual sales, such as materials, your labour, shipping costs you charge to customers, etc..

To give you an idea, the following could be included:

Wages (non-chargeable - see above)
Rent/mortgage (perhaps a portion if you are working from home - or none if your personal income covers this - it’s up to you)
Electricity
Subscriptions and memberships
Advertising
Printing
Office supplies
Internet connection
Phone charges
Travel
Depreciation of tools & equipment (eg. if you need to replace your computer every three years and it’s an essential business tool, put in a third of its value)
Insurance
Postage (which is not paid for as part of a sale)
Accounting fees
Exhibition costs
Research and development

Step 2 - profit/contingency

Add the final figure of your annual overheads cost to it an additional profit figure which you would like your business to make on an annual basis.

Profit - beyond the wages you have already calculated - is an important element of growing your business and I highly recommend coming up with a figure to add in to your calculations.

A profit figure will also help you to have room for error if anything goes wrong with your other calculations, so you can also think of this figure as a contingency. It could also go towards covering missing deliveries, breakages, unexpected fees, etc.. We all need some room to move when things go wrong or change, as they invariably do.

Step 3 - profit margin to break even

To earn enough to pay for your business overheads plus profit/contingency figure, you need to determine a profit margin percentage to add to the costs (labour plus materials) of every item you sell. If you don’t add a margin, there’s no way you will be covering your basic operating overheads, let alone making any profit.

As a starting point, give yourself a profit margin of 50% just to get your calculations started. Divide your total overheads plus profit/contingency figure by this percentage to determine the total value of annual sales you must make simply in order to cover your costs and make some profit.

An example:

Overheads: $15,000
Profit: $5,000
Total needed in addition to labour and materials = $20,000
Margin added to labour and materials costs per item to cover this: 50%
Divide $30,000 by 50% = $40,000

So in this example the total sales value needed in order purely to cover $20,000 overheads and profit is $40,000 - that's not including the costs of materials or payment for your labour.

To help make more sense of this, let’s say the average wholesale price of your items for sale is $20.00: $40,000 divided by $20.00 = 2000

... This means you have to sell 2000 items per year at your average wholesale price simply to break even and make some profit. That’s around thirty-eight items sold every week of the year. Does this sound reasonable?

If not, go back and do the same calculations, but this time look at increased profit margins - 60%, 70% ... all the way to 100% and beyond. Note the different outcomes as to how much less you have to sell in terms of volume to break even as you increase this margin. You’ll find this to be a very enlightening exercise whatever margin you eventually settle on!

Step 4 - wholesale and retail pricing

Once you’ve settled on a profit margin that you’re happy with which will cover your overhead costs and some profit, you should then regard this margin as the lowest you will sell for. In other words, this should be you minimum wholesale margin.

From there you should add in at least another 50% of margin to reach your minimum retail price.

Putting this into practice:

Once you’ve done these calculations and know the profit margin you need to aim for, you can start using a clear method to help you figure out pricing for individual items.

It’s a great idea to set up a spreadsheet to help you with calculating pricing - and learn how to do so if you don’t know already. You’ll find it will make your life considerably easier.

You need to keep track of the costs of your materials and labour for every item you make, whether finished pieces or components - your labour rate being determined by the calculations above. Add these two costs together and you have your base cost for the item.

You then need to add on the total profit margin you have decided upon to come up with your wholesale prices. From there you need to add the additional margin for your retail price - remembering to add any tax if appropriate. This will give you your minimum selling amounts for both scenarios.

Don’t forget to also take into account any other per sale costs such as shipping, selling fees, etc..

From there you can make a judgement about what people will actually pay for each item. Generally speaking it should be no less than the figures you have come up with, unless you feel any lost margin will be made up by other items which you can sell for a higher margin than your minimum.

It’s also a great idea to round out your figures to whole dollar amounts to make them more ‘attractive’, especially for retail prices.

Making adjustments:

Keep an eye on your overheads and materials costs as time goes by. Of course you can go back at any point to revisit and adjust your calculations. It’s a great idea to schedule time to do this at least once a year to make sure you’re still on track.

The Pricing for Profit workshop was presented by Tracey Collins from Project National. Learn more about the Department of State and Regional Development at www.business.nsw.gov.au.

A version of this article was first published in Filings, the quarterly newsletter of the Jewellers and Metalsmiths Group of Australia - NSW (JMGA-NSW) in July 2007.