Professional pricing for craftspeople and designers
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.
It's well worth spending the time to understand how to price properly and to lay the groundwork to make sure you are doing so.
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 same work you do in your business.
You are just as entitled to earn at least a 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 - what would you pay someone else in your own economy to do it?
Calculate the time and wage out into an annual figure.
This annual ‘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.
Every piece you make should have your labour factored into it. It doesn't have to be timed down to the last second - I just make an educated guess as to what a piece will take me to make on average once I have it in production.
To help you figure out what your labour rate should be, a great place to start is to 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 - 48 weeks works for me).
Finally, work out 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 to get your hourly rate.
So, as a fairly outrageous example, let's just pretend you want to make $500,000 a year in wages (!). $500,000 divided by 48 weeks = $10,416 a week. Let's say you intend on working just 5 hours a week making what you sell: $10,416 divided by 5 = $2083 - that's your hourly labour rate!
If it looks unreasonably low or high, then take a step back to the big picture and reassess. Keep doing this until you have a figure you're happy with.
Of course it’s entirely up to you as to the final wage figure you decide upon and you can always adjust it at any point - this is just a method to help you come up with a realistic figure, based on your own life and needs, along with your own economy (almost every country will be different as to what an appropriate labour rate looks like).
Use your final hourly rate figure to calculate costs for your time for everything you make. This figure does not get added to your overheads (see below).
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.
The one thing that so many design/craft pricing methods seem to forget is that your business must cover all of its costs - not just materials and labour. Every tool you use, every advertisement you buy, every business card you have printed, etc. must ultimately be paid for by your business.
Even if it isn't doing this as you start out and get established, you need to aim for this to happen in the longer term. To do this you need to know what these costs are and how they at least should be impacting upon your pricing.
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.. Your overheads are all the other costs that cannot so easily be accounted for in pricing for individual items.
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 replacement value)
- Insurance
- Postage (which is not paid for as part of a sale)
- Accounting fees
- Exhibition costs
- Research and development
Step 2 - profit/contingency
Profit - beyond the wages you have already calculated - is an important element of growing your business and I strongly 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 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, so be sure to factor this room in.
Add the final figure of your annual overheads cost to the additional profit/contingency figure which you would like your business to make as a minimum on an annual basis.
You'll now use this final figure to come up with a margin to add to your item costs.
Step 3 - margin required to break even
To earn enough to pay for your business overheads plus profit/contingency figure, you need to determine a 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 even your basic operating overheads, let alone making any profit.
To begin with, 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 (don't worry if your figures are wildly different either way - they will be different for everyone):
- Overheads: $15,000
- Profit: $5,000
- Overheads + profit (total amount needed in addition to labour and materials) = $20,000
- Margin chosen to be added to labour and materials costs per item to cover this figure: 50%
- Divide $20,000 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, with the extra $20,000 covering your materials and labour.
To help make more sense of this, let’s say the average wholesale price of your items 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 based on what you do and your capacity to make and sell items?
If not, go back and do the same calculations, but this time look at increased 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.
This might seem scary, but it is realistic: your wholesale prices must cover your overheads, labour and materials. And your retail prices should aim to be about double the wholesale amount so that there is room for the retailer to make profit.
Putting this into practice:
This can all seem a bit complex and daunting, but in practice it's not. The hardest part is getting the figures nutted out to begin with and from there it's just a matter of putting it all into practice and updating it occasionally (ideally annually).
Best of all, you can feel confident that your pricing is reflecting the true costs of running your business and the true income you need it to bring in. That's a lot better than doing materials + labour x 2, hoping for the best and probably coming nowhere near!
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.
Getting started
You need to basically 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 for one item you make and you have your base cost for an item.
Add in the overheads margin
You then need to add on the total overheads margin you have decided upon (see above) to come up with your wholesale prices.
From there you need to add the additional margin for your retail price - remembering to add any sales 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 which are not paid for separately such as selling fees, etc..
Finalising your prices
From there you can make a judgement about what people will actually pay for each item or 'what the market will bear'.
Generally speaking it should be no less than the minimum figures you have come up with, unless you feel any lost margin on one item will be made up by other items which you can sell for a higher margin than your minimum. Flexibility is good!
It’s also a great idea to round out your figures to whole dollar amounts to make them more ‘attractive’, especially for retail prices.
OMG - it's too expensive!
If you honestly don't believe that the market will bear the price you've come up with for an item based on the above method, then a serious step back is required:
- Are you being realistic? Maybe the market really will pay what your item is worth. Make sure it's not just yourself who is under-valuing your work!
- Is there any way you can streamline your costs and labour?
- Is this particular item simply never going to sell for the price it needs to in order to pay for itself and your costs? If so, should you try something else?
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.
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.
