Pricing is the centerpiece of your handmade business. The reason is simple: to be successful and make a living off your online shop, you need to be profitable. And to be profitable, well… You have to price for profit. Truth is, it can feel very uncomfortable, and if you’re like me and numbers aren’t your favorite thing to play with… well it just sounds like the least possible fun thing to do! The temptation is real to get it over and done with as quickly as possible, but you also risk falling into one the most common pitfalls of costing and pricing your products.
If you know deep in your heart that you haven’t spent much time on your pricing strategy, you might want to keep reading and make sure you’re not making one of these 5 costly mistakes.
Have you been browsing the WWW and you stumbled upon this simple formula on Pinterest?
Please, don’t! I know it looks so simple and understandable, but it also is NOT an OK way to strategically price your products. Like, at all. I couldn’t recommend more strongly to avoid this formula. It doesn’t account for the cost of labor (the time you spent making your product), or for your fixed costs. Stay away!
Another formula you might find online is this one:
While accounting for labor cost, this formula still closes it’s eyes on the fixed costs associated with your product creation (known as “overheads”) such as a printing service for example (if you sell illustrations), or utilities bills, or anything that you might need to pay on an ongoing basis to create your products in the first place.
To come up with a pricing strategy that works for your business, you need to get your costing right (i.e including labor and overhead), and you need to use a profit multiplicator that reflects the value of your products (x2 your cost just won’t cut it). Unfortunately, none of these formulas allow for that.
Ok, so if these very handy formulas turn out to not be that handy after all, then how should you come up with the price for your products? Well, the first step (that many of these formulas get wrong) is to get your costing right.
A good formula for costing your handmade products (and the one I recommend you use) is:
This formula covers the cost of your raw materials, your cost of labor, and your overhead. Now, what goes into each of these?
Some people will tell you to add to your overhead your website costs, your marketing and advertising costs, etc.
This is not the right way to look at it. When calculating your overhead, account only for the expenses related to the product creation. Marketing, sales and advertising expenses have nothing to do with it, and you shouldn’t charge your customers for your marketing! That’s a separate thing altogether. You will cover your marketing expenses by reinvesting a portion of your sales revenue to it, not by adding it to your overhead. If you’re just starting and haven’t made any sales yet, these expenses will need to be covered by a initial investment.
Another thing that’s quite common is “guessing” or “estimating” the time it can take to create a product.
Figuring out how long it takes to create a product is very hard, but also very important as your labor costs has quite a strong impact on your end-price (see it for yourself with the handmade pricing calculator).
Grab this free handmade pricing calculator!
use this “done for you” handmade pricing calculator to know exactly how much you should charge for your products.
I recommend that you run a little test to come up with an accurate estimate: create around 5 products and time yourself for each, then make an average of the time it took you. Careful though, if you’re in this as a business and not as a hobby, you are not crafting while talking to your kids, or while watching TV. Make sure you time yourself while working in a productive and efficient environment.
Remember the formula I first talked about? One of them was:
Wholesale price = cost of creation x2
Ever wondered what was that “x2” exactly? Look no further:
“X2” in this formula is your profit multiplicator. Its role is to add a layer of profit to the cost of your handmade product, so that each sale actually generates revenue. If you don’t have this multiplicator, you’re really just covering your costs.
The problem here is that this number should be different for each business, and sometimes even for each product. Applying this formula and “x2” your cost is dangerous because in most cases it won’t be enough of a profit layer and leave you working hard for not much return.
To define YOUR profit multiplicator, you need to use “value-based” pricing. Value-based pricing is “a pricing strategy which sets prices primarily, but not exclusively, in the value, perceived or estimated, to the customer”.
This means that you need to understand the value that your product provides to your customers, and reflect it in your price. The best way to become fluent in understanding your customers deeply (and the things they value) is to take some time crafting an ideal customer profile. Once you understand what they want, feel, and need, you can craft a product and a shopping experience that adds value to your product, and ultimately charge more.
A few things that affect the perceived value of your products:
Your profit multiplicator will depend on all these things: the value your customers gets from your product, your positioning, and the quality of your work. Most common multiplicators are in the 2.2 to 2.5 range, although for high-quality/high-value products some brands go up to 3 or 3.5 and for lower quality, high volume products, some would go lower than 2.
Costing and pricing your products probably isn’t the part of your business that you are going to enjoy the most, but it is the foundation of it all and deserves a bit of attention from the get-go. Doing so will put you in a good position to start and grow a successful business.
To help you figuring it out, I have created a handmade pricing calculator. Put your numbers in and it will calculate your prices for you! You can access it for free here.
If you want to take your pricing strategy one step further, I highly recommend my Handmade Pricing Masterclass here.
And if you’d like to learn more about pricing:
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WOW!!! I have been thinking about opening a craft / hand made shop and selling on line and I must say after reading all that Deb has said in her blog I am impressed and I thank you very much for the enlightenment and educational reading! GREAT JOB and GREAT READING material. It has given me the confidence that (YES!!!) I can do this!
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Thank you Melody, and YES you can do this!
Great article! Very thorough.
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Thanks Amy!
This is by far the most well written explanation of pricing strategy that I have read in all my searches for information on the process. Thank you very much for a real service to new business owners/creators.
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Thank you for the kind words Joan and I am so glad you found this article useful! Pricing is the foundation of everything 🙂
VERY HELPFUL AND ENCOURAGING
WELL WRITTEN AND EASY TO UNDERSTAND
I can’t seem to download the calculator. When it takes me to the other page, the only link for me to click says “No thanks. Take me back to the Homepage” Wondering if I missed something.
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Hi Stephanie, they should be a field for you to enter your email address in so the calculator will be sent directly to you.
Thank you for the sensible critique. Me & my neighbor were just preparing to do some research about this. We got a grab a book from our local library but I think I learned more from this post. I’m very glad to see such great info being shared freely out there.
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Thanks Hubert I am glad you found it useful!
This design is incredible! You certainly know how to keep a reader entertained. Between your wit and your videos, I was almost moved to start my own blog (well, almost…HaHa!) Fantastic job. I really loved what you had to say, and more than that, how you presented it. Too cool!
It’s hard to find knowledgeable people today on this subject, but you sound like you understand what you’re talking about! Thanks
I absolutely love your blog and find most of your post’s to be exactly I’m looking for. can you offer guest writers to write content for you personally? I wouldn’t mind composing a post or elaborating on many of the subjects you write about here. Again, awesome weblog!
I was taught to use a 3x formula
1x cost of item. Material, labor
1x taxes, rent and all those other expenses
1x for me…Profit
Fee for custom work that will take time from your production line can be added
I worked in the jewelry business for many years and found this to work for me
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Hi Mick! Glad this is working for you. This is tricky if your taxes, rent, or expenses aren’t exactly covered by the x1, but if it works for you – that’s all that matters.
Wow, this post was so so helpful. I could have used this like, 3 years ago when I started my Etsy. I love that you included the bit about “value-based pricing.” At the back of my mind, I’ve been thinking all along about that concept, I just wasn’t able to put words to it! Your explanations of every part are so thorough that I actually feel much more confident I can start pricing my products and stand by that pricing.
Thanks so much!
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Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
I can’t even explain how happy I am to read your comment! I am so glad you feel more confident, your work is worth it!
How would u price out stain glass suncatchers
[…] –> How to avoid the 5 common pitfalls of pricing your handmade products <– […]
Hello I downloaded the calculator. I did all my pricing and I’m getting a very high retail price. I don’t think I want to sell a 5×7 painted piece for $112. I even adjusted my pay, my rent and utilities. What could I be doing wrong?
Thanks so much! 🙂
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Hi Lindsay! Thanks for reading and commenting.
The pricing formula I use in the free calculator is the most conservative one you could use. It is the one that will always give you the most generous amount of profit.
I used (cost of creation) x markup with cost of creation being your cost of labor + material + overhead
so (time + supplies + overhead) x markup
In reality, there is no “one-size-fits-all” formula and if you were to take the top 10 Etsy sellers for example, I can guarantee they would all have come up with their prices differently.
The 2 golden rules you need to keep in mind when setting your prices are:
– Are you covering your costs + adding in enough profit to pay yourself, save for taxes, re-invest in your business?
– Are you using value-based pricing to price not only to cover your costs, but with a deep understanding of what your ideal customers are ready to pay for and the value they see in your products? This is where “perceived value” comes into play.
A test I like to run also is: will this pricing allow you to reach your revenue goal? When you price lower, you need more sales to reach that goal, which means more time spent on product creation (sometimes to a degree where there’s quite literally not enough hours in a week to do it).
Bottom line is, you can absolutely experiment with a different profit markup, or you can adjust the formula to work for your specific business (as long as you respect the 2 golden rules):
For example:
( material x markup) + time + overhead
or
( material + time ) x markup + overhead
Thank You very much for sharing this, you really know your stuff hands down, we need more people like yourself to build other people up to their highest potential, I love to see this in the world and it is very inspiring, I learned, and you taught, You are a great example of how we should all strive to be like!
The Real Person!
Author Deborah Engelmajer acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Thank you Trevor that’s very kind of you to say.
Hi, I was wondering if I put the wear and tear of my tools someplace. like printer I am going to use ink but that can be alot of printing and sooner or later the printer itself will have to be replaced. Same with my Cricut machine. I have blades, mats, pens, etc. but the machine will also need replacing. So my question is where do I put this on my pricing sheet. TIA
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Author Showit User acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Great question Rebecca, thanks for asking! Yes, you absolutely should include it – this concept is called equipment “depreciation” (printer, cricut, computer, etc.). If you know you will need $1000 5 years from now to replace old equipment, divide $1000 by 5 and add that number to your yearly overhead.
Thank you for the great lesson on pricing. I will be doing a craft fair the first week of December. It is not an affluent community so the buyers don’t come with a lot of money. I can lower my pricing so I can make at least cost of material x2 but that’s it. What are your thoughts? Thanks Bobby Jo
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Author deborahengelm acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Hi Bobby! If you are not making a profit… and paying yourself for the time spend making and selling the products, in my opinion this market/craft fair isn’t a good fit. You can always do it as an experiment, to see what products sell more and get to know your customers better by interacting with them but if your ideal customers (the ones who can pay what your products are worth) don’t live locally, selling online might be a better option 🙂 I would also say: are you sure they can’t afford it, or are you selling yourself short? 😉
Wondering how I can price calculate for more than one item as well as for the same item when the material cost is higher? Right now I have 5-6 different materials listed out in the calculator, but some are more expensive and the calculator is only giving me one overall cost. I’d also like to “add” another product that I offer but not sure how to do that!
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Author The Tizzit Team acts as a real person and passed all tests against spambots. Anti-Spam by CleanTalk.
Hi Sharyn, Thank you for checking the pricing calculator! More details can be found inside the Handmade Pricing Masterclass. You can also put your question in the forums inside the Tizzit HQ if you’re a member!