from dream to handmade biz

Lesson 6 – pricing your products

lesson outline

  1. The problem with pre made formulas

  2. What makes up 95% of a good pricing strategy

  3. The 5% remaining: value-based pricing

  4. The right way to price your products

lesson checklist

  • I understand why most pre-made pricing formulas are wrong or inadequate;
  • I know that my costs represents 95% of the pricing equation and that I need to calculate them accurately before I even try to price my products;
  • I understand what “value-based” pricing is;
  • I have used the pricing calculator to calculate my prices and know these numbers are right. Remember lesson one? “Handmade does not equal cheap!”
  • I will never underprice my work/my products to try to compete on price. I know this would eventually lead me to burnout, rather than to a profitable shop and healthy finances.

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The problem with pre made formulas

You’ve 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:

What makes up 95% of a good pricing strategy

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?

The first step (that many of these pre made formulas get wrong) is to get your costing right. That’s why in Lesson 5, we took the time to understand and calculate (not simply estimate) all of your costs. Once you get your costing right, that’s 95% of the pricing job done.

A good formula to figure out the cost of creation of your handmade products is:

This formula covers the cost of your raw materials, your cost of labor, and your overhead. Now, a little reminder from yesterday’s lesson:

  • Raw materials

This is the cost of the supply you need for each item you create (eg.: beads and leather for a bracelet) + the costs of packaging it (labels, tags, boxes, sleeves, etc.). Raw materials are part of your variable costs and vary for each product of your collection.

  • Labor/Time

This is the time spent creating this product x your hourly wage. You have to pay yourself for your work! This also guarantees that you can scale your business and hire someone to help you with the product creation when you are ready as that salary will be accounted for in your prices. The cost of time is also part of your variable costs.

Something that’s quite common amongst handmade shop owners is to “guess” the time it can take to create a product. That’s a big mistake. Figuring out how long it takes to create a product is very important as your labor costs have quite a strong impact on your end-price. Make sure you do the exercises in the Cost Cheat Sheet from Lesson 5 and you should be able to get an accurate estimate of the time needed to create each product.

  • Overhead

Your overhead is made of the expenses that you have to pay each month to be able to create those products: studio rent, insurance, design software, utilities, etc. Even if they’re not direct costs, they are costs related to your product creation and need to be accounted for. These are your fixed costs.

A note on overhead calculation: 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.

Go back to Lesson 5 for more information and a cheat sheet to help you calculate your costs. It is crucial that you get your costs right before trying to price your products properly.

The 5% remaining: value-based pricing

Remember the formula I first talked about? One of them was:

Wholesale price = cost of creation x2

Ever wondered what was that “x2” exactly?

“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 – or “selling at cost”.

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 (see Lesson 3). 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. It’s a bit like saying:

“Build a name, then name your price”

A few things that affect the perceived value of your products:

  • Is your product solving a problem? or a desire?
  • Are your materials of low or high quality?
  • How much attention is given to details?
  • Do you have outstanding product photography?
  • Do you share your brand story through a professional branding strategy?
  • How much attention is given to your packaging?
  • How is your customer service?
  • How do you want to position yourself in your market: basic? premium? luxury?
  • Have you ever been mentioned in the press or do you have a good following on social media?

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.

The right way to price your products

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.

So where does this leave us? A good way to sum it up is to say that:

Item Price  = Item Cost + Profit Layer

With Item cost = Labor + Overhead + Supply costs for this product

And Profit Layer = Value-based multiplicator

Your prices will then be Wholesale price = item cost X ‘profit layer’

And Retail price = wholesale X 2

Note: It is commonly accepted to markup a wholesale price at least 2 times to get to the retail price.

To make this easy for you, I created a pricing calculator that will do all the maths for you. You simply need to fill it in and it will calculate a price for each product for you.

Remember, handmade does not equal cheap! You can’t just put a price down because you think it is too high, or because your competitors offer the same type of product at a lower price. They might have a business structure and costs that are very different to yours. Or they could be underpricing their products! You definitely don’t want to follow that lead. Trust your numbers instead.

If you really find the price to be too high, make sure your supplies are as cheap as they can be, and if you’re only getting started it’s a good idea to reduce your overhead too.

see you tomorrow for lesson 7

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