Pricing is part art and part science. Knowing how to price your handmade products at the right level is one of the greatest challenges a new handmade seller faces. You need to set prices so that the product offers the customer value for money. This price also should be at a level where you make the profit you need to grow your business.
If you get your prices wrong, you may end up not selling any products. A high price may result in an uncompetitive product. You may also find your price doesn’t fit with how you position your product. Another reason why your product may be unsuccessful is you price might not fit with what your target market expects to pay. At the other end of the scale, if you set your prices are too low, you end up not making the money you need to build a sustainable business.
And this last point is really key. You need to build a business which you can grow by reinvesting in your business, scaling up and generally being on sound financial ground.
Professional Vs Hobby Seller
Researching and understanding pricing is what sets the ‘professional’ seller apart from the hobby sellers. There’s nothing wrong with being a hobby seller. These are people who are passionate about their craft, but just want to make some pin money or cover their supply costs. However, if you’re serious, and you want to build a business which will support you and your family, you need to take pricing seriously.
The Four Elements to Price Your Handmade Products
There are four key elements that make up your pricing calculation:
- Labor: The amount of time it takes you to make something
- Materials / supplies: The cost of the things you use to make something (remember to include all associated costs such as the shipping cost of supplies delivered to you)
- Overheads: These are costs you wouldn’t incur if you didn’t have your business. Therefore overheads could include things like software licenses, energy costs, insurance, printer paper etc. If you split the costs with your home you would apportion your costs accordingly. For example, if you split the cost of the Internet between your business and home, you would aportion the bills accordingly. Many people like to add a set % to their costs to allow for overheads. A bookkeeper will be able to help you better understand your overheads.
- Profit/Margin: While this is at the bottom of the list it’s the most important. If you don’t build a profit margin into your pricing, you are not building a sustainable business. A profit margin allows you to run promotions, offer discounts etc etc. Without this, you are paying for these out of your pocket! Happily, most pricing formulas factor pricing into their calculation.
The Challenges of Knowing How to Price Your Handmade Products
Here are three common challenges faced when knowing how to price your handmade products:
Product Development Research
The first challenge arises when we don’t factor in pricing into product development research. One of the reasons why we have problems with pricing is it’s often tempting to create a wonderful new product. We then get it straight into store without doing a product development plan. Your product development plan is one of the keys to running a successful business and pricing will form part of this process. If you set your pricing after you have developed your product, it is a little like putting the cart before the horse.
If you’ve developed a product, but not considered how to price your handmade products, you have very little flexibility.
If you are researching pricing as part of your product development plan, you are much more likely to come up with the right product at the right price.
Pricing formulas can also be a challenge when knowing how to price your handmade products. Price formulas or calculators are widely available, however, sellers should always use them as a starting point, not the endpoint. Some sellers believe that the price from a price calculator is ‘set in stone’. While that’s great if the pricing formula has worked well for you, however, if it hasn’t this can have a couple of unintended consequences. Either the pricing formulas give such a horrible price we run away in horror, vowing never to use them again, or we might apply them blindly without sense checking. This can result in setting prices which are completely at odds with our market.
We should only ever use the price calculated by a pricing calculator as the starting point. It’s base price from which to work. This gives you the ingredients you need to ensure are in your pricing pie. However, you may well need to tweak these to be applicable for your market. Imagine you make things that take 20 hours of labor. Your pricing formula may need to be a little different to someone whose products take 20 minutes. This is purely because the ratio of labor in the end product is very different – but that’s up to you. Take the prices from the price formula and see how they look when you price your handmade products.
Start Point Not End Point
This is the starting point. You may need to investigate how you can save money in labor or materials. Alternatively, consider how you can position your product as premium products so you can charge the correct price. If you find you cannot cover your costs and make a profit, you may need to go back to the drawing board. You may need to take another look at your product, how it is made and the materials used. Revisiting your product development will help you take costs into account when you price your handmade products.
Setting Prices By The Market
And the third potential pitfall we may face is to be tempted to cut corners on researching pricing. Instead, setting prices based on what our competitors charge without looking at our own costs. For example, if I launched a new set of earrings I might look at my competitors and set my prices at high-mid range. However, if it takes me longer than my competitor or I can’t buy supplies as cheaply, I am setting my prices at an unsustainable level.
Setting the price based on the market is a valid way to set pricing. However, a seller shouldn’t do this in isolation without looking at costs. You should reverse the pricing formula to ensure you’ve covered all your prices and you are making a profit. Let’s think about the earrings I mentioned earlier, if I sell them at $25 retail, they take 20 minutes to make and supplies are $2.50, will I make a profit? The figures work back like this: retail = $25, wholesale = $12.50, half again to get base cost = $6.25. Minus materials = $3.75. This leaves me with $3.75 to pay my labor and overheads – it’s not going to work. This is a rough example, but you’ll see the problem.
Therefore if you set prices based on the market, make sure you work out your costs to take into account everything you need to build a sustainable business.
You may hear about psychological pricing. This is when we dig deeper into the reasons why someone makes a buying decision based on price. Psychological pricing helps us optimize pricing. There are different forms of psychological pricing. One of the most well known is reducing the left digit by one, for example instead of a product listed at $10, we list it at $9.99. The theory behind this is that we read from left to right, therefore, the first number we register is ‘9’, so in this case, we register the price of this product at being ‘under $10’.
If you don’t like the thought of .99 ends on their pricing, feeling that it’s more Walmart than high quality handmade, do a little research into your market. Try taking a look at some of the brands which are influencers in your field and are popular with your target market. These don’t need to be in the same product area, but be the sort of products your target market will also buy. Look at their prices and see if they go for round numbers or .99. This can be quite an eye-opener!