Bloom Business Basics Bootcamp Week 2: Pricing for Profit

Ok, at this point let's say you’ve decided that YES, you ARE going to sell your craft. 

AWESOME!

I am a pretty big fan of surveying your audience for opinion when it comes to habit, style, use, etc, but there’s one question that I can’t STAND to see:

“What do you think I can charge for this?”

It sends chills up my spine just reading it.

Why?

Well, to be perfectly honest, it really doesn’t matter what someone *thinks* you should or could charge for something. Thoughts and feelings have no place in your pricing strategy if you are indeed running a business. One of the biggest mistakes I see craft business owners make is using their materials cost as their retail price, and this is a pretty quick way to get into a financial hole. 

If you are selling as a hobbyist, you can price just to cover your materials and call it a day...but if you want this to be a revenue stream for you, you are going to have to become intimately aware of your costs and your pricing factors. 

There are a few things to consider when deciding how you are going to price your work. 

First things first: you need to know EXACTLY what your costs are so that you can determine whether or not you can realistically create the product and sell it at a price that allows you to make a profit. Knowing your costs is the foundation to running a successful business. 

Costs include: 

• Raw materials
• Your time/labor to create the item
• Packaging
• Overhead (tools, rent, utilities, insurance, etc)

There are many pricing/cost tracking methods out there, but when you are starting out, the easier the better. I recommend using a simple spreadsheet where you can list out all of your costs so that you can quickly reference/update as things change (i.e., if you decide to give yourself a raise in your hourly rate, if the cost of your raw materials change, etc).  

It’s worth saying again: if you are only charging enough to cover your materials cost, you don’t have a business, you have a hobby. If that is your goal, then that’s awesome! You get to craft for “free” and have fun...win win! If your goal is to have a profitable business, though, you are going to have to take a few more steps here.

Once you know your costs, you need to multiply for profit. 

Profit, simply defined, is a financial gain (this is what makes it a business!). 

The most widely accepted formula for handmade product pricing is:

[(Material Costs x 2) + overhead + wage] = wholesale price

Wholesale price x 2 = retail price

Your “wholesale” price is the price you would charge to someone who was purchasing your product to resell in their store or business. You do not HAVE to offer wholesale in order to use this as your pricing formula, but it is important to know what your wholesale price would be.

Your “retail” price is the price you would charge to the general public, either at a show, on your website, in your Etsy shop, etc.

When you are selling retail, you have additional business costs that include things like show fees, website costs, shipping, etc. that you wouldn’t have if you were selling wholesale. That extra buffer in pricing is what allows you to run the business profitably. 

Now this isn’t to say that this is the be-all, end-all pricing strategy that EVERYONE has to go with: this is a broad industry rule of thumb that has been established because it works for many handmade business owners. 

This is often where handmade sellers go awry: they see that retail number and go “nope, no way, I can’t charge that”, and they end up charging wholesale or less. 

Here’s the problem with that: it’s not sustainable to run a retail business on wholesale pricing. 

If you get to your retail price and your heart about stops, here are some steps to take:

1. Do a search! See what other people selling this kind of product are charging (JUST for your own industry knowledge). See what the high and low prices are, then dig a little deeper to see if you can learn anything more about those businesses.
2. Look at your costs: is there anywhere you can cut them? Maybe you can purchase materials in bulk and get a lower cost per unit. 
3. Look at your hidden costs: if you are already set up to sell and have a resale license in your state, you should be able to purchase your raw materials sales tax-free (which can save you upwards of 10%!)
4. Look at your time: can you batch work or assembly line anything to be more productive?

Knowing your costs and determining your price is a crucial step: it may be the most important piece of the puzzle when you are deciding whether or not you want to become a craft business owner. My challenge to you this week is to analyze one of the products you’d like to sell. Specifically:

1. Create a spreadsheet to list out every single material component of your product and the associated cost for that component (make sure you include the sales tax if you are paying sales tax on raw materials!)
2. Time yourself when you are creating your product so that you know exactly how long it takes. Decide how much you want to pay yourself hourly, and include the appropriate portion of your wage as time/labor cost (i.e., if it takes 30 minutes to fully complete the item and you pay yourself $30/hour, include $15 per item for your labor cost)
3. Take a look around the marketplace (Etsy or Amazon Handmade are great places to look) and see what other people are charging for similar items. 

Don’t be discouraged if you end up discovering that you’d have to charge what seems like a crazy amount of money for your product. Ultimately, YOU are the one who gets to decide what to charge: what I presented here are guidelines and suggestions for how to be profitable. Everyone has a starting point: and as you grow, refine your process, cut your costs, and build your social proof, you will naturally begin to be able to increase your retail prices if you decide to start out on the lower end/with less profit.

Next week we will be talking about getting the basics of your business set up, including things like researching and registering for a business name, finding your website domain name, obtaining proper licensing, and tracking expenses. 

Remember to join the free Facebook group for handmade sellers, where we come together to talk about all things handmade-business related!