Pricing Products

Why pricing your products may not be as simple as you think

Alex Johnson
Owner, Designer & Strategist

As a craft business, you are constantly treading a thin line between supply & shipping costs, what the market will bear, and your time and knowledge. One change from an upstream supplier can throw your whole product price out the window if you don’t plan properly. So how should you handle your pricing?

When we first opened our candle business, we read a few books and looked at lots of articles online. Some of the articles gave us some pricing information, mostly suggesting a simple 3 times or 4 times formula. This sounded good, so we adapted a 3 times pricing structure.

And it worked for a little while. We seemed to sell a lot of products. But it was not long before something at the core changed and our pricing was quickly invalid. Our first mistake was to look the other way. We figured we could just eat the cost of these changes and everything would be fine.

As time went on, I become more and more frustrated with the business. We would spend all day at a market and clear barely anything. We had neglected to consider external costs, our time and so many other factors. Then add to it our eating the costs and no longer making even 3 times the profit was killing the business. Fast.

Start with the basics

We eventually took our pricing back to the basics and found our mistake. To start with we thought only about the original supply cost and triple that. We did not even include all the costs to get the supplies to us. But what we needed was to divide our business expenses into a few categories. Then we could create a baseline and plan from there.

When you start doing pricing, break your supply costs down first. In most cases, these are the simplest to calculate. Look at how much it costs to get the supplies to you and how much shipping you are charged. Don’t forget that you must pay shipping (or drive costs) to go get your supplies. This is a huge mistake many budding creatives make.

Now unless you have a magic wand and can control your supplies and outside costs, you need to add a buffer space to your supply costs. You never know when shipping or material costs will inflate, and you do not want to raise your prices every other month. I suggest between 1% and 10% depending on how stable your supply costs are over time.

Now you have part one. Let’s pretend this is $5.12 for this article. Next up are business expenses.

Business Expenses

I don’t care how small your business is. You will always have business expenses. Things such as your accounting software, merchant processing, and even the cost to have a website. These costs can add up quickly and kill any margin you add to your products if you don’t take them into account.

Even things such as the cost to go to a market need to be thought out. This was our second big mistake. My wife’s candle business has always had my business to rely on. That allowed us to ignore these costs. Or so we thought.

It was not long before her business was borrowing from my business and it added extra strain that my business was having to handle. Add to that the time that we were putting in and it felt like a total drain and waste of energy.

Tracking your business expenses

You need to add up everything you can think of or even imagine for business expenses. Then you need to take a small percentage and factor that into how many sales you think you will make over a year. This can be extremely hard in the first few years. You never know how many sales you will make.

But I suggest if you are unsure look at your production capacity and time involved instead. Let’s say you can only make 50 of your best handmade items per month. Anything more and your product is no longer up to your standard. So, you would take your total years’ expenses and divide it by the total number of products you feel comfortable producing in a single year.

For this article’s example, let’s pretend my 50 products above come to 600 per year. And my total operating costs including a few known markets I want to do is $954 per year. This gives me a fixed expense of $1.59 per product that I need to cover. Remember, you are doing your best to get a rough idea of the cost.

Your time (and blood, sweat, and tears)

Your time is valuable and fixed. We only have so much time on this earth. And you never know how much time your clock has left. You need to think about the joy your craft brings you, as well as what you are missing out on while focusing on your craft. Are you missing time with your kids? Do you hate spending all day at markets hoping to make a few sales?

This category is tricky. How can you place a cost to time? I like to think of this section as my ideal lifestyle. I think about how many hours I want to devote to running the core of the business, how many hours go into making the product, and the things I want to do and have in my ideal life.

Once you have the ideal life planned, you can factor in if your business is going to be the sole provider of that life. If the business is the sole provider, you need to think about your total living costs and divide those by you’re the products you can produce. If it is a partial income, factor in the percentage of the life you wish it to cover. Is it designed to just give you extra play money? Pay for vacations? Decide what you want and what it must do.

Let’s pretend in my ideal life will cost $5000 per month. I want the business to cover 20% of that or $1000 per month. So, $12,000 per year. Dividing that by my total number of products per year gives me $20 per item.

Wholesale, consignment, & sales

This is a question each business must answer for itself. But it can play a huge part in your calculations. If you want to sell wholesale or consignment, most expect between a 25% and 50% mark-up ability. This means you are sacrificing some of your profit so they can sell for the same price while making a profit themselves. It also means in exchange for a loss in your profit margin, you get continued and regular sales.

Each business will need to weigh this factor out. Unfortunately, most of the time you end up eating the wholesale out of your time portion until the business grows enough to cover your original desired income. The reason for this is you can’t lower your fixed business or supply costs.

When we originally started, we did not even think about this. After a short while, we got approached about a wholesale deal. Because we did not give ourselves the right margin, we ended up eating into our profit (and some of the business fixed expenses) to make it happen. A quick road to burnout.

Factor these adjustments after you put it all together. For example, desired price – 50% = wholesale price. It should never be lower than your fixed costs. If it is, you need to look at changing something.

Also, remember that wholesale may need you to increase your capacity. Can you do that effectively without much extra overhead?

The last thing you need to factor in is future sales. Think about what types of sales you want to run, and make sure you compensate for those in your core pricing. Sales will eat into any markups and time costs. They should not eat into your fixed base costs. Clearance products may be the only exception here.

Market research

Unless you have come up with the most unique whatnot, likely there is already someone selling what you make. You need to research the market and compare their items to yours to get an average market level that people would be willing to pay.

You can charge more per item or less. Just because someone else says your product is worth $10 in their business does not mean you cannot charge $15. But you may have a hard time justifying the extra money. If your quality is better, etc. it could be a simple thing.

The more defined your niche (target market) is, the easier you can charge a premium because your product meets or exceeds the needs of the ideal customers. I strongly recommend avoiding Etsy as your primary source of pricing research.

While you can use it, Etsy has become a huge race to the bottom. Same with sites such as Amazon. There are even businesses out there selling for pretty much no markup at all. Sounds like a crappy hobby to me.

Putting it all together

Now that we have our fixed costs the best way to find your selling price is to work backward. Start with all your calculated expenses: Supply cost + Business cost = Fixed base cost. In my example, this would be $6.71.

Price tag

Next, you add on your time costs. In my example, this was $20, so my total costs are $26.71. Compare this to your market research. Can I charge at least $27? If the answer is yes, and my research says I could charge up to $35, then now I get to decide the price. Is my product value or quality? In this case, let’s say it’s quality so I decide to charge $38. Now I can make what I desire with fewer products. This may increase the quality even more or the creativity of the products I make.

If the price you get is higher than the market value can support by a great margin, you will need to go back and look at the time costs and decide if the numbers are realistic. You can also look at the core number of products. Maybe I can increase my production to 700 without a compromise.

Looking at the other side, let’s pretend the market can only support around $20. Working backward to get to a reasonable and acceptable time cost. Market value – Base cost = Time cost. In my example, this would be $13.29. You can never lose your base costs. So, I could increase my production to around 900 and cover the costs. I may need to rework my product design to make it simpler or purchase a few tools to increase my production speed. Or I could simply look at it and say, well maybe 20% is too much and maybe my business can only produce 15% of my desired income.

All the hypotheticals vs X times

Keep in mind my above pricing method suggests many hypothetical guesses. And a new business may not know its market enough to know how much it can produce. Or how narrow their niche can become.

Therefore, many blogs and books recommend a simple base cost * 4 or * 3 pricing method. I don’t recommend the *3 pricing method, as I feel it will consistently come up short. This becomes even more extreme when you must account for things like wholesale. 3 times may leave you eating into your base costs. The * 3 pricing did not work well for our candle business.

If we use the * 4 pricing method with my example above it works like this: Base cost of $6.71 * 4 times = $26.84. As you can see, we can in pretty much at the same spot. But this way does not give me any information about my time or reasonable production thoughts.

Some recommendations even go as far as to not include fixed business costs, but just supply costs. This can also leave you short and eat into what you feel you want to earn from your business. They recommend this because not everyone can figure out what level of products they can produce in a fixed time. In my above example, it would be $5.12 * 4 = $20.48. As you can see, now I am not producing the income I want to get, because I am still losing the business costs.

Both X times methods are regardless of market research, and many places don’t even recommend research or are very minimal. Don’t make this mistake.

What do I recommend?

While the research and hypothetical might be entirely wrong, I recommend figuring out your pricing using all 4 methods. Come up with a price for each method. Compare them all to your market research and if you desire to have wholesale in the future. Then decide what works best for your business.

Our candle business has since adopted a hybrid model that uses the * 4 pricing method to quickly calculate the base price we want to charge based on the supply cost. Then we factor in a percent of business costs. Candles and soaps are decently easy to scale so business costs are very fluid. We used our ideal time costs to help us factor in the percentage as well.

No matter what you need to always do market research, calculate your base costs, and get a strong grasp of your business costs. You also must come up with a time-cost goal for your business. Until you do these basic things you won’t feel happy about your price and your business may be a drain on your life rather than an enrichment.

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