Saturday, March 3, 2012

Pricing Your Work (or, 'That bracelet is HOW much!!???...)

I never set out to make a profit doing chainmaille.  I do it because I enjoy it, I find it (paradoxically) relaxing, and I enjoy the feeling of giving someone a gift that I created myself.  However, as time has gone on and I've created more pieces, wearing my jewelry to work, out to dinner, etc. I've come to understand that people asking me about my jewelry and asking for me to make them one is not only flattering but is a potential income stream.  But it left me wondering, how do you decide how much to sell something you created for?  How do you tell your friends and family how much something they like would cost without feeling awkward or undervaluing your work?  How do you know what price the market will bear for a piece, especially with the potential competition available both locally and on-line?  What is your time worth?  Although there are no easy answers to any of these questions, there are ways you can set the price when someone asks you the (highly anticipated) question of "How much would it cost for you to make one for me?"

Unfortunately, there is not one magic way to determine what price you should ask for you handmade item.  Although the cost of materials can be very straightforward, and you obviously should set your price to cover materials, other factors in setting a price can be very subjective.  Factors such as labor costs, overhead, profit, and wholesale vs. retail pricing can be a little intimidating to someone who's just looking to share their love of a particular craft with the world at a fair price.  And the apparent penchant for handmade craft artists to undervalue their work means that pricing your work based on what is already on the market, or worse yet compared to what you find at a discount retailer, can leave you taking a loss on your work and potentially becoming frustrated with the craft overall.  It may be a bit of trial and error for you to find out what is appropriate for your situation, but I hope to give you a little guidance to get you started in the right direction.

The general formula for determining the cost of a piece is:

Materials + Labor + Overhead + Profit = Wholesale Cost
Wholesale Costs x 2 = Retail Cost

Probably the first factor people think of in regards to setting a cost is the materials needed to make the item.  And that is an important factor.  But it is essential that you actually KNOW the cost of your materials and the amount used when evaluating this component.  It can be fairly straight-forward in regards to chainmaille, count the number of rings that you need for a piece and determine the per-ring cost from your supply purchase ($2.75 for 100 rings = $0.0275 per ring) and you have the cost of the materials to make the piece.  Don't forget to include things like fasteners, beads, beading wire, etc. in the material cost as well.  I also think there is a strong argument for not only recouping the cost of the materials that went into the piece, but also the cost to restock your supplies to make a replacement piece.  This idea is (in some circles) controversial, but I feel that taking the cost of the materials x 2 is actually an appropriate materials cost equation.

Labor is an important factor in handmade crafts that, for me at least, is the most difficult to determine.  You want to be paid a fair amount for your time, expertise, training, etc. but for many hobbyists we are not looking to use our crafts as our main source of income.  So how do we decide what our time is worth?  If you are looking to make your living solely from your craft, you need to decide how much you need to make to keep a roof over your head and food on your plate, and then based on the time you invest in your crafts on a daily/weekly basis, you can determine what you need to make per hour ($2400 per month in expenses/160 hours per month crafting = $15 per hour for a living wage).  But for those of us doing this as a side gig, there is no 'hard and fast rule' for setting your wage.  You have to decide what you think your time is worth and try (desperately) not to sell yourself short.

Overhead accounts for the miscellaneous expenses that don't fall under materials or labor.  This includes things like tools, office space rental, office supplies, packing materials, etc.  This may be one of the easiest portions of cost to account for, although you may have to estimate when you are first starting out.  Keep track of all of these expenses for several months while also tracking how much time you spend on your craft, and then divide the expenses by that time and number of months to determine an overhead cost for each item ($450 in expenses/3 months/120 hours = $1.25 overhead per piece).  I tend to include things like purchased patterns and extended training classes in my overhead costs as well.

Profit.  Every one of us hopes to make a profit on our sold crafts.  But profit is not to be confused with the labor costs.  What you are 'paying yourself' for your time is NOT profit.  Profit is an amount over and above the cost of making the item that you can reinvest back into your craft for new supplies, better tools, a new craft desk, etc.  And how much you set as your profit per piece is a personal decision.  You may want to start out with a lower profit amount while you build a customer base and then slowly increase that amount as you build a loyal following and determine what the market will bear as a cost.

Wholesale costs vs. retail cost is an issue to consider if you intend to sell your items to retail outlets or boutiques for resale.  Wholesale cost would typically be the cost that you would sell your items to these resellers for, and then they in turn will multiply that wholesale cost based on their store policy to set their retail cost for your item.  If you do not intend to sell to a resale outlet, this number may only be used by you to set your overall 'direct to customer' retail price.  But it is unwise to use the wholesale price as your direct customer price if you can avoid it.  After all, you'd be hard pressed to find a resale outlet that will purchase your items for resale if they know that you are selling for the same (wholesale) price directly to customers.  Who would come to their store and pay 2 to 3 times as much for your item if they can go directly to you for it? So keep that in mind, if you think you may try to sell to retail outlets in the future. Also, if you sell directly to customers at your wholesale price and then start selling at a retail outlet, suddenly doubling your direct customer costs could (understandably) anger those loyal customers you spent time wooing. Explaining that you doubled your price overnight because XYZ Boutique started selling your stuff will not necessarily make your customers any more understanding of the sudden price hike.   

So, to put all this together, here's an example of setting the cost for a handmade piece:

Tammy is making handmade jewelry as a hobby, not for her sole income, so she decides that $10/hour is a fair wage.  The necklace she is currently working on takes $6.25 in materials and 1.5 hours to make.  She's tracked her expenses for several months and determined her overhead is $1.50 per piece.  And she sets her profit at $5 per piece to reinvest in her business.  Therefore, the cost for the necklace would be:

(6.25 x 2) + (10 x 1.5)  + 1.50 + 5 = $34 wholesale price
34 x 2 = $68 retail price

It's important to note that these cost calculations do not include things like sales tax or other (potential) accounting/tax expenses.  Be sure to check with a tax advisor regarding the tax requirements for your state, and include any necessary costs in your pricing calculations.

If you'd like to learn more about setting a price for your handmade craft, there are many wonderful references available on-line and at your local library.  A few to get you started include:

Blue Buddha Boutique
The Crafts Report
"Sell your jewelry : how to start a jewelry business and make money selling jewelry at boutiques, fairs, trunk shows, Etsy" by Stacie Vander Pol
"How to Start a Home-Based Jewelry Making Business" by Maire Loughran
"Marketing and Selling Your Handmade Jewelry : the Complete Guide to Turning Your Passion Into Profit" by Viki Lareau

And so, there is your quick overview of pricing your work.  Happy number crunching and may all your sales end in a profit...

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