Friday, July 9, 2010

Pricing Handmade Goods for your Craft Business (Part II) - Determining Specific Costs

In Part I of Basic Pricing, it was previously mentioned about the formula used for determining your basic price.

Production (and/or) Labor * (Materials + Tools + Supplies) = Sale Price

In this section we will be discussing more about calculating specific costs which will be used to conclude the total amounts used within the above formula for each section. There are additional costs that should also be accounting for as a business owner and operator.

When gathering your supplies do you calculate what type of portion is being used off a strand of beads for one piece? What percentage is not used or wasted? How much shipping was paid? How many hours were spent creating it?

Calculating Shipping Costs:

Let's take an example of a strand of beads that has 16 pieces on it. You use half of that for your project to create a bracelet. You have the cost as well for 8in of wire, crimp beads, and clasp. You now have the waste cost of what was not used and the shipping charges for mailing it. To calculate the shipping costs for individual purchased items you follow this equation.

Total Shipping Charges/Cost of Goods Before Shipping = Shipping Percentage Rate

If you are doing a shipment of multiple with different prices and want to determine the add on cost for each item in shipping, take the total cost of shipping for the entire purchase and divide by the total cost of purchase before shipping charges are added in.

Calculating Labor Costs:

For your labor cost you need to take into consideration how much time is spent in making multiple items at once. To determine the per piece price in labor, you take the total time spent during creation and divide it by 1 hour time frame for your wage than multiple that equivalent to your pay rate.

(Total Minutes to Complete Piece/60 Mins for 1 Hour) x Labor Per Hour Pay Rate = Labor Cost Per Piece

Do not forget to add in a small percentage for the wear and tear of use on your tools plus any equipment contributed such as sewing machines, pliers, scissors, needles, etc.

Calculating Overhead:

Your overhead costs would include things such as rent/mortgage, repairs, wear and tear on equipment, phone, internet, utilities, and other expenses. A percentage of these items pertain to your production costs of business. You can calculate these costs through the use of an educated guess on phone and utilities. This costs can be also calculated through the use of a simple formula where you divide the total of your overhead items by the intended number of pieces to be produced. This established a set of overhead costs per piece.

Example: A set of $1.00 amount gets added to each and every product with no regard for other costs or price.

Another method is to create a percentage rate that is automatically added to the price structure of each piece.

Example: 25% overhead rate, add $.25 to every $1.00 of other costs.

Other associated expenses for overhead cost could included
  • time spent working on website
  • correspondence
  • handling orders
  • cell phone
  • bookkeeping
  • inventory control
  • ordering supplies
  • developing new products
  • time spent in shipping orders
  • ink for printer
  • paper
  • subscriptions
  • advertising
  • time marketing on social sites and elsewhere

Calculating Profit:

Some ways to create a profit for yourself in business is to save on the pricing of goods by purchasing wholesale. Create an inventory that is stored and turning them into finished products. Determine a profit on those raw materials or supplies and your return on investment. Expect to earn a 10% profit on labor even if it is your own. If you are not willing to pay someone else a substandard wage than be sure that you don't pay yourself that rate.

Please stay tune for:
Pricing Handmade Goods for your Craft Business (Part 3) - Pricing Wholesale

Friday, July 2, 2010

Pricing Handmade Goods for your Craft Business (Part I) - Basic Pricing

This topic has been completely overdue for some explanation. It is one of the most widely asked questions for newly starting businesses and even established businesses whom wondered where their profits gone after acquiring a multitude of sales.

You craft for fun.
You enjoy it a lot.
You want to sell your creations.
What do you do now?

The first fact to be known about pricing your handmade goods is that not every artisan knows how to price their creations. This can create an unfair advantage when competing in business. Most artisans are unaware of what the appropriate pricing should be for their product. There are those whom are satisfied with any form of minimal profit. This doesn't mean it is savvy for your own business and career ambitions. In pricing your items, many factors are to be considered in cost and accounted for before you can even consider the term profit and what that amount in actuality should be.

When you made the decision to sell your crafts you are inadvertently creating a business; not a hobby for extra cash. The exchange of goods and services for money is considered a form of business exchange. Like any other business that operates in this form, you have raw materials/supplies used to produce your products since you are considered to be the sole manufacturer in it all. Building space is used, utility usage, phone lines for communication, and the internet for running your business. Other factors may be mileage on your vehicle, advertisement costs, and above all your precious time in charge of labor.

In order to establish your labor cost you need to calculate what you want your pay rate to be. Some would say minimum wage should be considered at the very least. As you progress at your business and craftsmanship skills you will be able to introduce a form of pay that increases along with your product quality and sales. To account for time accurately, you must consider the time spent every little second devoted to that item being created. You will more or less figure out that the labor rate is something that is easily dismissed in pricing and most likely never considered on an accurate level. If you are currently operating a business now this is a good time to adjust your prices and become more efficient. The cost of your items should involve a basic equation such as the one below:

Production (and/or) Labor * (Materials + Tools + Supplies) = Sale Price

Please stay tune for:
Pricing Handmade Goods for your Craft Business (Part 2) - Determining Specific Costs