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

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