The Right Way to Price a Handmade Product (Step-by-Step Formula)

Pricing handmade items is a subject that puts panic into many handmade business owners. They’ve heard their prices are too low, go looking for a pricing formula, plug their numbers in, and then freak out when they realize what their prices should be.

What you should be pricing your products at depends on so many variables, that you really can’t follow one basic formula to a T.

Multiplying your production hours by 2 can raise your prices unnecessarily high if you make labor-intensive items. Just because it takes you 3 hours to make an item or you use materials that are more expensive, doesn’t mean your overhead costs are just as high and require that big of a markup.

I’m going to share a simpler way to look at pricing that allows you to set prices based on what works for your business.

The difference between the traditional handmade pricing formula and this one is that the traditional one uses a basic markup and hopes that markup is covering overhead expenses and leaving you with a profit.

This pricing guideline will get a little more detailed with markups after all costs are covered.

 

HOW TO PRICE HANDMADE ITEMS

Handmade items should be priced, first and foremost, to cover the costs associated with making your products and running your business (including your hourly wage). Then, you should add profits to your prices, and then add a markup to allow for wholesale pricing, customer discounts, or to help cover incidentals.

We’ll look at numbers for one month at a time, as it’s easier to do so.

The basic 3 steps to price your handmade products are:

 

STEP 1: COVER COSTS

Your products’ prices must ensure you’re being paid back for the money you spend on your business each month. These costs should be where your prices start. Not just your production costs, but all costs.

 

STEP 2: ADD PROFITS

Your business must profit in order to stay in business. Profits should always be built into your price and properly calculated; not simply multiplying numbers by two and hoping there’s a profit left after costs are covered.

 

STEP 3: ADD MARKUP

Markup allows you to offer discounts and gives your business some extra padding. How much of a markup you add will depend on if you plan to sell wholesale, how much of a discount you want to be able to offer customers, and/or how much extra padding you’d like for your business.

 

 

THE WRONG WAY TO PRICE HANDMADE ITEMS

Before we get into the details of the 3 pricing steps, let’s take a look at why the traditional pricing formula doesn’t work for many handmade business owners.

TRADITIONAL PRICING FORMULA

• Materials + Labor = Production Cost
• Production Cost x 2 = Wholesale Price
• Wholesale Price x 2 = Retail Price

The traditional pricing formula starts off right, by calculating the production costs for a product.

But then that number is multiplied by 2 in an attempt to cover overhead expenses and add a profit.

This doesn’t work for a few reasons:

1) It’s not based on what your overhead expenses actually are

2) Just because your production costs are high doesn’t mean your overhead costs will be too (or visa versa)

3) You can’t be sure you’re profiting and how much

 

Let’s say I sew quilts from recycled material and I’m following the traditional pricing formula.

>> It takes me 10 hours to sew one quilt and costs me $20 in materials

>> I can make 5 quilts in a month

>> I want to pay myself $20/hour

>> I have $250 in overhead costs per month to list my quilts on Etsy, market those listings, package and ship orders.

 

Traditional Pricing Formula:

$20 + $200 = $220 Production Costs

$220 x 2 = $440 Wholesale Price

$440 x 2 = $880 Retail Price

 

If I sell all 5 quilts at $880, my revenue for the month is $4400.

The costs I must cover for the month are $1350 ($1100 for Production Costs of 5 quilts + $250 Overhead expenses).

 

Revenue minus Costs = Profit

$4400 (Revenue) – $1350 (Costs) = $3050 Profit

Profit Margin is 69%

 

That’s an extremely high profit margin. Great if I can sell a quilt for $880 but that high of a profit margin likely prices my quilt out of the market.

I don’t need that much markup on my quilts.

Just because I spend 10 hours sewing one quilt does not mean my overhead costs will correlate with those hours.

 

Now that we understand why the traditional pricing formula doesn’t work for a lot of businesses, let’s look at an alternative way to price your products.

 

STEP 1: COVER COSTS

There are many ways to categorize costs to properly file taxes, but for the sake of keeping things simple when pricing your products, we’re going to look at your business’s costs as:

A) Production Costs

B) Overhead Costs

 

WHAT ARE PRODUCTION COSTS?

Think of production costs as the money you must spend to create a product so it’s ready for market. Those costs may be:

• Materials
• Hours to make the item
• Price tags
• Packaging/labels

 

WHAT ARE OVERHEAD COSTS?

Think of overhead costs as anything you spend money on for your business, outside of production costs. Those costs may be:

• Photographing product (hours, equipment, editing tools, etc.)
• Etsy (listing fees, hours spent listing products, cost of running ads, etc.)
• Printing business cards
• Time spent answering emails
• Shipping materials
• Time spent packaging orders & driving to the post office
• Tool and equipment repair or maintenance

 

Don’t forget, this should always include your wage for every hour it takes you to complete the tasks on your list.

If you must drive to the sewing machine repair shop to get a repair done, those are business hours you must be paid for. If you spend an hour a day updating your Etsy shop, track those hours.

 

HOW DO YOU KEEP TRACK OF BUSINESS COSTS?

The easiest way to keep track of all money going out of your business (including your wages) and to see what you spend on a monthly basis is to use a separate bank account for your business.

Of course, running a business requires more tracking of your numbers so you can properly write off business expenses, file taxes, determine ROI’s, etc. But we’re not going to get into all that in this article. (THE SUCCESS PLANNER will help with that)

The other aspect that keeps expenses simple is to track by the month.

I know it can be hard to know how many hours you’ll spend working on your business or how much money you’re going to spend in a month until you’ve actually spent it, but your business should have a budget, just like your personal life does.

If you only have $250 left in your personal bank account for the month after paying your fixed expenses (rent, groceries, gas, etc.) and you want to go on a trip but you also need a car repair, you must choose one or the other to stay within your budget.

In business, if you set a budget to spend $500/month; $250 on production costs and $250 on overhead costs, then you can make decisions to stay within that budget.

 

 

STEP 1 – A: COVER PRODUCTION COSTS

Production costs must be tracked with a little more detail so you know how much to charge for one product vs. another.

For example, if I make jewelry, I can’t simply buy a bunch of jewelry materials and split the cost evenly among earrings, bracelets, and necklaces. That would likely lead to overpriced earrings.

Rather, I would add up the costs for my earring materials and divide that number by how many earrings I can make with those materials.

If I spend $50 on earring materials and can make 10 pairs of earrings, each earring would cost me $5 in materials.

You also want to track the time it takes you to make each item and multiply those hours by the hourly wage you want to be paid.

 

For example:

A pair of earrings may take me 1/4 hour to make

A bracelet may take me 1/2 hour to make

A necklace may take me 1 hour to make

 

If I want to pay myself $20 per hour, a pair of earrings would cost $5 in labor.

$10 ($5 in material + $5 in labor) would be the Production Cost for a pair of earrings.

 

 

STEP 1 – B: COVER OVERHEAD COSTS

Once you’ve purchased your materials for the month, all other money you spend on your business can be considered an overhead cost (for simplicity).

For the most part, these can be lumped together and divided amongst your products’ prices.

How you divide those overhead costs requires a bit more work if you have multiple products with varying production costs.

 

DIVIDING OVERHEAD COSTS AMONG DIFFERENT PRODUCTS

First, you must look at how many different products you have and the percentage each item’s production cost contributes to the total production cost of your product line (don’t worry, I’ll explain).

Then you must know how many products you’ll make in a month so you can divide overhead costs evenly among each product that’s made.

 

TYPES OF PRODUCTS

The price of each product will be different, and therefore, will absorb different amounts of your profits and overhead costs.

If I sell earrings, bracelets, and necklaces, the cost to make each will be different. Each product’s cost will be where my prices start.

 

For example:

>> I want to pay myself $20/hour

>> A pair of earrings requires $5 in materials and 1/4 hour of my time, the Production Cost for that pair of earrings is $10.

>> A bracelet requires $10 in materials and requires 1/2 hour of my time. The Production Cost for the bracelet is $20.

>> A necklace requires $15 in materials and requires 1 hour of my time. The Production Cost for the necklace is $35.

 

These are the starting points for my prices and tell me how I should distribute my overhead costs among them.

 

You can make it easy to distribute overhead costs by finding the percent each item’s production cost is of the total production cost for all items. This requires a bit more math but is really easy if you follow these steps.

To find the percent, add all of your products’ production costs together to find the total production costs of your product line. Then use that total to find the percentage of each item’s production cost by cross-multiplying and dividing.

 

For example:

$10 (earrings) + $20 (bracelet) + $35 (necklace) = $65 (Total Production Costs)

 

Now I want to know what percent $10 is (earring’s production cost) of $65 (total production costs), so I would cross multiply and divide.

 

$10         (I want to know this %) 

$65                 100%

 

Cross multiply and divide:

10 x 100 = 1000

1000 divided by 65 = 15.38%

 

I would do this for the rest of my products.

 

Earrings = 15.38%

Bracelet = 30.77%

Necklace = 53.85%

 

Now when I’m trying to determine how much an item should absorb of my total Overhead Costs, I can simply multiply my Overhead Costs by a product’s Production Cost Percent, to find that amount.

For example, if my Overhead Costs are $250/month, I would multiply $250 by each product’s Production Costs Percent to find the portion of Overhead Costs a certain type of product should absorb.

 

Earrings: 250 x 15.38% = $38.45

Bracelet: 250 x 30.77% = $76.93

Necklace: 250 x 53.85% = $134.63

 

I now know the portion of my Overhead Costs each item must absorb.

Now I must divide each of those portions evenly among how many of each item I’ll make and sell.

 

PRODUCT UNITS

You must know how many units you’ll make each month, which will be based on the materials you buy.

Once you know how many units you can make each month, you can divide your Overhead Costs among those units.

 

For example:

>> I spend $250/month to run my business

>> I’m able to make 25 items, and those items are all the same price

 

I would simply distribute that $250 evenly among the 25 items.

$250 divided by 25 = 10

I would add $10 to my Production Costs to get my Base Price.

When I sell those 25 items, I cover the overhead costs associated with them (25 x $10 = $250).

 

If I sell a variety of products and they each have a different price and I make different quantities of each, I would divide the portion of my Overhead Costs a product is going to absorb, by how many units I’ll make in that product.

 

For example, if I sell jewelry, and my prices are different for earrings, bracelets and necklaces, I’ve already determined the portion of my total Overhead Costs each type of product will absorb, now I need to divide that portion among how many units I’ll make.

 

Earrings: $38.45 (portion of Overhead Costs earrings will absorb)

Bracelet: $76.93 (portion of Overhead Costs bracelets will absorb)

Necklace: $134.63 (portion of Overhead Costs necklaces will absorb)

 

Let’s say I make 30 pieces of jewelry per month, 10 of each. That would mean I’m adding the following numbers to my prices:

 

Earrings: $38.45 divided by 10 units = $3.85/unit

Bracelet: $76.93 divided by 10 units = $7.69/unit

Necklace: $134.63 divided by 10 units = $13.46/unit

 

Now I have the Base Price of each item, which ensures I’m covering all of my business’s costs:

 

Earrings: $10 (Production Cost) + $3.85 (Overhead Cost) = $13.85 (Base Price)

Bracelet: $20 (Production Cost) + $7.69 (Overhead Cost) = $27.69 (Base Price)

Necklace: $35 (Production Cost) + $13.46 (Overhead Cost) = $48.46 (Base Price)

 

When I sell all 30 pieces at their base prices, I’ll have $900 ($650 to cover Production Costs and $250 to cover Overhead Costs).

 

Determine your Production Costs for each item you make. Then determine your Overhead Costs for one month and distribute those costs among your products. This will give you your Base Price. 

Now we want to add some profit in there.

 

 

STEP 2: ADD PROFITS

The first aspect of success when it comes to a business is profits. If you don’t have profits, or a plan to start profiting in the near future, your business cannot survive.

Profits may be used for different things, but you’ll likely use those profits to grow your business or pay yourself more than an hourly wage.

Without profits, your business isn’t growing.

You’re simply spending money and then getting that money back. And, you end up being an employee of your business; getting paid for the hours you work and nothing more.

But most people start a business for the opportunity to earn more than an hourly wage; profits allow you to do that.

 

WHAT ARE PROFITS?

Profit is the money that’s left once you deduct your costs. Not just the costs of the product, but ANYTHING you spend money on to run your business; that includes your wages.

You can get more detailed than this (gross profit vs. net profit) but we’ll stick with this basic definition for simplicity.

 

WHAT ARE PROFIT MARGINS?

Profit margin is basically expressing your profits in a percentage. You determine your business’s profit margins by dividing your profits by revenue, then multiplying by 100 to get the percent.

For example, if I charge $100 for a product and $90 of that sale pays for expenses, I have $10 in profit.

10 (profit) divided by 100 (revenue) = 0.1 x 100 = 10%

My products have a 10% profit margin.

 

We’ll use a profit margin to calculate how much money to add to your base price.

 

HOW MUCH PROFIT SHOULD YOU MAKE ON A PRODUCT?

Profit margins vary depending on the industry, but a good range to fit within is 5% – 20%. You may want higher or lower profit margins depending on your business model and how much money you want to invest back into your business for growth. Profit margins may also vary from product to product, and you may increase or lower them as your business evolves.

 

>> 5% profit margin is considered low

>> 10% profit margin is considered average

>> 20% profit margin is considered high

(source)

 

5% – 20% profit margin is a good range to be in, but you can set your profit margins however you see fit; base them on the goals you have for your business.

If you’re focused on growth, you may aim for the higher end of that range (e.g. 20% – 25% profit margins) so you can invest more money back into your business each month.

If you’re a volume-based business (i.e. you sell lots of units), you may aim at the low end of the profit margin scale. Your profit margins per product may be low (e.g. 5%) but if you can sell 100 units per month, your profits overall will be high.

 

To work profit margins into your prices, follow these steps:

1. Determine what you would like your profit margins to be (e.g. 5%, 10%, 20%, or another percent)
2. Turn that percent into decimal form, by moving the decimal two points to the left (e.g. 5% -> 0.05, 10% -> 0.1, 20% -> 0.20)
3. Subtract that number from 1 (e.g. 1 – 0.05 = 0.95, 1 – 0.1 = 0.9)
4. Divide your costs per product (production costs + overhead costs) by that number.
5. The number you’re left with is your price with profits built in

For example, let’s say I can make 10 scarves per month and the base price for a scarf is $70. I may want 20% profit margins since I’m selling a lower volume of scarves each month.

20% -> 0.2

1 – 0.2 = 0.8

$70 divided by 0.8 = $87.50

Profits per scarf = $17.50 (20% profit margin)

Total profit per month = $175 ($17.50 profit per scarf x 10 sales)

 

Now let’s say I can pump out 50 scarves each month so I lower my profit margin to 5%.

5% -> 0.05

1 – 0.05 = 0.95

$70 divided by 0.95 = $73.68

Profits per scarf = $3.68 (5% profit margin)

Total profit per month = $184 ($3.68 profit per scarf x 50 sales)

My profits are much lower per scarf, but my monthly profits are higher because I’m able to sell more units.

 

Decide on a profit margin and multiply your base price(s) by that percent to get your “wholesale price”.

This price ensures, if you do sell wholesale to retailers, you’re still covering all costs and profiting.

If you sell at Retail Price (which is what we’ll calculate in the next step with Markup), you’ll profit even more.

 

 

STEP 3: ADD MARKUP

In this pricing strategy, I define/use “markup” a little differently than the traditional pricing formula that uses a standard markup (Productions Costs x 2) to get Wholesale Price and then another standard markup (Wholesale price x 2) to get Retail Price.

Covering your overhead costs and adding in profits by simply multiplying your production costs by 2 is a bit of a shot in the dark. I may be adding more markup than needed to cover my Overhead Costs and Profit (if my production costs are high) or I may not have enough.

 

HOW MUCH MARKUP SHOULD I ADD?

How much you mark up your prices will depend on your business, the types of discounts you want to be able to offer, and how much padding you’d like.

If you’re going to sell wholesale, add at least a 100% markup.

Most businesses should have a 100% markup so they have the potential to sell wholesale to retailers.

However, as mentioned, some business models/products aren’t a fit for selling wholesale (e.g. marking a quilt up by 100% is likely to price it higher than most customers are willing to pay, so wholesale may not ever be a fit). If you never plan to sell wholesale to retailers, you may set a lower markup percentage.

 

Markup in my formula is simply allowing you to offer discounts (e.g. 50% discount when selling wholesale) or add extra padding to your business. And you’ll set markup based on your business and your goals for it; not based on a generic number.

Wholesale Price plus your Markup will create your Retail Price. Retail Price is what the consumer pays, whether they’re buying your products on Etsy, at a craft show, or through a retailer.

How to add markup into your prices

1. Decide how much of a discount you’d like to be able to offer – if you plan to sell wholesale to retailers, you’ll need to be able to offer at least a 50% discount. If you’re selling a labor intensive item, such as quilts, and won’t be able to sell through retailers, you may want to be able to offer your customers a 30% discount.
2. Turn that discount into decimal form (e.g. 50% -> 0.5, 30% -> 0.3)
3. Subtract that number from 1 (e.g. 1 – 0.5 = 0.5, 1 – 0.3 = 0.7)
4. Divide your current product price (costs + profits) by that number
5. The number you’re left with is the product’s price with markup added in

 

For example, let’s say my scarf is $73.68 with cost and profit. I plan to sell through retailers so I need to be able to offer a 50% discount.

50% -> 0.5

1 – 0.5 = 0.5

$73.68 divided by 0.5 = $147.36

The retail price $147.36 allows me to offer a 50% discount and still cover all my costs and be left with my desired profit.

 

I may realize that selling wholesale is going to raise my price too high. I could go back and find a way to lower my costs, or I may decide to choose a different business model; selling directly to consumers. But I still want to be able to run sales, and may want to be able to offer up to a 20% discount (without losing profits).

20% -> 0.2

1 – 0.2 = 0.8

$73.68 divided by 0.8 = $92.10

The retail price $92.10 allows me to discount a scarf 20% and still cover costs and be left with my desired profit.

 

DO I REALLY NEED MARKUP?

As mentioned, markup is often used to cover Overhead Costs and add Profit. However, in this pricing strategy, markup will allow you to offer discounts or give your business a little extra money for incidentals.

 

>> WHOLESALE (OR CONSIGNMENT)

When you sell wholesale to retailers, they expect to purchase your products for (typically) 50% off the retail price. That 50% discount then allows them to mark your prices back up to the Retail Price, and that markup helps cover their overhead costs and give them a profit.

If you have a product that is well suited for selling wholesale and you hope to have your products carried in retail stores, you’ll want to add at least a 100% markup to your wholesale prices (multiply wholesale prices by 2).

However, not all products are suited for selling at wholesale prices, and that’s okay.

For example, if I make labor-intensive products, such as quilts, and there’s no way for me to get my production costs down, it may completely price my quilts out of the market to mark them up by 100%.

If marking your prices up now to maybe sell wholesale one day will raise your prices to the point that no one will pay them, don’t sell wholesale for now. You still want to add a markup, it just doesn’t need to be as high as it would need to be if you were selling wholesale to retailers.

You can always raise your prices as your business grows, your brand develops, and you find a profitable target market willing to pay the higher prices for your pieces (here’s how to do that).

Consignment is a similar situation but often, shops that sell handmade items on consignment will only take 30% – 40% of the sale. You can learn more about the difference between wholesale and consignment here. 

 

>> CUSTOMER DISCOUNTS

If you plan to sell wholesale, marking your prices up by 100% will allow you to offer discounts when selling directly to your customers, so you don’t need to add more markup on top of your wholesale markup.

However, if you don’t plan to sell your product wholesale, you should still mark your prices up so you can run sales once and a while or offer promo codes to your VIP customers.

 

>> FREE SHIPPING

You may even use your markup to absorb some or all of shipping costs into your prices so you can lower shipping fees or even offer free shipping, without cutting into your profits.

 

>> GUARANTEES/REPAIRS

If you offer things such as a money-back guarantee or free repairs, you need a markup on your products to help ensure you’re not losing money when a customer decides to cash in on that offer.

The customer isn’t paying you any more money when you fix an item for free and you may be taking a loss if they return a product you can’t resell. But that little extra money you get from each order, on top of covering your costs and making a profit, helps cover those hours and losses that only pop up once and a while.

Of course, this only works if the majority of your customers are happy with their products. If 9 out of 10 customers want a refund or need a repair, your markup would have to be extremely high to cover those losses/hours.

 

>> INCIDENTALS

Your markups can also add a little extra cushioning so you have extra money if you need to take time off work or have a one-time business expense pop up.

For example, if you use an expensive piece of equipment to make your products, and that equipment breaks one month, you can’t all of a sudden raise your prices to cover the cost of repair or replacement.

Markup can help you put a little extra money away each month to help you cover unexpected or occasional costs without having to dip into your profits or go into the red (loss/debt).

 

 

WHAT TO DO WHEN YOUR PRICES ARE TOO HIGH

If you’re finding, even with this pricing formula, your prices are higher than people are willing to pay, you have a few options.

 

LOWER COSTS

Your business’s costs are the starting point of your prices, so if they’re high, your prices are going to start high. There are several ways to lower your costs such as speeding up production, removing product features that are time/cost consuming but that your customer doesn’t place importance on/isn’t willing to pay extra for, buying materials in bulk or at wholesale prices, etc.

You can find more ideas to lower your costs here.

 

INCREASE PERCEIVED VALUE

Why are consumers willing to pay 10x the price of a t-shirt when they’re shopping at Gucci vs. Old Navy? Quality is obviously part of that factor, but another big factor is Gucci’s branding.

Through several factors, Gucci has increased the perceived value consumers place on their products. They believe their products are better and worth more money.

If you want to increase the perceived value of your products, so customers are willing to pay more money for them, you can work on your branding.

It’s also important to communicate why your prices are higher. Shoppers won’t know, unless they’re told, if you use a material that is better quality than your competitors.

 

CHANGE YOUR TARGET MARKET

Who you target has a big impact on how much you can charge.

If I make jewelry and I’m targeting a consumer who may wear my pieces when they go out for dinner, I can’t charge as much as I could if I target brides.

Brides will be wearing my jewelry on their big day, which makes the jewelry more important to them and makes them willing to spend more to get that perfect piece.

Once you find a profitable target market, you also must offer them the right product and experience.

For example, if I’m going to target brides, my jewelry must be bridal jewelry. And if I’m going to target brides willing to pay high-end prices, I must use high-end materials and make sure my business screams “luxury” every step of the way.

HOW TO FIND A GOLDMINE OF CUSTOMERS will help with this step.

 

GET OFF ETSY

Many people selling on Etsy aren’t running businesses. They’re trying to sell the crafts they make or test the waters to see if what they make will sell, and they’re basing their prices on what other Etsy sellers are charging.

On Etsy, it can become a bit of an infinite loop with sellers trying to undercut each other and, in the end, no one is profiting because they’re just trying to get the sale (not build a sustainable business).

When people shop on Etsy, they see your competitor’s prices right next to yours. When given two similar options, most shoppers will go for the cheaper one, especially if there are no discerning features.

If your prices are much higher than your competitor’s prices on Etsy, it may be beneficial for you to start building your own website or selling through other sales channels.

A website will allow you to customize it to perfectly suit your brand (Etsy only allows so much customization). It also removes the competition when someone is looking at your products; they’re only seeing your products and prices, not hundreds of other Etsy sellers.

 

DON’T SELL WHOLESALE

Some products aren’t made for selling wholesale and that’s okay. If you focus on building your business and selling directly to consumers, you don’t have to worry about factoring in that wholesale markup. As mentioned, you do still want some markup, but it doesn’t have to be as big.

 

RECONSIDER YOUR BUSINESS

Although you love what you make, it may not create the best business opportunity. Usually, there is some way to simply alter your product or business model, but if you’re unwilling to do that, you may not be able to run a profitable business.

For example, if I make bejeweled quilts that take me 100 hours to create, but no one is searching for “bejeweled quilts”, there isn’t a target market willing to pay thousands of dollars for my quilts, no matter how great my branding is.

Some crafts have the ability to be more profitable than others. You can check out CRAFT BUSINESSES THAT MAKE THE MOST MONEY and CRAFT BUSINESSES THAT MAKE THE LEAST MONEY for more on those.

You must also know what people are searching for before you start creating and building a business around what you want to make. If you want your business to make money, it has to be about the consumer.

This article will help you determine keywords people are searching, which can help you create products you know are in demand (even if you don’t sell on Etsy).

 

 

I hope you’ve found this article on how to price your handmade items helpful 🙂