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 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.
We’ll look at this example again using the pricing methods explained in this article, after I’ve explained each step.
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:
- Hours to make the item
- Price tags
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.
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.
>> 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.
$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 %)
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.
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.
>> 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 $110 for a product and $90 of that sale pays for expenses, I have $20 in profit.
20 (profit) divided by 100 (revenue) = 0.2 x 100 = 20%
My products have a 20% 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
To work profit margins into your prices, you’ll take your Base Price that covers all of your costs, and then multiply that number by the profit margin you’d like to make.
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.
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.
Base Price per scarf = $70 (Production Costs + Overhead Costs)
Profits per scarf = $14 ($70 x 20%)
Wholesale Price = $84 ($70 + $14)
Total monthly profits = $140 ($14 x 10 units sold)
Now let’s say I can pump out 50 scarves each month so I lower my profit margin to 5%.
Base Price = $70
Profits per scarf = $3.50 ($70 x 5%)
Wholesale Price = $73.50 ($70 + $3.50)
Total monthly profits = $175 ($3.50 x 50 units sold)
My lower profit margins allow me to keep my prices lower, but my profits are still higher at the end of the month because I’m able to move more units.
Let’s take a look at the jewelry example again with a 10% profit margin:
Base Price: $13.85
Profit Margin: $13.85 x 10% = $1.39
Wholesale price: $15.24 ($13.85 + $1.39)
Base Price: $27.69
Profit Margin: $27.69 x 10% = $2.77
Wholesale Price: $30.46
Base Price: $48.46
Profit Margin: $48.46 x 10% = $4.85
Wholesale Price: $53.31
Decide on a profit margin and multiply your base price(s) by that percent to get your “wholesale price”.
We’re going to all the price you get to after adding profit, your Wholesale Price, regardless of whether you plan to sell wholesale or not.
This price ensures, if you do sell wholesale (or with your maximum discount), 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 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.
We need to work with actual numbers and goals for more accuracy.
For example, if I’ve built a business selling jewelry to brides, my Overhead Costs may be higher than average because of all the customer service I provide before and after a sale, and the elegant packaging I wrap and ship purchased products in. Multiplying my Production Costs by 2 may not cover all those extra hours I spend outside of production and the added costs of high-quality wrapping supplies. That generic markup would be too low for my business.
On the other hand, my overhead costs may be fairly low because I’ve chosen the right target market and have an in-demand product, so my products sell without much marketing and sales effort.
If it takes me several hours to make one product and my materials are high quality so they cost more, multiplying that Production Cost number by 2 can raise my prices way too high. It may give me really big profit margins since I have more than enough to cover overhead costs, but those high profits are likely pricing my products out of the market. That generic markup would be too high for my business.
Instead of multiplying production costs by 2, we’ve calculated our Overhead Costs and Profits and accurately added those numbers to our prices.
Markup in my formula is simply allowing you to offer discounts 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.
WHAT DO I NEED MARKUP FOR?
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 50% markup to your prices (multiply 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 50%.
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.
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 50% 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 a bit 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.
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.
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).
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 50% markup.
If you don’t plan to sell wholesale but want to add a markup so you can offer discounts, determine how much of a discount you would like to be able to offer (e.g. 10%, 20%, 35%) or that you need to cover something like shipping fees.
HOW DO I CALCULATE MARKUP?
Determine the amount you’d like to be able to discount (e.g. offer 10% discounts), and that’s your markup percent (10%). Subtract your markup percent from 100%, which tells you the percent your Wholesale Price is of your Retail Price.
If I want to be able to offer 35% discounts:
Markup = 35%
100% – 35% = 65%
Wholesale Price is 65% of my Retail Price.
If I want to be able to offer 10% discounts:
Markup = 10%
100% – 10% = 90%
Wholesale Price is 90% of my Retail Price.
If I want to be able to offer 50% discounts:
Markup = 50%
100% – 50% = 50%
Wholesale Price is 50% of my Retail Price.
Now I can take my Wholesale Price, and the percent that my Wholesale Price is of my Retail Price, and cross multiply and divide to find my Retail Price.
I want to offer a 40% discount
Markup = 40%
Wholesale Percent = 60% (100% – 40%)
Wholesale Price = $15.24
I want to know my Retail Price so I would cross multiply and divide:
$15.24 (Wholesale Price) 60%
? I want to know this number (Retail Price) 100%
15.24 x 100 = 1524
1524 divided by 60 = 25.40
My Retail Price will be $25.40
This price allows me to offer a 40% discount ($10.16) and still be paid my Wholesale Price $15.24, which ensures I’m covering all my costs and profiting.
THE RIGHT WAY TO PRICE A HANDMADE PRODUCT
Let’s take a look at that quilt example again, using the pricing method I’ve just explained.
Based on the traditional pricing method, I would be pricing my quilts at $880
Let’s follow the steps outlined in this article to try pricing that quilt again.
STEP 1: COSTS
Production Costs = $220 ($200 (10 hours x $20) + $20 (Materials))
Overhead Costs = $250/month
I can make 5 quilts per month
$250 (overhead costs) divided by 5 = $50
Base Price to cover costs: $270 ($220 Production Costs + $50 Overhead Costs)
STEP 2: PROFITS
I would go for an average profit margin of 10% since I’m not selling many units each month but I don’t want to raise my prices too high by adding a higher profit margin.
$270 x 10% (profit margin) = $27 Profit
$270 (costs) + $27 (profit) = $297 Wholesale Price
STEP 3: MARKUP
Unless I found a strong target market for my quilts that allowed me to charge a higher price, I would NOT sell my quilts wholesale. Doing so would require me to have a 50% markup and would raise my price to $594.
Instead, I may mark my quilts up by 10% so I’m able to offer discounts to my customers once and a while or absorb some of my shipping fees into my prices.
$297 + 10% markup ($33) = $330
This is a more reasonable price for a quilt than the $880 Retail Price the traditional pricing formula gives me. And it still ensures I’m being paid for all my hours and costs, and making a profit.
My quilt price would be on the high end if I’m selling on Etsy but I can still make sales if I get my branding and target market right.
If I was priced way above other quilt sellers on Etsy and was having a hard time making sales at that price, I would consider the following steps to try and lower my costs or justify my prices.
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.
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 customizing). It also removes the competition when someone is looking at your products; they’re only seeing your products and prices, not 100’s 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 🙂
Yes! I get sooo frustrated with that simplistic formula and trying to explain to anyone why it’s not a solid, confident way to price your handmade items. I’ve seen way too many people that use it and are then very discouraged when they find themselves struggling financially, or plain out not making sales.
Thanks so much for putting this wise, logical, reasonable information out here for handmade makers!!!!
Thank you so much for reading!! I always felt the basic x2 formula wasn’t quite right but wasn’t sure how to explain the “right” way in a simple to follow formula. This way isn’t as simple as the “x2” method but I think it makes so much more sense for a wide variety of business and products. Glad it does for you too!
Love how you broke this down, it makes so much sense. I will definitely try to implement these strategies
I’m so happy to hear it helps! Let me know how it goes as you apply them to your business. Always good to see it applied to different types of businesses and products and make sure it works in a variety of scenarios 🙂
This is one of your best articles yet! Fellow vendors in my co-op often tell me my items are priced too low and that I’m “worth more” than what I sell my products for. But I’ve been struggling to find a way to decide my prices that makes sense. This is extremely helpful! Thank you SO MUCH!
Thank you so much Bri!! Keep me posted on how it goes once you dive in and get some new prices for your work 🙂
thank you I will try this ,and see the difference, very helpful
Thank you for this article! I do have a couple of questions:
I make candles, and I don’t math well, so I’m having trouble comprehending all of this.
– What if you don’t know how many hours you will be spending on Etsy posts, social media, photography, etc.?
– In regards to how many hours spent, is it per month?
– Could I maybe contact you personally and you could help me figure this out? I know, sounds ridiculous but this stuff is really hard for me to figure out.
I’ll try my best to offer some advice here…
How many hours you’ll work is a bit of a guessing game until you have more of a routine with your business. I find it helps to start by basing your work hours on how much time you have available.
For example, if you work a full time job and have kids, you may know, realistically, you can only work on your business for an hour or two after the kids are in bed. So you may guesstimate you’ll have 12 hours per week to work on your business.
Then consider that most craft businesses need about half their work hours for creating products and half for responding to emails, creating Etsy listings, packaging orders, planning new products, shopping for materials, etc.
So now you can guesstimate that you’ll spend about 6 hours per week on tasks outside of production. Then multiply that by 4 to get your monthly hours (24 hours per month).
That will give you some rough numbers to start with, then you can refine them as you start tracking how many hours you actually work on tasks outside of production.
When you work backwards like this, it also helps you to realize how many hours are available and how important it is to cut out tasks that aren’t worth your time (i.e. won’t give you a return on investment/lead to a sale).
I hope that helps!
Thank you so much, Erin! I’ll probably have more questions 🙂
How do you set a budget for your business?
Sorry one more question…
I upcycle beer/wine/spirit bottles into candles. I try to make 24 each week for inventory.
However, I also have wholesale clients who give me their bottles from their brewery/distillery to make into candles, and these numbers vary.
In the “Dividing Overhead Costs Among Different Products” section, you say you must know how many products you’ll make in a month so you can divide overhead costs evenly among each product that is made.
I guess my question is… when I don’t know exactly how many I am going to make in a month because it fluctuates due to wholesale accounts, should I base this number off the candles I make for inventory?
There will be an element of guessing until your business has more of a rhythm. You’ll firm up numbers after each month when you look at profits/expenses. But until then, you can base numbers on the hours you have available to work on your business.
For example, if you only have 20 hours to work on *production* (not 20 hours total, as there are many other tasks outside of production that require your time), and each candle requires 1 hour to make, you can only make 20 candles in a month, regardless of whether you receive 20 bottles or 100 bottles. Knowing this number (how many products you have time to make in a month) can also help you set a budget/determine how much to buy. If you’re constantly offered 50 bottles to make candles but can only make 20, buying more supplies than you’re able to use each month will eat into your bottom line and reduce profits (unless buying in bulk reduces your cost per unit).
And at the end of the day, your prices must reflect how much money you need to earn back to cover your costs and make a profit. Whether you make a candle this month but sell it next month doesn’t really matter. When it does sell, it should cover you costs.
Hope that helps!
The initial calculations add only $20 to the equation.
The data shows that the hourly rate is $20.
Each quilt takes 10 hours.
5 quilts equals 50 hours.
50 hours x $20 = 1000.
So the profit margin you configured is not 69%.
It seems as though you didn’t read the entire section. The traditional pricing formula is based on one product (Materials are $20, labor is $200 ($20/hour x 10 hours), not $20 as you’re stating), with $220 being the production costs for 1 product.
Following those calculations, numbers are then multiplied by 5 (for 5 quilts)(total: $1100 for production costs and $250 in overhead = $1350)
For 5 quilts, revenue is $4400 and costs are $1350 = $3050 (as shown).
Profit divided by revenue = 0.69 x 100 = 69% profit margin
If you’re referring to a different section and there is indeed a mistake in my calculations, please let me know.
Very helpful article. I really appreciate the way you have broken down each step and given examples. I’ve been told that my bags and purses are both underpriced and overpriced. This approach gives something concrete upon which to base my prices, rather than the x2 method. Thanks so much for putting this out there.
Thanks for reading Elizabeth! I’m so happy it was helpful. Hopefully it helps you with pricing. Just as a side note…I’ve had many people tell me my handbags are overpriced. Some people don’t understand the value of handmade; those are usually the same people telling you your products are overpriced 😉
I needed this! Thank you!!!
No problem 🙂 Thanks for reading!
Thank you for this! My question is about dividing overhead costs. I make crochet and jewelry with many varied items. Should I literally add up all my different crocheted items and jewelry respectively to divide overhead or just take how many of each item I could make a month and then divide? Thanks!
Hi Renee! Have a read over Step 1B, it should answer your question about how to divide your overhead costs 🙂
I have a query about overhead costs…
You said that overhead costs would include:
• Photographing product (hours, equipment, editing tools, etc.)
• Etsy (listing fees, hours spent listing products, cost of running ads, etc.)
• Printing business cards
• Time spend answering emails
• Shipping materials
• Time spent packaging orders & driving to the post office
• Tool and equipment repair or maintenance
What about the purchase of new equipment and also heating, lighting and electricity costs? Should these be included in here too?
You bet! There are different ways people define/categorize costs (which is important when filing taxes), but for the purpose of pricing, you really just need to think of overhead costs as anything you spend money on, outside of production costs (materials and time to make your products). That’s the simplest way I look at it anyways 😉
This was an absolutely great article. Very detailed and informative. Really going to help with my business. Thankyou dear. May God bless you!
Hi Fatema! Thank you so much! I’m so happy you found it helpful 🙂
Thank you so much for this article! it was insanely helpful. I am so glad I found you. Can’t wait to read your other articles.
Thank you so much for this article! I suck at math and I’m not very Business savvy but this explained everything perfectly and it makes so much sense.
Do you have any suggestions or tips for calculating production costs when the products are digital? What are some things that should be factored in other than your own wages and your time? Utilities maybe?
Thank you so much again!
That’s so great to hear! Digital is tougher to calculate because you may spend weeks creating a digital product but you’re able to sell that product over and over again, sometimes for years to come. So pricing/product is not a direct correlation to hours in. Let me look into writing a detailed article on the subject.
However, yes, definitely explore any expense required to make your digital products. That may include the costs associated with your home office, editing or design software you need a subscription for, and you of course still want to factor in your time to create marketing images, product listings, etc.
I hope that helps!
It does, thank you! And if you make an article focused on that I’d love to read it!
Great article! So informative and easy to read and follow. I had so many mixed ideas on how to price my handmade products, but you broke down each one with examples which is extremely helpful. Thank you so much!
Hi Stacey! I’m so happy it was helpful 🙂 Thank you fo reading.
I’ve been reading your posts here all day and they are the most informative of any I’ve found so far. I’ve been selling candles, paintings, and drawings for several years, and I’ve found those basic formulas so confusing when selling my paintings and drawings, especially. Someone once told me I should just price things at three times the cost of materials, but that doesn’t make sense when you are talking about a tube of oil paint, which you’ll likely only use less than 1/4 of its contents on a painting. Then I heard that you should price by that formula PLUS what you want to be paid per hour, and one more recent one for paintings was to charge $1 per square inch of canvas or paper or whatever, which seems great if you’re already well known, but a bit high if no one has ever heard of you (of course, if you’re confident, I know that makes a difference, but as someone who only painted sporadically up until the last decade or so, I have never felt that my 16×20 inch landscape paintings could be worth $300 to anyone).
There are definitely a lot of opinions on how to price products 😉 I find, with anything in life, there is no one-size-fits-all. So I like that this formula allows you to adjust based on your business model and desired profit margins. Good luck pricing your paintings!
Hey Erin, I recently started reading your blog and it’s fantastic, so much helpful info in every single post! I was wondering, as I’m making cards and when creating a price for them, how do I calculate the materials such as stamps or die-cuts that are not a material to be used and replaced? Thank you in advance for the answer!
Thank you so much for posting such valuable information!
Hi! Trying my luck here because I’m not sure how often this blog/post is checked but I’m a student who makes accessories(resin, fabric) for fun. Have been thinking of selling my crafts to 1) clear space(especially because I can’t wear half the crafts I make) 2) cover material costs 3) earn some additional money 4) give my crafts a new owner who would use/treasure them more than I can, but pricing my crafts is extremely daunting and a struggle for me because
1) I’m not sure how much my crafts are worth/how much people would buy them for and what’s a good way of finding out (in the same tone, I’m not sure how good of an idea testing the waters is. I worry that changing my price afterwards(likely higher) would drive away potential customers)
2) how much I myself want to earn out of this. To elaborate, I’m not financially struggling, but earning money off selling my crafts which I make for fun is striking two birds with one stone. Besides, I can continue making more, and new designs with the money for materials covered. Nonetheless, the more money I make the better, I just do not know how much is too little, enough or too much. In other words, I want to balance both the money I Have to make, Want to make and the money I Actually can make.
(Some other related questions I have)
3) It’s been a very long time since I’ve thought about selling my crafts but haven’t taken action and the more I delay, the more worried I get and the more discouraged I feel because I am wasting time. Is it worth to bite the bullet and sell my items at a price(not fully thought out and might change a lot afterwards) or think it through a bit more before I start selling?
4) If I am not doing this to sustain myself, should I be considering overhead costs?
5) I think I’m asking too many questions so are there people/types of people/even books or websites you recommend I consult additionally?
If you have time, could you help me with a bit of the math? I tried to figure it out but my brain decided to twist everything around lol! I did the math for a rough production cost($143.5), but if I only sell one product, how does the math for step 1-B work?