Pricing Your Product: Part 1
Calculating Material Costs, Tool Maintenance and Overhead
Hindsight: After writing and previewing this particular blog, I came to realize that the subject is larger than I anticipated. Pricing is an essential skill that will determine your success. So, I have split it in two, to relieve reader fatigue. I will post Part 2 next Monday.
Don’t Ignore the “Stripe-ed Whistlers”
Back when we were touring the midwest (1980s), we did shows with 15 to 20 other crafters in small town malls. We all caravanned gypsy style, to Fremont, Nebraska - Yankton, South Dakota - Jamestown, North Dakota and a dozen others.
Our promoter’s reckoning was that big city malls drew shows on a monthly basis, while small towns only saw them once or twice per year. It was a sound philosophy and we did very well in the fall and wintertime, when farms were dormant and the communities sought the comfort of shopping malls for exercise and entertainment, as well as goods and gifts.
We were demonstrating artists and garnered an audience of wonderful people who would watch and ask questions while we worked our crafts. Occasionally, we would get a fellow dressed in a John Deere jacket and blue striped bibbed overalls who would watch for an hour or so, saying nothing. Just watching. Eventually he would step up, actually pick up one of our items and ask his question, “How much is this?”.
We would tell him (although the price was clearly displayed) and he would reply with a whistle that descended from high to low pitch, set the item down and walk away. We dubbed these wonderful people who put food on our country’s dinner tables, “Stripe-ed Whistlers” and looked forward to seeing them every year we returned to that town.
Nine times out of ten, he would come back before he left the mall and make the purchase. He shopped as he farmed, with thoughtful economy, consideration and planning. They sometimes even brought us gifts of their own making. We got jars of preserves, T-Bone bison steaks and crafts that they themselves enjoyed while waiting out the winter. They became our friends.
Now, selling online from home, I miss the personal interactions with these folk who are so crucial to our nation’s economy.
Still, there are online shoppers who carefully consider their purchases and may at first seem abrupt or even rude but become friends, correspondents and gift exchangers via the internet. This results from patiently answering questions and providing prompt service without pushing them for the sale.
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Getting Paid for Your Time and Talent
Figuring out how much to sell your work for can be a daunting task. Determining your prices should include material costs, workshop time and labor, tool maintenance, location and shipping costs, fees charged by your venue, overhead (utilities/rent), and competitor’s pricing.
Pricing is an important skill to achieve, as you do not want to either outprice or undercut yourself. You will rarely get a second chance at a customer, surfing the market, if they feel that you are offering a cheaply made product or are overpriced. Balance is the key objective.
Below are factors that I use for all my products and after doing this for over 40 years, I have a simplified method that I use and may work for you. Keep in mind that to survive in online retail, I believe that you must have a profit margin of 60% to 65%.
Material Costs:
These should include everything you use to make your product. Pennies turn into dollars. All raw materials (wood, fabric, clay, etc.) and hardware purchased for assembly, as well as consumables (such as sandpaper, blades, finishing supplies) should be considered.
First, do a mock-up sample. For cost purposes, use the high end prices for materials that you need to produce a few of your products. This is a starting point. If your item takes off and becomes popular, you can then search for alternate/bulk pricing of these supplies, lowering your costs and increasing your profit margin. This practice may also allow you to offer discounts during slower times.
Finding an oak dresser that is beyond repair or a maple chair with broken legs at a garage sale is not only fabulous for your bottom line, but very green. For pricing purposes, you should use current market prices for the usable material you wind up with, as if you bought it new at your lumberyard and not the $5.00 you paid for the whole whack. Remember to keep track of your time, the miles and gas you spend in finding. This is one way I reduce product cost and add to my bottom line.
Upcycling materials is an advertising plus in your listings. Toot your “Earth Friendly” horn!
People love to known that their purchase is "Green" and helping the earth in it's struggle managing the human footprint.
If you are ordering your supplies online, remember to include the cost of shipping in material costs. In the same vein, if you have to drive 60 miles to pick up a load of fine hardwoods, you’ll need to add the cost of gas and your time doing it to the receipt you get from the lumberyard.
If I decide to try a new exotic wood for my chopsticks, I will purchase a couple board feet from a vetted online vendor for $30 - $40 to do samples (and to discover its workability).
I then photograph the new item and make a test listing. If I see a lot of interest and sell them right away, I will search for a less expensive source to buy 10 - 20 board feet of that wood. Thus, reducing my wood cost from about $4 per pair, for the test product, to about $2 per pair. This profit is added to your bottom line but does not change your item‘s listed price.
Same goes for hardware and consumables. However, keep quality foremost. Do not be tempted to cheapen your product’s quality just to earn an extra 50 cents. You want to stress value and quality in your work to keep these customers coming back.
Using basic high school math, you can now figure out how many of your items you can get from a unit of material and their cost. For example, if I can get 12 pairs of chopsticks from a $12.00 board foot of nice Cherry wood, my wood cost per pair is $1.00. Adding other consumable costs (blades,sandpaper,finish), brings my cost up to about 10 - 15% of my selling price.
Tools & Equipment Maintenance:
In addition to the initial investment for your workshop tools, which are totally deductible on your federal income taxes, you will need to replace blades, sanding belts, vacuum filters and other parts that wear out on a regular basis. While these costs are negligible when doing production work, they need to be figured into the cost of your item. I nominally set about 3% as my cost for tool upkeep.
Our vehicle costs are almost non-existent, but if you will be using yours for your business, be sure to keep track of mileage and costs as you would your other tools.
Location and Overhead:
This cost of doing business has a wide set of variables. Each will be unique to you and your situation. Due to the growing number of people living in “communities”, homeowners associations are dictating what you can do at your place of residency.
So, you may need to rent space in a mini-warehouse, maker-spaces (which are growing in popularity) or someone else’s shop. This cost will dramatically raise the price of your products.
Since you are reading this blog, you are likely wanting to do your thing from your home, where you already pay rent or mortgage and utilities. The self-employed tax software (TurboTax) I use every April allows a percentage of your total home costs to be deducted for a home based business. For the past few years it has been set at 16%. So I use this percentage in my cost figuring. If you have paid your mortgage off (Congratulations!), so much the better. This savings on overhead will translate into profit.
Pricing Your Product: Part 2 will be published next Monday with information on Competition, Shipping costs, Listing fees and the Pricing Formula I use for all my works.
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