One of the themes that has come up this week is that accelerated growth requires money. Whether it’s hiring a web designer, tackling a trade show, or simply buying materials for a new collection, everything has it’s cost. So how do you finance growth? Well, you could borrow money from friends and family, dip into your savings, or take out a line of credit from the bank. While these are great options for a quick influx of cash, in the long run, your business needs to generate the revenue to support new initiatives. You need to price your products for growth.
Hopefully you’re using a pricing formula that looks a little like this:
labor + materials + overhead + profit = wholesale price
wholesale price x 2 (at a minimum) = retail price
What I’ve found is that when most makers start pricing their products, they aren’t hitting all four of those areas that add up to wholesale price. Perhaps you’re undercharging for your labor. Or your price doesn’t reflect the true cost of overhead like rent and utilities. And more often than not, by the time you add up labor + materials + overhead, you forget to add that all important last element, profit. So let me share one more equation:
profit = growth
When your price doesn’t include profit, your business can’t expand. Even if you use one of those methods I mentioned previously to finance growth, at some point you’ll need to pay that money back. And if you aren’t making a profit, how can you?
Profit is different then the hourly rate you pay yourself. Your hourly rate is what funnels into your personal account to help you pay for things like food and your mortgage. But profit is money that gets invested directly back into the business.
If you’ve got another source of income, it’s tempting to not charge enough for labor and profits right now, because you can invest all the money you make back into the business. But if you ever want to make a full time living from your products, this strategy won’t work. You need to be able to pay yourself and invest money back in the business.
As you look at the growth of your business, it’s important to do a thorough and truthful analysis of your finances. The profit margins in your pricing structure should reflect the amount of profit you need to make to continue to grow your business. Do the math – if your materials costs and overhead are $20,000 a year, you want to make a salary of $25,000, and you want a profit of $15,000, how many products must you sell at your current price to meet those goals?
It’s important to look at your pricing structure, continually reevaluate your finances, and figure out if the prices you’re charging and the money you’re bringing in are truly enough to support the ways you’d like your company to grow.
You’ll find more articles on growth all week long here on CMBA and over on Scoutie Girl.
Thanks for posting this really wonderful article. I see far too many talented artists and artisans not charging enough for their work. I’m currently in the process of restructuring all of my prices. It’s hard work, but necessary for the future I want to create for myself.
Great stuff. Having a decent profit after paying yourself, your materials and your overhead also gives your business a value. In Canada we have a show “Dragon’s Den” which is a much more grass roots version of “Shark Tank” that you have in the US. They are really good at explaining how to value your business which is really good thing to know if you need to get financing or if you plan to sell the business in the future.
I’ve been following along with this Growth series all week Megan and am so thankful you’ve taken the time to do it. It comes at a perfect time since my husband and I are looking to take our business to another level within 2-4 years.
I’m particularly interested in this post about pricing and have a few questions.
Is Overhead figured at a percentage of materials + labor? or should it be a flat $ amount?
I think if selling on a venue such as Etsy, fees should be included. I add them in as a % of materials + labor before adding on the profit %. Is this appropriate?
I realize every business will be different, but is there a general or starting profit% to shoot for?
And the big question. What if I figure out all of these numbers and the wholesale/retail costs come out to be higher than the market will bear? I’m also not just thinking about Etsy, but all online venues and brick and mortar locations I sell at. This is where I am stuck currently. My retail prices are close to what they need to be, and I think I’ll be able to get them to the right price within a year. Some of my products will still be priced too high following this formula. Options I’m considering are 1. Not wholesaling some items, 2. Making a couple of products loss leaders, and 3. Creating a higher priced line for balance. (I got confirmation of this practice in one of your previous posts.)
I’m sure this is a lot of information to cover, but I will be very interested in other comments and reading your future posts on Growth!
Thanks
Julie
For years I worked in the plumbing industry and I like to let you know that two and three are definately viable. Often we’d have items we could sell at a larger profit margin and some not. We’d have our bread and butter items that are sold everyday and larger cost items that would have a low percentage profit but large money value and cheaper items that we could have a larger profit. Also keep in mind big corporation shop around for pricing of supplies so make sure you done your research on that part.
I myself have still got the whole juggling thing with pricing underway. I know that it will work out eventually and remember everything we learn from is good and will help the business grow.
hi julie – i don’t figure overhead as a percentage of materials + labor, because this is unreliable. instead, you should take the time to accurately calculate your overhead, and then figure out a way to divide this out into the number of products you sell each month
your profit margins are going to depend on the volume of products you sell – some companies have slimmer profit margins, but make up for it in volume. if you are selling less products overall, your profit margins will usually need to be higher.
i think any of those options will work for products where your wholesale price doesn’t quite cover your costs. if you’re going to have products that are loss leaders, you need to make sure that your other products can make up for it.
When I saw this formula at one one of your workshops I attended it was a real wake up call. I thought I was pricing my items well, but I wasn’t factoring in profit. I adjusted my prices, so now I play the waiting game to see how it goes.
It can be frustrating selling on online venues where your competitors have significantly lower prices. I am taking your advice on not relying solely on the online venue to bring your customers in. I am now starting to try to pull in customers from outside the venue to my shop. Crossing my fingers:)
Man, this really is a hard subject. Both Julie and Alicia’s comments were so good and really hit home on my fears as well. When you look at the equation and think about it logically really it’s not hard to price your items. But then there is other variable: market value, other sellers selling items at a cheeper price, etc.
Great info as usual! I’ve recently come to the conclusion (and acceptance) that one of the lines I had would never make me any money. Because I still believe in the idea, I am reapproaching it to offer the supplies that I would use to make the item, along with tutorials on how to achieve my end result. My labor costs factored in just never allowed me any profit, but I’m pursuing it hoping that other people will enjoy the making process to “make” it for themselves. I can definitely meet the profit formula if I take my creative labor out of the equation. I’m working on packaging and tutorials now, so hopefully this road will meet with more success. Try, try…then try again!
stacey – i think this is a great idea! i’ll be interested to see how it turns out.
[...] Don’t use Etsy as a benchmark for pricing. I’ve vented here before about the artificially low prices on Etsy. The problem is compounded when people use Etsy as their only sales strategy and feel like they must keep their prices low to compete. If you want to grow your business, you need to develop realistic pricing that factors in costs, labor, and profit. [...]
great article. There are a lot of crafters out there who need to take notice of this forrmula if they want their business to grow. Don’t give away your hard earned craftiness!
This is a hard subject. It’s made especially difficult for me at the moment because people out there who sell what I’m selling have their items on sale to the point where I can’t compete. So I”m seeing one person who has sold 3x as many widgets as I this month and I am losing my marbles. I’m not sure what to do about that.
m – if there seem to be other people selling a similar product at a lot less, then you should figure out how to differentiate your product to command your higher price. i would also not let the number of items someone is selling cause you stress – just because they are selling a lot of items doesn’t mean they are making a profit.
I love this article. It’s the truth. I use a free spread sheet from openoffice.org and figure every thing I spend.
I think some people forget they might pay tax on some of their stock and forget to figure it in as part of the cost of supplies, like wise with shipping costs. You also need to figure in Paypal fees and Etsy fees.
If you manage to get a savings from a huge order from a bead store like say 10-20% because you laid out $200 you don’t need to pass this discount on to the buyer. Keep the discount for later to reinvest in stock. Use the regular price to calculate the cost for the buyers. Save your receipts to refer to later for your spreadsheet.
I multiply everything by 2.2 most of the time also and on more complicated pieces usually 2.5-3 but it would be more on a very, very elaborate piece because it takes even more time.
I think the buyers do understand this so people shouldn’t shy away from proper pricing and resort to garage sale or flea market prices.
I think obvious underpricing causes a little bit of disrespect for the other artists who work very hard and price accordingly some customers might disrespect also.
I had business cards made up on Etsy to increase my outside sales. I leave these everywhere including hotel drawers!
I have a simple webpage with a box to type in for special orders that gets sent directly to my email.
Megan,
Thanks so much for this important reminder. Creating a “race to the bottom” by neglecting to pay ourselves / invest in our businesses will only result in an unsustainable situation.
Crafters, if your competition is doing this, keep in mind that it will not allow for sustainable growth!
Mandy @Sageoldwisdom on Etsy.
Hi Megan! Thanks for posting this wonderful article – I love it! Very informative and helpful. With love, kitty at zooshii x
Great article. I’ve had several people ask me about this. Now I know that I can send them your way. Thanks for this fantastic series!
~Amber
http://www.mommythemarketer.com
Megan~
Thx. Good article, esp. about undercutting your own labor or not even considering ‘your time’ as an integral part of pricing. Thanks for the reminder! I’m one of those who has a day job…
aisha123
Great post and valuable info!
There is an important variable missed here – the market capabilities.
If the market allows higher prices we can put a price tag even high enough to put most of the income to the “profit”.
But if it does not? We are limited with the real competition and the real price tag customers may pay for our products. Especially on such a venue as Etsy where we have hundreds of thousands sellers, where we have sellers from China, you know what it means.
Anyway, thanks for the important information!
Tasi Fashion
There is another method of pricing called “perceived value” pricing. It means, for example; let’s say you have a unique item and you apply your formula and the selling price comes out to $20. Considering your selling conditions, if that item “looks” like it can get $30, then you may want to price it at $30. That additional $10 is pure profit!
tasi and pamela -
i couldn’t agree more about understanding the market and perceived value. there are plenty of products out in the world where the mark-ups are huge because the perceived value allows them to command a higher price. so, by all means, if you can get a higher price for your products, do it!
tasi – i would caution against using etsy as your benchmark for pricing. prices there are artificially low.
Megan, you are doing a PHENOMENAL job in your business educating!
I’d like to point out something often overlooked. When adding cost of materials make sure you add the COST OF SHIPPING to get the materials to you. I find that many novice wholesalers forget to include that expense. When pricing keystone, you may want to apply the following formula: cost of materials x 2.2
I love your blog! Pamela
Thanks for posting this! I was just wondering today about my prices. I used your formula to price some of my things and I am charging was already charging the right price. I was like YES! Thanks so much for helping me feel confident about what I charge!
Wow… I really makes me think about what I have my items priced at. I never really think about my time, and I always try to buy everything I can on sale so that I can put it up for “cheaper”. My math is all off… Thank you for your post and thank you all for the following comments after.
Phenomenal information! I totally agree that so many artists under price their work and in the end it hurts all of us. We work hard as artists, and we deserve to make a decent living. Thank-you for sharing this information.
Honestly, making art is the easy thing … pricing is the hardest!
I find myself constantly jumping between what I think I should charge, what I think people will pay, and what others are charging … when I really need to ‘get real’ and think about my labour, overheads and profit!
Turns out for some of my items, I’m actually selling at a loss when I calculate what goes into it ~ how crazy is that!?!
I’m also learning that finding the correct market for your work is everything … there’s no use selling work at a flea market when the person next to you is offloading their stuff @ $2 a pop!
Thanks so much for your articles, they are so helpful and help bring me out of the clouds and back down to Earth!
Thank you for this excellent and (for me) timely reminder. Please do it again sometime.
Thanks so much for the challenge. I really like what Chrissy said. I’m often asking myself, “Will people really pay this much?” But I guess finding the right market is key. Sometimes I think Etsy might not be the right market because there are so many people selling at low prices.
I’ve been accounting for all four factors but the formula of wholesale x 2 = retail, well… honestly it freaks me out! There’s no way I can follow that formula for the hats I make, at least not the fabric hats. I’ve discontinued at least one style because it took too long to make with the quality I demand, and I figured out I could never be profitable on that hat. If I had had to double the wholesale price to sell retail, I wouldn’t have ever sold one!
I’m starting to make blocked hats in felt and straw that I believe will bring higher profits. I finally figured out that people don’t value soft hats and don’t want to pay proper prices for handmade soft hats. My theory on this is that people can imagine how a soft hat is made, even if they could never make one, so it’s not novel to them and therefore not valuable (Americans expect everything to be novel, all the time).
Blocked hats are a mystery – most people don’t know how they’re made so they’re willing to pay higher prices for them. I know supplies for blocked hats are more expensive but the price/profit difference seems to be due to public perception. Sewing a quality hat ain’t easy, folks, and designing a brand new hat + pattern is even harder. I’ve met seamstresses who haven’t a clue how to make a flat pattern for a hat!
Blocked hats are to millinery what painting is to the art world: The One True Art Form – and I’m hoping they’ll lead the way to better profits for me!
That might be a nice theory but when you are selling and competing with overseas sellers from different countries who are selling at bargain prices you can only sell what the market will pay. Thats the problem now that etsy has sellers from all over the globe.
Right now the economy is bad and people are watching their money.
viv – yes you do have to consider the market in which you’re selling your products. however, if you aren’t making any money with your products, then your business can’t grow. it’s an important balancing act.
Hey everyone! You are all talking as if you are selling the same thing as everyone else. Believe it or not…it is NOT all about pricing! It’s very much about differentiation, reaching your audience and making an emotional connection. It’s much more involved than just a pricing formula. How is your product unique from the person who sells something similar? PLAY THAT UP! Target your audience…know what they are willing to pay but more importantly, know what they want. Use keywords that talk their language. How is your customer service? How do you “look” [i.e., do you look fun or elegant or unique or whatever you say you are? Remember, people buy because of an EMOTIONAL CONNECTION…how are you creating that?
All I hear is a bunch of fear when you focus on the price!
Hi Pamela
Thank you, thank you, thank you! I am an artist and don’t want to be like everyone else and I don’t want to conform to a pricing structure because my prices offend other craftspeople. I sell my stuff because it makes me happy, and I sell to people who want stuff to make them feel unique and individual. I use the formula above for pricing, and I think my prices are reasonable. I couldn’t justify charging double because Joe Blogs on the other site does. I accommodate my financial needs, my creative needs and hopefully put a smile on my customers faces when they receive their purchases.
Imagine, inspire, create is my motto : not cost, price, sell.
Well said, Pamela. I think this is important. However, I think you also need to have an understanding of the numbers to be sure you are actually making money.
I think the point of discussion about the business of crafting is that all aspects must be working together. Whether it’s left brain: pricing, distribution or marketing or right brain: product development, branding or innovation…each area impacts each other. When something isn’t working, we can look at the other spokes. I just find that there’s a lot of issues around $ for creatives. We tend to mystify it and build fears around it. I believe it’s important to talk about it. I also think there’s not one answer and we have to be open to knowing as much as we can. It’s not just numbers or any other one aspect.
Thank you so very much!
Have to think about it!
Pricing is a real struggle for me…
Thanks for the great advice laid out in such a simple basic way. Unfortunately when I add up all of those things the product becomes too expensive and no one will buy it or double it for wholesale. I guess I need to take another look. Thanks!
Melissa
this absolutely makes since to me, my thinking after reading this is if you charge more for your items they will sell, because some may figure that $$ =quality that is how I shop. Why not price my items for customers who want quality ?
[...] business expenses, and how much money you’d like to make in a year. Take a hard look at the profit margins and pricing of your products. Then figure out how many products you need to sell each month. Is this realistic? If [...]
I was just reading the comments – which are so helpful along with the original article.
We came out of the gate with a premium product and a price to match but in the last year we decided to drop our US price quite considerably – the volume of sales we were doing enabled us to lower our per unit costs considerably and, with the state of the economy, we decided to pass the savings on to the buyer. This has turned out to be one of the best moves we have made – we are selling way more product, plenty to easily make up for the slightly lower profit margin. And the lower price has opened up many more retail markets to us. The buyer now has perceived value knowing that they are getting a great quality product for a much lower price than they were offered originally. The lower pricing seems to have generated it’s own momentum in sales which really didn’t happen at the higher price. We are still quite picky who we sell to so it hasn’t lowered our standards. We also never need to explain why “our prices are so high” anymore- which is a good thing
Thanks for all the information, specifically, the pricing formula. Adding additional money for profit over and above my labor charge is something I had not thought of. Of course, all that being good, it really comes down to what the market will bear and keeping in mind the competition is often large retailers with volume discount pricing!!
[...] Pricing Your Products for Growth [...]
Thank you for this super helpful article. I never know if I’m pricing my shirts the right way. Now I have the tools to do it!
Here is a good example of the correct pricing, according to your principles:
http://www.regretsy.com/2010/04/22/taiwan-on/#comments
Is that what you mean?
LOL
Thank you for posting such a great article!
I really need to re-think about pricing my products.
It is really hard to raise prices because it makes my products look more expensive than others…
Fantastic! This is such a great help for small business owners just starting out. Thanks for the great tips!
I have linked to this blog on my blog, and posted my views on this very interesting topic.
Thank you for reminding us that profit is an important part of the equation. Pricing is hard, but I find getting the traffic is even harder! It is easy to forget that. I would love to read an article on how to best set up one’s day to maximize one’s sales on Etsy. I feel like I need a game plan that can be fitted into a couple of hours a day. Is it best to post images on flickr, or to post to groups. There is so much information out there, I find myself doing research and not having the time to put any of it to practice…
I love your posts; each one is so informational and a great tool for those of us starting out, whether on Etsy or just plain starting out as a whole!
Thank you, thank you, thank you!
What an eye opening post! As I am just venturing into etsy selling and at my local farmer’s market I have had a tough time pricing – I don’t want to price too high because I want sells
You have given me some great things to think about!
Thanks!
Fantastic help, defiantly a sensitive and hard area to cover, but involves everyone selling. Thank you.
I love the idea of the profit formula. It makes sense logically until I think about whether my products will actually sell at a price that will make me that kind of profit. Granted, I don’t live off of the proceeds from my jewelry sales but I’m not sure I could. Right now there are dozens (if not more) Etsy jewelers who sell comparable products for far less than what could possibly match your profit formula. How do I sell for a profit when my competitors are underpricing? Aren’t I forced to underprice until I either build a niche or a loyal client base?
So what do you do when people won’t pay your asking price?
I know I’m small potatoes compared to many other sellers but I’d like to build a brand and my dream is to make a living at this. How do I get there from here?
-Tricia
This is all really fantastic information, and my husband has always told me to mark up 200% over cost. I’m never really sure how to charge for labor, though. Usually what I handcraft takes many, many days to complete. Another question of mine is, if you are not selling your goods, how do you know they are priced right? It seems to make sense to ask less, not more. Is this the case?
Great article…interesting that my husband and I had a conversation about this yesterday. I am not business minded especially for retail and am not allowing for growth. You answered my question on the formula to price your product. Looking forward to more info so that I can get better and make some money!
Thank you for the article.I love your blog, easy read and very clear.
I admit I didn’t read the whole article but it looks good and I think you are telling the truth! Thanks for the help!
[...] helpful link which spells out much of what I have found from multiple sources is this article on “Crafting an MBA”. In it, Megan Auman, describes the difference between profit and wages and strongly argues of the [...]
[...] business costs to run) so that you can be sure you are making a profit. I’ve talked about this pricing formula [...]
a very insightful and useful post megan, thank you! I couldn’t agree
more.
megan, regarding the 100% market up on the wholesale price used to
determine retail price. is this mark up also considered ‘profit’?
my understanding is that this ‘mark up profit’ also gets put back into
my business account for growth. ok, so i also plan to dip into it on
occasion for specials treats, assuming of course the business is
covered and there are surplus funds.
megan, would you mind if I asked you your thoughts on managing the
‘mark up profit’ when pricing for growth? many thx!
ps. delighted to have found you and you blog megan!
ceri – in regards to the mark-up from wholesale to retail – when you are calculating expenses for your wholesale price, you would technically leave out any business expenses directly related to selling your products to customers (your own retail expenses) Those expenses would then come out of the retail price, and the rest would be profit.
I also think you should certainly take money out of the business account for yourself. I talk a lot more about that in this post – http://www.craftmba.com/2010/06/09/myths-about-profit/
hmmm, hadn’t thought of it like before megan, i appreciate you pointing that out. makes sense….
thanks for your time and comments megan.
[...] Pricing Your Products for Growth [...]