Want your craft business to be a success? If so, you have to step back from the creative process and realize that on the money-making end of this proposition, you sell a product. When it comes to financial planning, your craft is no different from a computer, car or gallon of milk.
Pricing for Crafts - Figuring Up How Much it Costs You to Make Each Craft Item: Every little component and material you use to make each craft item, plus the labor to put them together, is an expense. In accounting lingo, this is called cost of goods. You can't set a reasonable selling price for your handcrafted goods before you figure out your cost of goods sold.
Cost of goods sold items are also known as variable costs. Materials and labor costs will vary (go up or down) depending on how many craft items you sell. Here are a few examples of variable costs your craft business will have:
Pricing Craft Raw Materials: For crafters, this will probably be your biggest variable expense. The following fact is important so keep it in mind: your raw material cost for each craft item is only the material you use to make it.
For example, let’s say you make quilts. You purchase quilt squares in bulk for $500 and only use half of those squares to make one quilt. Your cost of raw materials for the quilt squares isn’t $500, the total cost of the order. It’s $250, representing the portion of the order used to make that one quilt.
Pricing Craft Labor: If you have employees, labor costs have to be factored in as well. I find this easier to do than raw materials, as you’ll probably pay most craft help by the piece rather than by the hour. So, if you pay a crafter $50 to line the quilt, that amount is also added to the quilt’s cost.
Don’t forget your own labor. Just because you’re the owner doesn’t mean that your labor is any less a cost of good sold than the crafters you hire to help. Many craft business owners either have the tendency to undervalue the worth of their own time or haven’t adequately figured out how much time it takes them to get their craft item to market. Don't fall into this trap - your time is important! Make sure you figure it into the final cost of your product.
Pricing Craft Packaging and Shipping: Remember, your customers are partially buying into the story behind your handcrafted product. They can buy a sweater at Target. Your hand-loomed sweater made from wool shorn from organically fed Alpacas is a special item for which you’re charging (and they’re paying) a higher price. It deserves special packaging, which is also a variable cost.
If you ship your product to your customer – perhaps you have an ecommerce website – shipping is also a variable cost. Even if you pass the cost of shipping along to the customer, it’s best to break your shipping costs out as a variable expense. This gives you more accurate financial reports.
Pricing Craft Fixed Costs: Next, let's discuss typical craft business fixed costs. These are the business expenses you have each month regardless of the number of craft items you sell. Things like rent and telephone expense are examples of fixed costs. If your lease calls for $1,000 monthly rent, you owe your landlord $1,000 each month regardless if you sell a million sweaters or none. Like variable, fixed costs have to be factored into the price of your craft item. Breakeven point analysis is an easy way to do this.
Setting a Price: After you know how much it costs you to create your product, you can set a price for your craft. Many small business crafters “keystone” their product. This means they take the cost to make the item and double it for retail. So, if it costs you $100 to make a sweater, you sell it for $200.
Pricing for Craft Supply and Demand: Remember how I emphasized the importance of preparing a business plan? Well, you can make a beautifully crafted sweater or quilt, but if your price is higher than the market will bear, your craft business won’t be a success.
This is an issue normally addressed and handled while writing the business plan, before you set up shop. I recommend checking out what other similar craft businesses at your level of exposure charge for their pieces. In the beginning, use this as a benchmark, increasing your price as demand increases.
Pricing for Perceived Value: This is tied to the image your business has with current and potential customers. If your perceived value is good, you can consider increasing your prices above what your competition charges.
Here's how it works using blue jeans as an example:
You're considering buying a pair of blue jeans at discount department store. They're dark blue, heavy cotton made with 90% cotton and 10% spandex. Another pair of blue jeans that are identical in fabric, make, quality and appearance are sold at a major department store. The only difference between the two is a famous designer label sewn on the back pocket.
I think you know the end of this marketing tale. The designer jeans will probably be at least three times as expensive as the discount department store jeans. That's perceived value at work.
If you want to sell your crafts and make a profit, you have to set reasonable prices. Carefully consider what your actual costs are, or you'll quickly put yourself out of business.