Pricing Formula and Things to Consider When Pricing a Handmade Product
In early 2019 Wayfair invited me to sell my mobiles through their site. I had to take another look at my pricing calculations to find a price that would make it worth my while to sell to them at wholesale rates. This got me thinking about my pricing and how I came up with the numbers I had. I revisited the standard pricing formula and saw once again that I was pricing too low, so I came up with all new prices using the following formula:
Materials + Labor + Expenses + Profit = Wholesale x 2 = Retail
This is a typical pricing formula. Now, let's break it down a divide each one of the values into its parts.
You must consider the cost of all the materials you buy and how much of that cost goes into making a single product.
My material costs are relatively low, so this number isn't too high for me, but you may use more expensive materials. In my case I need nylon thread, glass beads, glue, paper, and wires.
For this number you take the time in hours to make a specific product multiplied by the hourly rate you feel you deserve for that work.
When coming up with an hourly rate you must also consider the time you spend maintaining your website/shop, photographing and listing products, writing descriptions, communicating with customers, posting on your business social media accounts, packaging your product, and driving to and from the post office.
This is where I get the most fluctuation in numbers for my equation. Each of my mobiles is handmade from start to finish. Wires are cut and bent, beads are tied to strings, models are folded and then strung up, levels are balanced and tied together, and glue is applied to every knot. This is all done by hand and it's all extremely time consuming. The smallest and simplest mobile I sell takes at least 3 hours to make, and my custom themed mobiles can take upwards of 12 hours - and that's if I don't have to learn how to fold anything new!
This number would be the calculation of all the expenses that go towards making a single product.
You need to figure out how much you spend on each of these things a month, then figure out how many products you want to sell each month and divide the expenses by the number of products. As an example:
Let's say your business expenses are $450 a month, and you want to sell 30 products a month. Then you divide $450 by 30 to get $15 as your number for the expenses per product.
In my case this would include the cost of having a website, a domain, shipping fees, credit card processing fees, Etsy fees, the cost of my physical work space, a percentage of my utilities based on the size of my home office, internet, gas and car expenses related to traveling to buy supplies and ship mobiles, as well as the cost of business related education, office supplies, business cards, post cards, ink and paper for printing labels, shipping boxes, packaging materials, and thank you notes. The list goes on and on to include any number of other expenses related to running my in-home business.
Here is where things get interesting - you have to think about where you want your business to go, and how you want it to grow. Put a number here that reflects your goals for your handmade business.
For me I've always put a low number here because the high number from all the rest of the equation always scares me. But I do have goals and I should raise this number. I want my business to grow, I want to increase the variety of products I offer, and manufacture the wire frames to simplify the mobile making process, and I want to be able to do all this without taking out any business loans.
This variable needs to be added here because there's more to the pricing formula than what we've discussed so far. You must also consider your experience in the field, your level of education behind what you do, where and how many times your products have been featured, and how rare and unique your product is.
I've been making these mobiles for over 10 years now, so I do have a lot of experience. I didn't go to art school, but I've always been an artist and a creator, and I've been folding origami since I was 10 years old. My products have been featured in a couple of feature films, a TV show, a commercial, and several events. In terms of rarity and uniqueness, I designed the wire frames myself, as well as engineered the mobiles so that each level can freely swivel 360 degrees independently of the levels above or below it. There aren't any mobiles like mine on the market as far as I've ever seen - and I've looked.
Wholesale and Retail
Once you add all those numbers you calculated, you will have your wholesale price. This is not what you should sell your products for. You must take your wholesale price and double it, and then sell your product for that price. This is important because when you get approached by a wholesaler they will only pay you half of what you're selling your product for. If you're already selling at wholesale rates then you would lose money by working with them.
This is where I always struggle. I see my wholesale rate and think, that's not too bad, but when I double it I freak out and want to slash my prices. For years I've been selling around my wholesale price, but because of my new partnership with Wayfair, I am essentially being forced to raise my prices to their full retail prices.