How to avoid the 5 common pitfalls of pricing your handmade products
You can watch the video, or read the post below.
Pricing is the centerpiece of your handmade business. The reason is simple: to be successful and make a living off your online shop, you need to be profitable. And to be profitable, well… You have to price for profit. Truth is, it can feel very uncomfortable, and if you’re like me and numbers aren’t your favorite thing to play with… well it just sounds like the least possible fun thing to do! The temptation is real to get it over and done with as quickly as possible, but you also risk falling into one the most common pitfalls of costing and pricing your products.
If you know deep in your heart that you haven’t spent much time on your pricing strategy, you might want to keep reading and make sure you’re not making one of these 5 costly mistakes.
Pitfall #1 – Using a premade pricing formula
You’ve been browsing the WWW and you stumbled upon this simple formula on pinterest?
Please, don’t! I know it looks so simple and understandable, but it also is NOT an OK way to strategically price your products. Like, at all. I couldn’t recommend more strongly to avoid this formula. It doesn’t account for the cost of labor (the time you spent making your product), or for your fixed costs. Stay away!
Another formula you might find online is this one:
While accounting for labor cost, this formula still closes it’s eyes on the fixed costs associated with your product creation (known as “overheads”) such as a printing service for example (if you sell illustrations), or utilities bills, or anything that you might need to pay on an ongoing basis to create your products in the first place.
To come up with a pricing strategy that works for your business, you need to get your costing right (i.e including labor and overhead), and you need to use a profit multiplicator that reflects the value of your products (x2 your cost just won’t cut it). Unfortunately, none of these formulas allow for that.
Pitfall #2 – Not accounting for your costs properly
Ok, so if these very handy formulas turn out to not be that handy after all, then how should you come up with the price for your products? Well, the first step (that many of these formulas get wrong) is to get your costing right.
A good formula for costing your handmade products (and the one I recommend you use) is:
This formula covers the cost of your raw materials, your cost of labor, and your overhead. Now, what goes into each of these?
- Raw materials: This is the cost of the supply you need for each item you create (eg.: beads and leather for a bracelet) + the costs of packaging it (labels, tags, boxes, sleeves, etc.).
- Labor/Time: This is the time spent creating this product x your hourly wage. You have to pay yourself for your work! This also guarantees that you can scale your business and hire someone to help you with the product creation when you are ready as that salary will be accounted for in your prices.
- Overhead: Your overhead is made of the expenses that you have to pay each month to be able to create those products: studio rent, insurance, design software, utilities, etc. Even if they’re not direct costs, they are costs related to your product creation and need to be accounted for.
Pitfall #3 – Getting your “overhead” all mixed up
Some people will tell you to add to your overhead your website costs, your marketing and advertising costs, etc.
This is not the right way to look at it. When calculating your overhead, account only for the expenses related to the product creation. Marketing, sales and advertising expenses have nothing to do with it, and you shouldn’t charge your customers for your marketing! That’s a separate thing altogether. You will cover your marketing expenses by reinvesting a portion of your sales revenue to it, not by adding it to your overhead. If you’re just starting and haven’t made any sales yet, these expenses will need to be covered by a initial investment.
Pitfall #4 – Not knowing exactly how long it takes to create a product
Another thing that’s quite common is “guessing” or “estimating” the time it can take to create a product.
Figuring out how long it takes to create a product is very hard, but also very important as your labor costs has quite a strong impact on your end-price (see it for yourself with the handmade pricing calculator).
I recommend that you run a little test to come up with an accurate estimate: create around 5 products and time yourself for each, then make an average of the time it took you. Careful though, if you’re in this as a business and not as a hobby, you are not crafting while talking to your kids, or while watching TV. Make sure you time yourself while working in a productive and efficient environment.
Pitfall #5 – You’re not using “value-based” pricing
Remember the formula I first talked about? One of them was:
Wholesale price = cost of creation x2
Ever wondered what was that “x2” exactly? Look no further:
“X2” in this formula is your profit multiplicator. It’s role is to add a layer of profit to the cost of your handmade product, so that each sale actually generates revenue. If you don’t have this multiplicator, you’re really just covering your costs.
The problem here is that this number should be different for each business, and sometimes even for each product. Applying this formula and “x2” your cost is dangerous because in most cases it won’t be enough of a profit layer and leave you working hard for not much return.
To define YOUR profit multiplicator, you need to use “value-based” pricing. Value-based pricing is “a pricing strategy which sets prices primarily, but not exclusively, in the value, perceived or estimated, to the customer”.
This means that you need to understand the value that your product provides to your customers, and reflect it in your price. The best way to become fluent in understanding your customers deeply (and the things they value) is to take some time crafting an ideal customer profile. Once you understand what they want, feel, and need, you can craft a product and a shopping experience that adds value to your product, and ultimately charge more.
A few things that affect the perceived value of your products:
- Is your product solving a problem or a desire?
- Are your materials of low or high quality?
- How much attention is given to details?
- Do you have outstanding product photography?
- Do you share your brand story through a professional branding strategy?
- How much attention is given to your packaging?
- How is your customer service?
- How do you want to position yourself in your market: basic? premium? luxury?
- Have you ever been mentioned in the press or do you have a good following on social media?
Your profit multiplicator will depend on all these things: the value your customers gets from your product, your positioning, and the quality of your work. Most common multiplicators are in the 2.2 to 2.5 range, although for high-quality/high-value products some brands go up to 3 or 3.5 and for lower quality, high volume products, some would go lower than 2.
Costing and pricing your products probably isn’t the part of your business that you are going to enjoy the most, but it is the foundation of it all and deserves a bit of attention from the get-go. Doing so will put you in a good position to start and grow a successful business.
To help you figuring it out, I have created a handmade pricing calculator. Put your numbers in and it will calculate your prices for you!
You can access it for free here.
If you want to take your pricing strategy one step further or want to read other resources about it, I highly recommend you head over to the Lucky Break Consulting website. Lela is a pro when it comes to pricing handmade goods strategically and I can’t recommend her strongly enough.
If you have any questions about pricing your handmade products or using the handmade pricing calculator, ask away in the comments and I’ll reply as quickly as humanly possible 😉
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