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Friday 29 June 2012

Pricing for a profit

Since I started say it in September, it's been a steep learning curve. And as I learn about different aspects of running a business I like to share them, just in case it will be of use to you too. Something I've been thinking quite a bit about recently is pricing. I'm trying to make money so I want my prices to be high enough to bring in a profit, but if I price items too high they won't sell. I'm sure everyone who tries to sell their handmade items struggles with this at some point.

I've done a fair bit of reading and digesting what others have to say. There's quite a lot of helpful information out there when you start to look. There's an interesting blog post and discussion on The Crafty Network about pricing your crafts that's well worth a read.

It seems that there are three main ways that people work out what price to charge for an item:

1. Research how much similar items sell for and price it within that range
2. Decide how much you would be prepared to pay for your item
3. Work out the cost of the materials used, plus an hourly 'wage' for your efforts

The problem with options 1 and 2 is that often the price that seems reasonable doesn't take into account the cost of the materials or the amount of time that the product has taken to make. Many artists/crafters/designer-makers tend to end up under-pricing their work this way. It's not too much of a problem if you're not aiming to make much of a profit or bring in an income, but it's not a business mindset.

When option 3 is used, the calculated sale price for the item can end up so high that you just laugh at it. This is particularly the case for crafts that take a long time. If you made a crochet blanket and the wool cost you £15 and it took you 5 hours to make (I have no idea if this is realistic, I don't crochet this is just an example!) you might calculate the final price to be £15 + 5 x £6.08 (the current minimum wage) = £45.40. But then you think to yourself £45.40! No-one's going to pay that for a little blanket!

The common element to all three options for pricing your items is that they begin with the finished product. You've made a lovely bag/card/cushion/bowl and now you'd like to sell it. I want to suggest that this is possibly a backwards way of doing it, particularly if you are trying to run a business and make a profit. Perhaps you should start with what you think is a reasonable price for your idea for what you would like to make. Then think about how much you could afford to spend on materials, and, pricing your time, how many minutes you can afford to spend making it. Nine times out of ten you'll probably work out that you can't make the item quickly enough, or you can't buy the materials cheap enough, to be able to make a profit. This is why I advise thinking about your pricing before you get out your sewing machine/craft knife/knitting needles.

For example, I make cards. I think they are lovely cards but realistically no-one is going to pay £5.99 for them. So I choose to price the majority of my cards at £2.20. It costs me approximately 62p to sell each card online. So I have £1.58 left to play with. My time costs me 51p for every five minutes I spend making (at the minimum wage), so if the card took 15 minutes that would be all of the money spent. I need to allow a little for materials. So, realistically, if I can't make the card in under 10 minutes and using resources that cost less than 56p, it's not worth making unless I am prepared to charge more for the finished product. And that's not taking into account any time I spend advertising the product, packaging it and taking it to the post office - you may also want to factor this in.

Think about the costs first, not last. If you want to run a business that makes money, design products that you know are going to bring in a profit (of course, there's also the small matter about actually finding people to buy them...!). Think about the margins before you start splashing out on those amazing buttons/fabrics/stamps. Buy them for yourself because you like them, but don't buy them with your business hat on unless you've worked out that you can afford them. I have lots of card designs that I make because I like making cards. They take me way longer than 10 minutes, and use lovely materials that aren't cost effective. These are the cards that I keep for myself to give to friends and family - they might be nice, but they won't bring in a profit so they're not headed for my shop.

12 comments:

  1. I agree with so much of what you have said. I am in the process of ditching certain items in my range because they are not and cannot pay for themselves. However, similarly thinking about material costs, time taken has encouraged me to introduce new items into my range (coming soon) which will be higher value items and worth the time+costs. Much higher profit margins. All good. Excellent post.

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  2. A really good discussion on the ever difficult pricing problem. I really do need to re-think my makes in they way you suggest.

    I like your suggestion of still doing the unprofitable items as gifts - this allows you to let your creative side go without being stifled by the bottom line.

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  3. Really good blog post - I used to make cards and sold in 12 outlets but it really wasn't profit making. I do think you could price your card higher though....

    Dottie x

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  4. Great post. I dislike pricing calculation methods, because at the end of the day you simply have to take account of market value, so it is better to work backwards in my opinion and see if the item can make you a profit. In the world of fine art there is an additional difficulty with pricing because prices can be higher due to the reputation of the artist or gallery with no reference to any basic value.

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  5. Interesting article! I think many of us struggle with this. I suppose it is the difference between a paying hobby and a proper business. I think you need to find your 'unique selling point' and concentrate of a range that is distinctive, also don't underprice, because that makes the items seem 'cheap'.

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  6. great post - I make crochet blankets and they take hours and hours to make (maybe 30 to 40 at least). because I make them when I am sitting down watching TV I don't factor in the hourly rate. And I make cards too - these take about 15 or 20 mins at least but my material costs are very low as they are sewn, stitched and use recycled stuff. They sell more than anything, but hardly at the scale that I could retire on the proceeds!

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  7. Thanks all for your comments. I'm pleased you've found the post interesting and useful. Great points about having a unique selling point, the difficulty with art and increasing profit margins. Thanks for reading and sharing your thoughts :-)

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  8. I do think this is a good way of thinking, but really doesn't allow for experimenting and just the joy in making items. I hav ebeen painting so long I can produce items quicker than a lot of people, however it has taken me years to do this, and that is not something you can factor in. I still can't work out pricing for my art work, and not sure I will ever get it right, very interesting read thanks

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  9. This is an interesting blog post. I've just completed my first year of selling on Folksy and I'm looking at my product range to try and price things better and I will probably have to drop some items. But I'll still experiment and make OOAK items that probably aren't going to make a huge profit because I love making and if I came up with a new idea I'm usually too excited to stop and think! Thanks for the taking the time to write these helpful blog posts.

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  10. Luckily, i make the majority of my money by my supplies shop on ebay but with regard to my knitting/crochet i charge flat rate of 4 x the materials (materials having been bought at wholesale rate but i do 4 x retail price) I feel it is impossible to use point 1. When people are selling baby cardigans for £3.50, the CHEAPEST materials i use would cost £3.00, how on earth can i compete? A small baby cardigan takes around 4-5 hrs to knit so using point 3, based on 4 hrs work, the finished item would cost around £27. Again, a ridiculus cost that no one would pay. Using point 2 i find very hard as i have been knitting for over 30 years i would never pay for a hand knitted item so no, i wouldn't pay the prices asked. For me, i think £12 (based on 4 x materils/times mentioned) is quite reasonable for a hand knitted baby cardigan made with over 30 years experience and that will last for years.

    Carol x

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  11. Interesting! I'd discount #2 straight away because I am not my target demographic, and am not in the income band of that group so it's irrelevant. My own pricing depends on the time I take, the difficulty and - most important - the fact that nobody can buy meerkats like mine from anybody else.

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  12. Really interesting comments - thanks for adding to the discussion.

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Thanks for your comments, I always love reading them.

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