Pricing your products is like walking on a tight rope, where you don’t want to lean too far to one side or the other, meaning you don’t want to under or over price your products. You want to maximize profitability without undercutting or overvaluing your products.
There are several strategies to pricing your products and they vary in complexity. To make it simple, here are 2 common methods and some tips you should know to price your products accurately.
Break Down Your Costs
First and foremost, you need to price out the cost of materials you use in creating your product. Depending on your craft, this is much easier for some than it is for others. Our friend Holly at Accounting Spot has a Free Cost Spreadsheet, which you can download and modify to suit your craft. This spreadsheet will help you determine the price of your product by breaking down the costs of your raw materials as well as allow you to calculate your other costs including labor costs, listing fees and any other miscellaneous expenses you might incur.
Once you’ve accounted for the cost of your raw materials, you need to account for the cost of your labor. Consider how long it took you to make your product and assign a value to that time (i.e. $10 for every hour of labor). Next, make sure to take into consideration the additional miscellaneous costs it took you to procure and get the product to the customer. If you are selling online, have you accounted for listing fees and PayPal fees? What about the cost of packaging the item? Also consider general overhead and business expenses and make sure you’ve created a little bit of a cushion within your pricing to account for those items.
Once you’ve identified all of these costs, add the line items together to get your total...this is your product price! And, if you are creating similar products over and over again, you will begin to intuitively develop a range of pricing for future products. As a side note, it's handy to track the costs of your raw materials as an inventory list that is easily accessible, either in another spreadsheet or with the products themselves. For example, in my jewelry design, I like to keep handwritten tags with the cost of each item (i.e. bead, wire, etc.) wherever I store that material, that way I can easily multiply the amount I used to produce the end product by the cost of that item to calculate the total cost of materials.
Rules of Thumb
A less complicated method to price your products is to follow some general guidelines (a.k.a. "rules of thumb") and today we have a few to choose from. First, take the cost of your raw materials and multiply that number by 3 (i.e. $7 in supplies x 3 = $21 for the price of the final product). Second, take the cost of your materials and multiply that number by 2, then add 20% (i.e. $5 in supplies x 2 = $10, $10 x 20% = $2, so $10 + $2 = $12 for the price of the final product). Finally, if you are evaluating the cost of establishing wholesale versus retail prices, another rule of thumb frequently used is to double the cost of producing the product to set the wholesale price, then double that price again to set the retail price.
No matter which method you choose to set the price of your product, here are a few additional tips to consider:
- Compare your product price to other comparable items. Shop around to confirm that you aren’t under or overvaluing your product.
- Consider the "perceived value" of your product and price accordingly. This is basically your customer’s opinion of what your product is worth. If you have a tough time evaluating this one, ask someone you trust for their feedback and what they believe the market value of the item is worth (don’t tell them what it cost for you to make the item because it will sway their judgment). If their opinion is considerably different than the price you have in mind, you may need to make an adjustment.
- Last but not least, make sure you are covering your costs and not selling your products for less than it costs you to make them.
At the end of the day, confirm that your revenue and personal fulfillment is worth your energy and efforts! It is wise to include a range of products at different prices to encourage a broad spectrum of buyers to visit your shop. If you have any additional strategies or tips and tricks relating to product pricing, please share your ideas with us!
Oh, and here are a few other blogs dedicated to the same topic for you to take a gander at: