Should you be in business is a valid question for most artisans. You can approach the question from several angles. Lets take pricing as a starting point, most people will pick a price based on what they paid for the raw materials and what others are charging for a similar item. But when it comes to pricing your product you really are the centre of your own universe. It doesn’t matter what others are charging for a similar item. For all you know they are trying to compete with Walmart and they might be out of business in a year. It’s important that you calculate your price based on what you need to make a living. That means taking EVERYTHING into account; everything from how much time you spend thinking about your next design to how much time you spend talking to customers on the phone, to how much the ideal client would be willing to pay. A good way to approach this is to ask yourself; “how much do I need to earn to be content?” and work backwards from there. For example, if you want to earn $60K per year and you figure you can make 200 of your products in a year, then you will need to charge $300. per item (or so you might think).
What’s in a Price Tag?
It’s a good practice to compose cost estimates based on an average per year and then divide that figure by the number of items you expect to make in a year. That will force you to make estimates based on averages, and enable you to estimate the costs for materials and tools that might be used on more then one item. Here are the basic steps in calculating your price:
- Estimate the cost of your materials, packaging and shipping over the course of a year.
- Estimate how much time you spend on designing & making each item and, based on a reasonable hourly rate, calculate that cost.
- Estimate how much you spend on sales. Include everything from the cost of craft shows, to the cost of advertising and marketing, to the cost of your website. Add to that, the total number of hours that you devote to each of these things and make a calculation based on some reasonable hourly charge for your time.
Now, add all of it up and divide it by 200 to see how much should be attributed to the cost of each item you make over the course of the year. One more thing….it is considered a good practice to add and additional 30% to your best cost estimate to take into account things you might have missed, miscalculated or for any unexpected business expenses. So for example, if your total costs per item came to $100. then add another 30% to get a new total of $130.00 Now, going back to the $300 you were thinking of selling your item for; add another $130 to that figure and your price tag is $430 per item.
The Price Of Doing Business
It’s not the cost of doing business that really matters – the rubber hits the road on price. Calculate your price accurately and the everything else starts to fall into place. There will be challenges for sure; how to convince the customer that your product is worth the price; how to reach the right customer who will both appreciate the value of your product and have the money to pay for it; how to spend your precious marketing & advertising budget, to name a few. But don’t let “how will I compete with Johnny over there selling his widget for $100 less then mine?” become something you focus on too much because it could well be that Johnny will be lowering his price every time someone walks by his product without buying it. Johnny may not be able to think of any other way to reach out to potential customers other than to say “hey, look how cheap mine is!” News flash….Johnny will be out of business before you can say “how much?”
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