Thursday, February 16, 2012

Business Tips: understanding product cost and learning how to price handmade products - part 1


Let me start by saying that everyone who is trying to become a full-time, successful indie biz owner should read this. Hey, even people who sell handcrafted items as a hobby should read this. 

When I was starting out, I let my emotions get the best of me. I always put my heart and soul into every one of my pieces so I thought, hey I love this, people will most certainly love it too! There will be a market for it! This is what I'd pay for something like this, so let's price it at "X". 

That was one of the biggest mistakes I've made. Not only did I not understand how much it cost to make each one of my products, I did not even consider my time. How can one be a full-time business owner if one does not pay herself? What was I thinking? Very embarrassing to even admit this, considering I have a business background. 

While it is important to sell something that you are passionate about, if you are going to treat your little shop as a business, it is important to know whether or not that item is cost effective to make. You should be asking yourself questions such as: How much does it cost? After I factor in my labor costs as well as my profit margin, will people still want to buy it? Mostly importantly, you need to be able to answer these questions. 

There are so many things one must consider when costing out their items. Let's take one of my appliqué  coffee sleeves for instance: 

Pumpkin spice latte coffee sleeve

I am extremely passionate about them and I LOVE making them! Right now they go for $15.99 each (I have recently increased the price, they were $12.99 each all throughout last year)

What exactly do I need to consider?

via

Materials cost: we are talking about the cost of any raw materials you use to make your product. In this case it includes the outside fabric, lining fabric, appliqué fabric, fusible web, batting, elastic and button. Based on my calculations, the total comes to $3.00. 

**If you have coupons, it is important to consider the cost as if you did not have a coupon. Depending on the demand for your product, you may have to buy more materials at a time when coupons are not available. So go with the worst case scenario. 

**If you buy your materials online, you need to include the shipping costs as well. 

Total materials cost: $3.00

Equipment cost: I am using a sewing machine, that requires periodic tune ups and TLC, as well as needle and thread, right? So based on the amount of sewing I do, I figure I will add $0.10 to each item I make, to cover these costs. 

Total equipment cost: $0.10


                                                   Source: joyshope.com via Timalee Sue on Pinterest


Labor cost: You need to make a living and deserve to be paid way more than corporate giants pay their employees overseas. Do not undersell yourself. For the purposes of this exercise, I am going to use $10/hr. as my hourly rate. Now, $10/hr. translates into a $20,000/year salary, or $1,666.67/month before taxes. $10/hr. is less than the minimum wage in the San Francisco Area.  

**If you are having a hard time deciding how much money you should pay yourself, check out this hourly rate calculator.

It takes me about an hour to cut my fabric and batting, hand cut and apply my appliqués and finish the sleeve, provided I do everything assembly style. This also includes taking pictures, editing them, listing the sleeve and marketing it on various social media sites. So let's add $10 to the mix, to cover my labor costs. 

Total labor cost: $10.00

Listing fees: although it would be nice to sell an item as soon as you list it, it doesn't always happen that way. Based on my experience, I need to re-list an item anywhere between 3-7 times before it sells. That is an average of 5 times/item. Etsy charges me $0.20 every time I list/re-list an item, so we need to add $1.00 to the cost of the sleeve. 

Total listing fees: $1.00

Etsy and PayPal fees: every time an item sells, Etsy charges me 3.5% of the sale price, not including shipping. So for an item that sells for $15.99, 3.5% comes to $0.56. PayPal on the other hand, charges me 2.9% of the total price (item + shipping) to process payments. Say shipping is $2.00; 2.9% of $17.99 comes to $0.53. They also charge me $0.30 per transaction. So between Etsy and PayPal fees, we need to add $1.39 to the overall cost. 

Total Etsy and PayPal fees: $1.39


                                                    Source: decor8blog.com via Isadora on Pinterest


Packaging supplies: this includes shipping labels, printer ink, envelopes, tape, tissue paper and in my case raffia. If I buy them in bulk, I am paying about $0.50 per item that I sell. 

Total packaging supplies: $0.50

Marketing materials: I also like to add my own label as well as a nice tag and a business card with each one of my products: I will show you how I arrived at this figure when I post about how I order my labels, tags and business cards, but for now, believe me when I say that the total cost comes to about $0.75 per item sold.

 Total marketing materials: $0.75

Let's recap:

Materials cost
$3.00
Equipment cost
$0.10
Labor
$10.00
Listing fee
$1.00
Etsy and PayPal fees
$1.39
Packaging supplies
$0.50
Marketing materials
$0.75
Total cost
$16.74


Do you see what I see?!? So far my cost alone (without a profit) exceeds my price! Some of you may argue that a profit is not necessary when you are already factoring in your labor costs. Wrong! How do you expect to pay for all your fixed costs/overhead, such as rent, utilities, CPA costs, etc, if you don't make a profit? 

I also donate a portion of my sales to various causes throughout the year. Yikes! It gets scarier by the minute, doesn't it?

Everyone with me so far? 

I just about died when I realized that I am practically paying my customers to buy my coffee sleeves. 

Boo, the girly ghost
Is that the case for you too? 

What does that mean (to me)? That although I love making coffee sleeves, at their current price, they are not getting me any closer to my goal of quitting my day job and becoming a full time business owner. Does that mean I can't/won't sell coffee sleeves in the future? Hmmm, probably not (there are a few left in my shop, still going for $15.99). But I feel empowered because I know that I am required to change directions (raise my price - provided there is a market for it at that price point - or focus on other products, that have higher profit margins) if I still want to achieve my goal. 

I wanted to go into pricing strategies, but I figured it would be too much for one post so I decided to break it into 2 parts. We will cover that next week. 

I have prepared a spreadsheet to help you figure out what your product cost is (told ya I was a spreadsheet kind of gal - wink!). Simply enter your numbers in the pink cells, and the rest is calculated automatically for you. It is a Google spreadsheet, and you can access it even if you don't have a Gmail account. You can also download it to your computer if you would like. You may access it by clicking here

**Edited to add: you will need to download the file in order to populate the spreadsheet with your own numbers. To do this, click on file, then on download as, excel. Or email me and I will send you a copy by email.

Again, I'd love to hear your thoughts on this, as well as any other topics you would like to see covered in the next few weeks. 

Please email me at oohleela{at}gmail{dot}com in case you have any questions!

Happy costing friends!

To see all the business topics we have covered in the past click here.

About The Author : Leela

Leela is a 4.5 y.o. Silky Terrier who truly believes she is a baby. She is the Chief Designer at Ooh Leela!™, a dog boutique that specializes in personalized dog shirts, trendy dog clothing, beds and accessories. She is sassy and sweet, full of personality and attitude. You can follow her on Twitter and you can connect with her on Facebook

15 comments:

  1. This is so informative. I must say I already suspected I was practically giving my items away. Now I know! My dicroic teas light holders have gone from $19 to $34 in the last two years as I have tried to make them a profitable item.

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  2. oohleela, Its scary the things we overlook while deciding a price for something we make !! Thank you for listing them all here..This is a serious eye opener !!

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  3. Thats a 'yikes' from me too! Back to the drawing board for me! Thank you for such an informative (but scary) post. I need to et my act together!

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  4. Awesome article and I love the way you broke everything down so simply and easy to understand! It breaks my heart to see artisans who obviously are underpricing their work. When I first started selling my beads and jewelry, I looked around and was tempted to price my work comparable to what a lot of others were selling them at, but I quickly realized I wouldn't make any money if I did! So I determined to price what they were really worth for my time/supplies/quality and was pleasantly surprised that I have been blessed with a thriving shop, even though I know my items are often priced a little higher. When we take ourselves seriously as an artist/business, then our customers will too! ;-D

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  5. Wonderful, thank you so much!!!!

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  6. Wonderful article! I too recently went through everything in my shop and evaluated time, money, and all those things above. The result - I increased my prices, sometimes more than doubled. And you know what? The very next week, I made just as many sales as I had been making at the lower prices. I'd been giving my pieces away, and not valuing my time. Never again!

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  7. Nicely displayed in the table at the end. I really should do more spreadsheets! Thanks for sharing!
    Amy

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  8. Very good post! I visited a few minutes ago and didn't think I'd have time to read it all, so I came back. I've been telling myself that I need to sit down and make some spreadsheets for the business, but I always get sidetracked with other things (that I consider more fun), so I'm really thankful that you included your awesome spreadsheet!!! Thank you! I can't wait to see Part 2. =)
    ~Kim

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  9. What a wonderful post. Very informative. Thanks so much for sharing. I'm looking forward to next weeks already.

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  10. Wow, GREAT post and love how you went into detail, and that calculator for hourly rates, LOVE IT!!
    I played around with some fantasy numbers and WOW!!
    I can't wait to see part 2, and you are right, after selling a handful of a popular item in my shop I realized that I am LOSING money selling them, WOW!!

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  11. Ohhh, it's probably a good thing I am reading this on my phone right now and can't download the spreadsheet just yet. The mental calculations on what I should be pricing my birdhouse pendants for, versus what I have been, will probably make me want to cry. They take me about 12 hours to make - even "assembly line" style - and that doesn't include time for photographing and listing. And I recently raised the price to $78. Good grief!

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  12. Great post! Well written and informative:>D

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  13. excellent article Isa...been there done that...and it makes my head hurt but you're right it's a headache we all need to have once in a while...ummmmm - i think it's better know as a reality check! i do my annually, even though cost of goods continue to go up throughout the year - if i did it more than that i think my head would explode! LOL

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  14. Great info Isa, thanks so much for sharing!
    I think we have all made those mistakes just starting out :)

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  15. Good Posting , Good Information , Thanks for sharing.
    seo company india seo solutions india

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