After a recent interview, I was stunned to be in the minority for including an hourly rate in my prices. Ladies & gentleman, if you are charging for materials only, you will never have a viable business. Ever.
How to Price Handmade Goods
Cost of Materials + (Total Hours x Hourly Rate) + % Margin (15-30%) = $ Price
Now you do it & don’t you dare calculate your hourly rate at minimum wage. Minimum wage is reserved for unskilled labor. You are skilled labor + every other department in a business. Charge at least double minimum wage.
Comes out to be pretty expensive, doesn’t it? That’s what the prices should start off as in the first place and why it’s infuriating when customers ask for discounts or when other makers charge for materials only. Don’t worry about others undercutting your pricing. They won’t be around for long. You are in this for the long term.
What about someone who can whip up something in a jiffy?
The man/gal hours may decrease but it probably took you years of school & grunt work to get that fast. Increase your hourly rate. Less time ≠ lower price
My favorite response to someone asking how long it took to make something is “25 years.” Think about it. Skills build on top of skills. If you didn’t have the experience and knowledge, then you couldn’t have figured out a better way to make something. You need to take this into account when pricing your goods.
Why a margin?
In order to do business, there are extras you have to pay for unlike being an employee. There is software, office supplies, equipment, travel expenses, continuing education, possible business loans, etc. Running a viable business without a margin is risky as the possibility of a single client putting you in the red is high. You also need a buffer for advertising, unexpected material costs, mess ups, lost packages, etc. This is not “screwing over” your customer. This is ensuring you are still in business to serve your customers in the future.
Next in the series: How to Discount Bulk Orders
Élana camille says
I really like the breakdown formula that you share at the beginning! Helps to put things into perspective!
Colleen Kozlowski says
There is one other factor to be considered, and it’s an important one…overhead.
The lights don’t stay on for free, nor does the rent/mortgage pay itself! someone has to pay for these.
Even if a craftsperson considers these perks of working at “home”, there are still expenses unique to the business. Closer to the business – and unrelated to cost of materials – is the cost of computer, connection, website, credit card fees, paper, ink, packing materials, bookkeeping/tax preparer fees, tools, supplies, and more.
Colleen Kozlowski says
retail stores all expect to receive a profit from that margin; not to just use the margin to cover overhead expenses.
So what i’m getting at is this. The formula should be:
Cost of Materials + (Total Hours x Hourly Rate) + overhead + % Margin = $ Price
15 to 30% may very well not be nearly enough to cover overhead AND profit.
Genevieve says
Yes, very good point! The problem I see in pricing that way is how do you calculate overhead per item accurately? It would fluctuate based on the number of items you make because many of those “operating costs” are sunk costs and not dependent on the number of items made. If you make 20 rings or 2,000 rings, the accountant will still cost $500.
For a seasoned seller with years of data, you can possibly calculate overhead accurately, but for someone new to this, I have to keep it simple with the formula provided.