Pricing your products right is vital. You don’t want to pitch too low and risk not making a profit, but at the same time you don’t want to go too high and price yourself out of the market. You will find that some crafters sell their creations extremely cheap in comparison to your well thought out prices, either because they are not registered as a business and do this for pocket money, or they have not got a clue about pricing. This can make it harder for those who play by the rules and, more importantly, know their product’s value. Do not be lured into lowering your prices – remember you are crafting a successful small business.

You need to know these three key prices for each of your products. This is where your business success will lie.

  1. Cost price – this is the actual cost for you to make each piece, including time, overheads, raw materials, etc.
  2. Trade price – this is the price you’re willing to sell to stockists and enable you to still make a profit.
  3. Retail price – as a general rule the retail price should be twice the trade price.

If you do sell to stockists – whether that be via wholesale or ‘sale or return’ (we will come back to these terms later in Chapter Four) – stick to this retail price as you do not want to undercut your stockists.

Make sure you know these three prices off by heart, or if not then always have them to hand. It will make you look far more professional if you are asked unexpectedly. Also make sure you review them on a regular basis, and think about the elements which may change, such as the minimum wage or the price of raw materials. You do not want to suddenly find you are only breaking even, or worse still making a loss.

Working out your cost price (please note this writer is from the UK so all figures are in pounds & pence but you can substitute in all your Oz figures):
My advice is to devise a simple formula. The figures you need to include and consider are: your time, the cost of raw materials, and what others are charging for similar products. I think this is the fairest way to develop a pricing scheme.

This is a very basic example to give you the general idea.

Cost of supplies per unit:

If a metre of material is £2.50 and that is enough to make eight bags then the unit price is 31p (£2.50 ÷ 8 = £0.31).
I buy all my cotton, labels, swing tags and string in bulk, which per item costs less than 1p, so I add 5p to each bag, which brings the total to 36p.
£0.31 + £0.05 = £0.36

Your time:

You want to earn £6.08 per hour (the minimum wage in 2012) and can make five bags per hour, so each one costs you £1.22 in labour (£6.08 ÷ 5 = £1.22).

The competition:

I would take the average price from three similar businesses. For example, A = £1.99, B = £1.49, C = £2.00, so the average is £1.83 ([£1.99 + £1.49 + £2.00] ÷ 3 = £1.83).

The break-even point is £1.58 (36p + £1.22), meaning any money made above that is profit, and your competitors’ average selling price is £1.83. Taking all this into consideration I would look at your recommended retail price (RRP) being between £1.85 and £2.

If you make more substantial items such as jewellery, paintings or clay hand casts, then Viv Smith of PoppySparkles’ formula would work better for you:
“I have a formula – although I do occasionally tweak it if I feel something is coming out too pricey and just won’t sell: materials + time + overheads. I then add 20 per cent and then double it. This means that I have priced in a way that enables me to do trade and retail without making a loss. I see so many handmade items priced in such a way that it’s not even a self-funding hobby! I won’t compete on price – I’m working on building a strong brand and offering a great shopping experience.”

Things to take into consideration when pricing:

  • You ideally want to pay yourself NO LESS than minimum wage.
  • When calculating your cost price, do factor in: waste, shipping, equipment and advertising, as well as utilities such as broadband, electricity and calls. You will probably need to make an educated guess for this.
  • Weigh up your target market. High-end clients will expect to pay a premium for handmade products.
  • Do not pitch yourself too low. When the orders start flying in and you are up at all hours making products and the cash tin is empty, you will struggle to raise your prices and keep the orders coming.
  • Be reasonably competitive but DO NOT compete on price. Your products will inevitably vary from those of your competitors as they have been handmade by two completely different people.
  • Competing on price is never going to be sustainable – it is also very poor practice and not an ideal business model. It can only lead to failure in the end (unless you are selling vast numbers of units and benefiting from large economies of scale). For handmade businesses, your USP (unique selling point) is that each item has been made by you and not mass-produced. Your prices also reflect the standard of your product. If you price too low, customers will not have confidence that your product is well made.
  • Value your time. A crafter’s most valuable resource is their time; some may have more than others, but ultimately this is what prices your products at a premium. If you’re going to give your time away for free then you will not develop a successful business. Instead of seeking to lower your product prices in order to compete with others, look at your USP. Think of ways in which you can develop a strong brand, ensuring potential customers will want to do business with you even if you are not the cheapest on the market.

Costing correctly is vital to the success of your business so take the time in the beginning to develop a formula and get to grips with your pricing.

This is an extract from Joanne Dewberry's first business book – Crafting a Successful Small Business available through Brightword Publishing and Amazon from £8.50 to £9.