Craft hobby: A Cringe Worthy Pricing Method
A craft hobby remains a hobby until the product made gets sold. Once this happens, a business is formed, and a whole new set of skills are needed.
There are a lot of people with craft hobbies who make wonderful products and want to transition it into an additional income source. Their reason for doing this can range from wanting to be able to cover the cost of materials, through to wanting to stop being an employee and start working for themselves. There are also some who have fallen into a craft hobby business accidentally.
There is a common struggle craft hobby businesses, established businesses, service providers and anyone who has something to offer have, and that is trying to decide how much to charge.
Like most people when we have a question that needs answering, we turn to search engines for the answer. Google, Pinterest and YouTube have an answer for every possible question we can imagine and if there is no answer, the search results displayed will have closely related answers.
For makers doing a search on how to price a handmade product there seems to be a simple calculation that appears in the search result. The most common one found gives a rule of thumb approach.
Cost x 2 = wholesale price
Cost x 4 = retail price = retail price
When I first saw these formulas, I cringed and you may too. Initially, I was amazed this method was used to come up with a selling price. The more I saw this pricing method used the more I felt compelled to tell people that setting a selling price is about so much more than using a one size fits all calculation.
Issue with formula
My main issue with this form of pricing is it only takes into account ‘cost’.
Calculating a selling price is not a simple quantitative exercise. There are qualitative factors to take into consideration that forms part of the pricing process, such as:
- Knowing your target market and their sensitivity to prices;
- What competitors charge;
- Where you want to position your product in the market;
- How the selling price fits into your current pricing architecture.
Without taking these into account and opting to use the formula in isolation, there is the potential of either leaving money on the table by under pricing or charging more than the market is willing to pay.
Another common calculation found adds time taken to make each product as part of the selling price formula:
(Cost + time) x 2 = wholesale price
(Cost + time) x 4 = retail price
Here the issue with this formula is about adding a sunk cost to the selling price calculation. Makers do need to be paid, however this method of paying yourself doesn’t make sense to me.
Does it mean makers only pay themselves when an item is sold?
Added to this, time is not something you can get more of. Once it’s gone it is gone, there is no more of it. Unlike the materials used to make a product which can be reordered when needed.
Accounting for time
Time is a sunk cost and is measured in terms of wages and wages are an operating expense. Therefore, makers should not add time into the selling price equation.
Time spent making products and other business costs and expenses should come out of gross profit. Once these expenses and any applicable taxes gets paid, whatever is left becomes the true profit figure, which can be reinvested back into the business.
Makers should also set themselves a fixed wage to pay themselves that is based on time spent working in and on the business. After all, if they hired someone else to work for them that is what will need to happen.
There is one redeeming feature for these pricing calculations and that is, it forces makers to be aware of what their per unit cost price is.
It is just a start though, as coming up with a selling price is about more than just coming up with a figure to charge.
After the per unit cost price is known, the actual selling price needs to be a figure that people are willing to pay. That takes, amongst other things, knowing who your customers are and not just multiplying the cost price by 2 for wholesale and 4 for retail.