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Chapter Two: Is the price right?

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

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.

Example

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’s (www.poppysparkles.co.uk) 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% 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:

 You ideally want to pay yourself NO LESS than minimum wage.

Rates from 1 October 2011

The national minimum wage rates are reviewed each year by the Low Pay Commission. As of 1 October 2011:

 the main rate for workers aged 21 is £6.08 (rising to £6.19 in October 2012)

 the 18–20 rate is £4.98

 the 16–17 rate for workers above school leaving age but under 18 is £3.68

 the apprentice rate, for apprentices under 19 or 19 or over and in the first year of their apprenticeship is £2.60 (rising to £2.65 in October 2012).

(This information is taken from www.direct.gov.uk. Check the new rates every October and increase your prices accordingly.)

 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 benefitting 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.

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. Jamie Fry (www.creativestores.co.uk/UncleBundleCrafts) describes below how he used to be guilty of underselling himself and his products:

“I used to do my research online and try to fit in with those prices or lower, but would never make any money. Also, initially I was buying my materials from high street stores but soon realised that I needed to get myself some trade accounts to buy wholesale. I do, however, have an individual price for every part of a make and at the moment simply round it up to a sensible selling price.”

Jamie has already started to make the necessary changes to increase his profitability. His next step is to construct a pricing formula which works for him and his customer base.

When I posed the question “How do you decide on price/ monetise your products?” to a variety of different craft businesses, the response was varied.

Michelle Williams (www.craftecademy.co.uk) agreed with my suggestion to have a formula:

“Taking into account all of the costs; not only the cost of the materials, but also make sure you factor in your time accordingly! Remember, when people are buying hand-crafted goods, they are paying for your time. Many handmade goods take a considerable amount of time to make, not to mention skill and dedication! Many people sell their craft products at a price that is too low when you actually analyse the amount of time that has gone into making them. Always check out your competitors too, to see what their pricing strategy is and position against them appropriately.”

Michelle also points out that your pricing strategy should be appropriate to your target market too. It’s important to think about who you are targeting and where you will sell your products, as this will have also have a bearing on your pricing.

Caroline Watts (www.carolinewattsembroidery.co.uk) gives a prime example of how she tailors her prices and products to her target market, dependent on where, when and how she is selling:

“Pricing for me depends on where my products will be sold; for local craft fairs I have to charge less than I would online. It is very much pricing for the market you sell in. I don’t sell my current range at craft fairs because in Yorkshire people don’t seem to be prepared to pay full price but if it is a bargain they are likely to buy a few small things. At craft fairs I tend to sell samples, seconds and end of line products.”

However, some crafters said that they like to try and keep their product pricing more ‘real’:

“I often think ‘what would I pay for this?’ My prices have changed over the years. I can now get more for my work because I have built up a reputation and of course my skills keep improving. I do believe though that crafters cannot charge for the time and effort that goes into their lovely things, and so we at best accept a reasonable donation, and I am happy with that.”

– Catherine L Owen, The Raggy Rat (www.facebook.com/raggyrat)

In my opinion these people are not interested in developing a brand or a business, they are looking for a hobby whereby they can make a few pennies if that.

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.

N.B.

I’m not going to cover keeping accounts, cash flow, VAT, etc. in this book as there are literally hundreds of existing books that already do that.

Activity #2: Fresh Face Mask

by Skin Bistro ( www.skinbistro.co.uk )

This is a simple recipe which you can make with ingredients bought at the supermarket.

You can choose from a variety of fruits, dairy or tea as the ‘liquid’ part and for the ‘dry’ part there is cocoa powder through to clay. It’s always good to pick your ingredients according to your skin type.

If you don’t use the whole preparation in one treatment, keep the rest in the fridge and use within three days.

 Liquid part: 2 teaspoons

 Dry part: 1 teaspoon

Recipes

Step 1. Mix both ingredients together until you get a smooth paste consistency. Apply to your clean, dry face. You can use the back of your mixing teaspoon to smooth the liquid onto your face. This works really well!

Step 2. Leave it for 10–15 minutes, until it’s dry. If you have dry or sensitive skin, leave it for less time (5–10 minutes), just so that the mask doesn’t dry on your face.

Step 3. To rinse it off, wet a face cloth with tepid water, wring it out lightly, stretch it and press it gently against your face. Leave it for one minute and then wipe the mask off. Rinse the cloth and repeat until the mask is completely removed. To finish off, splash your face with cold water.

Honey is a versatile addition to your mask and can be used for any skin type. If you suffer from blemishes or spots, Manuka honey may help alleviate the condition. Add 1/2 teaspoon to any of the recipes above.

© Skin Bistro UK