Sustainable Pricing: Gathering the Ingredients

06 November 2020 12 minute read

In the previous post of this series, we looked at the most common pitfalls of product pricing. This time we'll cover which ingredients you'll need to start calculating the price of your handmade products.

If you haven’t done this before, it can be overwhelming. The good news is that you’ll only have to do this once. Of course, the cost of materials and labour change. So from time to time, you’ll need to revisit the data you collected. But generally, you can reuse the same information over and over again for years to come.

Before we get started, we’ll need something to work with. In the exercises, we’re going to create a sofa cushion as an example. It’s a relatively simple object we all know well enough. It’s easy to reason about, even if you don’t know how to sew.

Sustainable Pricing Cushion

Set your salary

First, we’re going to define the cost of labour. It’s what you decide to pay yourself for making your products. Or it can also be what you pay your contractors or employees if you have any. Maybe it’s just yourself right now, but sooner or later you may need to hire an extra pair of hands. So keep that in mind.

If you’re not sure about the level of pay, do a bit of research. Ask around with colleagues. Check what’s the minimum wage in your country and make sure you don’t go below that. But ideally, it should be much higher than that.

One thing that’s easy to forget is (self-)employment taxes. They vary depending on your country and type of business. If you’re not sure, ask your accountant for a rough percentage. Generally, it’s between 25% and 35%. If you’re not sure, you can use 30% as a safe number going forward.

Homework:

Define the types of tasks in your studio. Think about it as if you need to hire people. Some tasks may require less skill, resulting in a different level of pay. You may end up with two or three levels. But keep it simple, less is better.

To calculate the cost of labour with a 30% tax rate, use the following formula:

[hourly rate] * 1.3

Example:

description hourly rate tax rate with tax
office work 12.50 30% 16.25
making products 25.00 30% 32.50

Done? Great, let’s move on to the next section.

Track your time

For this section, measure how long it takes to make a product from beginning to end. If you’re just starting, measure it a few times as you’ll get more efficient over time. You want to reach a realistic level of efficiency because the labour cost can quickly get out of hand.

It’s easy to miss some steps. So make sure you’re counting everything, the whole process from preparing your source materials to packing.

Homework:

Grab a timer, I’m sure your phone has one installed already. Start tracking your time spent while working on a single product. Write down separate tasks, because it will give you a good idea of where you spend the most time and where you can improve.

To calculate the cost, use the following formula:

[hourly rate] / 60 * [number of minutes spent]

Example:

Building on our cushion example, here’s the situation:

task time hourly rate cost
cut panels 4 min. 32.50 2.17
sew panels 9 min. 32.50 4.87
insert zipper 7 min. 32.50 3.79
add label 1 min. 32.50 0.54
insert filling 1 min. 16.25 0.27
pack item 5 min. 16.25 1.35
total 27 min.   13.00

There we have it. The labour cost of our cushion is 13.00. On to the next part.

Cost of materials

This is a relatively easy one. It’s a list of all the materials required to make a single item of your product — everything from source materials to packaging.

Don’t forget to include the shipping price you paid to get the materials to your studio. Because that’s often overlooked and it can affect the price of your source materials significantly.

If you’re VAT registered, don’t include VAT in the material costs. You’ll be able to reclaim it later.

Homework:

Write down the cost of every material as scalable units. By which I mean, the price per kilo, metre, sheet, etc. If you’re using consumables like glue, for example, estimate how much items you can make with a single bottle of glue and divide the price of the bottle by the number of units.

Example:

Continuing the work on our cushion, our bill of materials now looks like the example below.

description price per unit units needed amount
fabric 21.45 / metre 0.65 13.94
thread 0.01 / metre 25 0.24
zipper 0.52 / piece 1 0.52
filling 3.94 / piece 1 3.94
wrapping paper 0.35 / metre 1.5 0.52
brand label 0.57 / piece 1 0.57
box 1.38 / piece 1 1.38
total     21.12

Great! Now we know the cost of our materials as well.

Cost of sales

Making sales also comes at a cost. For example, Etsy will charge $0.20 listing fees as well as a commission of 5% on your sales. Amazon does even better with 12% on sales. So does Shopify with a 2% commission, in addition to their monthly fixed fee of $29 / month or more. But even if you sell through a physical location, there will be a substantial commission on your sales.

On top of that, payment processing services, like PayPal, Stripe or Mollie, also take a cut. On average, that’s an extra 3.5% taken from the total amount of an order, including taxes and shipping costs.

Homework:

List all the platforms you’re using with their charges. We’ll use them later when we’re calculating profit margins.

Example:

1. E-commerce platforms:

description transaction fees other fees
Etsy 5% $0.20 / listing
Amazon handmade 12% -
Shopify 2% $29 / month

2. Payment service providers:

description transaction fees fixed fees
PayPal 2.9% $0.35
iDeal - €0.29
Stripe 1.4% $0.20

Bonus: Overhead or indirect costs

This is, by far the most annoying part. Mostly because it’s vague and seemingly unrelated to production costs. But it’s also crucial not to ignore overhead. Because if you do, it will eat away your profit margins in unexpected ways.

You may be wondering, what is overhead exactly? Overhead is the same as indirect costs. The sum of your predictable expenses. The bills you’ll need to pay and investments you have to make, regardless of how many products you sell.

If you’re starting out or you don’t feel it’s worth the trouble, you can skip this section. There is a rudimentary formula to include overhead into your prices, without having to go into detail. It’s much less precise, but nevertheless a decent safety net. More on that later.

Homework:

Because there is a lot to process, we’ll divide this section into three parts.

1. Running costs: Write down all the expenses related to running your business on a day-to-day basis. These include rent, utilities, insurance, office supplies, advertising, cleaning supplies, legal fees, accountancy or bookkeeping fees, etc.

What we’re after is the yearly cost of every item individually. If you work from home, like many of us do these days, you’ll have to calculate a fair percentage of every individual utility bill.

2. Investments: List all the investments you made. For example, a computer, a sewing machine, a ceramic kiln or a professional photo printer. In short, tools and machinery, you need to do your job.

For every item, roughly estimate how long it will be of service. A computer will last 2 to 5 years, depending on your needs, of course. But some other tools may as well serve you a lifetime.

3. Working days: Finally, calculate how hours per year you’re working for your business. We’ll use this number to determine your hourly overhead. Which we then can include in your product price.

Example:

1. Running costs:

description cost unit   yearly
rent 380.00 / month x 12 4560.00
electricity 35.00 / month x 12 420.00
phone 15.00 / month x 12 180.00
accountant 120.00 / month x 12 1440.00
insurance 85.00 / quarter x 4 340.00
printing paper 4.99 / pack x 5 24.95
printer cartridges 29.95 / set x 3 89.85
tape, pens, staples... 120.00 / year x 1 120.00
ads on Etsy 125.00 / month x 12 1500.00
magazine ads 180.00 / quarter x 4 720.00
total       9394.80

2. Investments:

description price lifetime yearly
sewing machine 599.99 / 30 years 20.00
scissors 35.95 / 10 years 3.60
iron 189.99 / 10 years 19.00
ironing board 64.75 / 20 years 3.24
steamer 99.00 / 10 years 9.90
laptop 1284.95 / 3 years 428.32
printer 124.72 / 5 years 24.94
total   508.99

3. Working days:

description   8 hours / day
total available working days (52 * 5) 260 days 2080 hours
spring vacation (one week) -5 days -40 hours
summer vacation (two weeks) -10 days -80 hours
winter vacation (two weeks) -10 days -80 hours
total per year 235 days 1880 hours

Summing up

Wow, that’s a lot of numbers. If your head is spinning right now, that’s perfectly normal. The good thing is you got through it and have all the information needed to start getting some results.

If you went through the exercises, you should now have the following five items:

  • one or more hourly rates for different tasks in your studio
  • at least one sheet detailing the time spent on a product
  • at least one sheet detailing the bill of materials needed to make a product
  • a list with fees for galleries/shops/e-commerce platforms
  • a list with fees for payment service providers

And if you went all-in on overhead as well, you’ll also have:

  • a list with running costs for your studio
  • a sum-up of your investments
  • the total number of days you work per year

The next post will cover three pricing strategies. We’ll start out with the most basic version and then level up two times, every time adding another level of detail.

How TiliShop can help

It’s not really convenient to keep all those lists lying around, is it? TiliShop has a place for those numbers, right where they belong: next to your products. So you can immediately see how much profit you’ll make for each and every product in your shop.

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