If you do a quick google search for a pricing guide, you will find many pricing formulas to try and help you work out what is the best price for your product. But when we are talking about handmade or digital goods, it is all too easy to undervalue both your product and your time.
When you first publish your product, it is always a concern whether you have the pricing right. Is it too high so people will be put off? Or is it too low and people will think it’s cheap and nasty?
What if your competitors’ products are more expensive or cheaper, how will that reflect on your products?
Finding the right pricing strategy is also a challenge and finding that sweet spot is an ongoing challenge.
Two things you must remember when setting your pricing is that:
- you can always change them and
- you are not basing them on what you would pay. Let’s face it, you are biased because you know how much it costs to make them and have the skills. You are basing it on someone who doesn’t have either the skills, the materials or the time to make it. And all these factors provide value to your customer that is more than just cost.
Let me walk you through my pricing guide. It will result in a formula that will mean you can set your prices consistently and know they are justified and reasonable.
1. Work out your material costs.
The first thing you need to do is work out what your material costs are.
In this pricing guide, I will be working through the formula using an example of making a quilt. First, you need to work out exactly how much material, wadding, etc. you use. Think of all the items you use to make the item and have a cost per item associated with it.
If you bought the material in bulk and only use part of it for the product, then work out the proportion of cost you used. For example, if you bought a 5 metre roll of fabric for £10 (including shipping). The cost per metre = (Total price / unit of measure) = £10 / 5 = £2.
You only need 1.5 metres per quilt, which means the cost of the fabric per quilt = (quantity used x price per unit of measure) = 1.5 x£2 = £3.
Do this with everything that goes in to make the item.
Remember, different sized products will use different amounts of material so their cost will be different. You can’t do it once and apply it to all your products.
The sum of all the costs is the Material Cost.
Let’s say for this example, your material cost for each quilt is £20.
2. Work Out your overhead costs.
Material costs are not the only costs associated with making your product. For instance, to make your quilt you will have a sewing machine, needles, you will use electricity, you might even rent a studio.
You need all these items to produce your quilt, but they don’t disappear once the quilt is finished. They are used across all your quilts.
These costs are your overhead costs. They are slightly tricker to account for, but account for them you must as if you don’t you will be out of pocket by the end of the year.
To include them in your product pricing, you need to be a bit of a fortune-teller.
Firstly you need to guess the number of products you think you will sell over the coming year. Base this on your previous year’s sales or if you are just starting out choose something that seems realistic. It’s essential to be realistic because the higher the number you guess, the smaller the overhead rate. And if you don’t reach that number, you won’t cover your costs.
For example, if your total overhead costs are £350 per year. You also expect to sell 5 quilts a month, then the overhead cost will be split over all 60 quilts (5 x 12 months). So £350 / 60 = £5.83.
What this means is you have to add £5.83 onto the cost of every quilt.
So the cost of a quilt is now :
Price = Material Cost + Overhead Cost
For this example it’s £20 + £5.83 = £25.83.
3. Work out how long it takes you
This is where it shows how much you value your time.
It is easy to work out how long it takes to make your product. Remember to include the time it takes for you to take photos, process them and create the listing on Etsy. You should also include the time you will spend on marketing the product.
In this example, let’s say it takes you 8 hours to make each quilt.
The tricky part is how much do you think you should be charging for your time.
If you want to make a living from your Etsy shop, you need to value your time. So what would a ‘professional’ get paid for doing the same job? Plus, if you are a solopreneur, you are also the person who is running the business, so you have to have skills in doing everything. How much would someone of that calibre be worth paying? If you do have help, what do you pay them? Do you deserve to get paid more or less than them?
There is no right or wrong answer to how much you value your time. Just make sure you value it enough to pay yourself at least the minimum wage.
In this example, we are going to say that the cost per hour is £15.
So the labour cost is (time x rate) 8 x £15 = £120
Having a labour cost is essential to allow for outsourcing in the future. If you don’t include a price for labour, you would need to alter all your prices if you ever got help.
Interestingly, if you were paying someone else to make the quilt, would you pay them the same rate that you have decided on for paying yourself? If you feel you should pay them more then you are obviously undervaluing yourself!
The cost of a quilt is now :
Price = Material Cost + Overhead Cost +Labour Cost
For this example it’s £20 + £5.83 + £120 = £145.83.
4. What about other costs.
Before we go any further, remember there are costs attributed to selling a product online.
Let’s say you are selling on Etsy. The costs of selling are detailed here.
In summary, on Etsy, you pay $0.20 (approx £0.15) listing price plus 5% of the total payment collected, including the shipping price charged to the customer. There is also a 5% Shipping/Delivery fee on the cost of postage, if you charge this separately. You’ll also pay an additional 4% plus a $0.25 (approx £0.20) fee for processing the payment.
Other marketplaces might have different costs, so you need to make sure that you have accounted for these fees in your pricing.
Assuming you having shipping costs of £5, let’s say for this example the fees on Etsy would be (I’m going to ignore the VAT that gets added on as this differs by country) :
- Listing Fee – £0.15
- Transaction fee = £145.83 x 0.05 = £7.29
- Shipping fee = £5 x 0.05 = £0.25
- Payment processing fees = (£145.83+£5) x 0.04 + £0.20 = £6.23
- Total Fees = £13.92
This doesn’t account for advertising fees.
If you intend to advertise the product, then you need to make sure you add these costs in as well.
Make sure you add this into the overall cost. Obviously, the fees change as the price changes, so it’s a bit of a guesstimate that you are including.
The cost of a quilt is now :
Baseline Price = Material Cost + Overhead Cost + Labour Cost + Fees
For this example it’s £20 + £5.83 + £120 + £13.92 = £159.75.
At this point, we have the breakeven figure.
This means that if you sell a product at this price you have paid yourself a wage and you shouldn’t lose money. But charging this price does not give you any wiggle room to offer discounts, bonuses, etc.. So you need to add in some profit to the equation.
5. Add in your profit
You are probably thinking well I’ve covered my costs and I’ve paid myself something why do I need to add anything else in. And this part is the most challenging part to justify with yourself.
BUT you are running a business and profit is key to running a business. It means you can invest in more tools, people, resources, and who knows what else. Without it, you are relegating yourself to always just getting by.
There are a couple ways you can work out what to charge for your profit:
- You could work out how much profit you want to make in the year. Divide this by the number of sales you want to make and then add this cost to every item cost (like the overhead cost). This works, but to me, it’s a bit like hitting it with a sledgehammer. You have to guess how many sales you are going to make and then add the same cost to everything. Depending on how varied your product prices are, this may be unreasonable to add on to some of your cheaper products.
- Some formulas say add a percentage of the price back on for your profit. For example, add a 50% profit markup. So £159.75 x 0.5 = £79.88. Giving a total price of £239.63.
- You could use a profit markup rate and multiply the baseline price by the profit markup rate to get you profit. Your mark up rate could be 1.5, so the price would be £159.75 x 1.5 = £239.63. Notice this is the same as a 50% markup in point 2. It’s just a different way of doing the calculation. You can change the markup rate to be whatever value you like as long as it is greater than 1.
I don’t know about you, but I think the resultant figure of £239.63, using the formulas above, maybe a tough to sell for a quilt. I know this is how you do it for retail shops, but they have the economies of scale that helps reduce the price.
An alternative and I think a more reasonable, way of adding in profit for handmade goods is to use the profit markup rate just against the materials cost.
Price = (material costs x profit markup rate ) + overhead cost + labour cost + fees
=(£20×1.5) + £5.83 + £120+ £13.92 = £169.75.
This might seem a more palatable amount for your customers.
If you are planning on selling wholesale, then you need to have a figure for wholesale and a figure for retail.
Remember, wholesale sellers need to have room to make a profit as well. And if wholesalers can increase the retail price of your product and still make sales, then why can’t you?
When you are looking at the profit markup rate, you should really be looking at a number around 2 to give you a wholesale price and 4 for your retail price.
The final pricing guide formula is:
Price = (material costs x profit markup rate ) + overhead cost + labour cost + fees + ShippingIf this pricing guide seems overly complicated, then download our free product pricing spreadsheet. It will walk you through the steps included in this pricing guide, calculating each cost. And once you feed in your costs, it will automatically calculate the final wholesale and retail prices.
What about digital downloads?
You have just got comfortable with the new pricing formula, and now you want to sell some digital downloads. Well, let’s agree now that you can throw the formula you’ve just learned out of the window for digitals.
Firstly, labour is a one time only event. You create the product, and then you can sell it 100 times over, at no extra labour cost (providing you are not offering customisation). So including the labour cost for every sale would not be reasonable.
Secondly, you don’t have any material costs, which means your profit markup has nothing to multiply, so that doesn’t work.
Thirdly, because you can sell the same product multiple times at no extra cost to you doesn’t mean that each customer values it less. So pricing it too low undervalues your product.
Here is a good summary of the things you need to take into account when you think about pricing your digital downloads.
Don’t undervalue what your customer is getting
If someone is willing to buy your product, then they must think it is going to either solve some problem for them or provide them with some value.
The fact it may only take you 30 minutes to make is irrelevant because the customer has no notion or does not care about this. What value it does offer is that the customer doesn’t have to bother learning how to create it and then create it. If they thought they could make it for themselves, they would. They wouldn’t buy yours.
So if you do nothing else, you are at least providing your customer with something that has saved them the time of doing it themselves.
Price abundantly so you can offer value
One phrase I heard recently was to price your products abundantly.
This means think of a price that makes you feel a little uncomfortable and go for that.
Using the amount that you feel is asking slightly too much gives you the scope to offer more to your customers, i.e. adding extra bonuses, providing how-to videos and so on.
All of which offers value to the customer and is worth paying for. If you provide more additional value than your competitors, it may be something that attracts more buyers.
If a product is more expensive than it’s competitors, it often gives the impression that it is of better quality. Customers are willing to pay for that better quality, and it may surprise you that you sell more of the more expensive product than you ever did when it was cheaper!
Look at competitors to make sure your price is reasonable
If you are in a market that has other similar products, then make sure you check out the competition to see what they are doing.
This doesn’t mean you have to match, undercut or sell higher, it just means compare what you are offering to your next best competitor. Check whether the price you are charging is fair based on your costs and the value the customer is getting.
But what about a pricing guide to help price downloads
Before you think well this is all finger in the air stuff for digital downloads, there is a pricing guide formula you can use to get to a reasonable ball-park figure.
- Material costs. This is likely to be 0.
- Labour costs. Calculate how long it takes you to create the product. It would be reasonable to assume that something that takes you longer to create should cost more than those that were quicker to make.
- Overhead costs. Workout your total overhead costs in the same way as above. You will still have these even though you are making a digital product.
- Fees. Workout the fees, in the same way as above. These don’t change just because the product is digital.
- How many products do you think you will sell in the product’s lifetime? Some products are time-limited, others can be useful forever.
For digital products I have found the following pricing guide formula most useful:
Baseline Price = overhead cost + (labour cost/number of products) + fees
From here you can add in your profit markup rate as follows:
Retail Price = overhead cost + ((labour cost x profit mark up) /number of products) + fees
From here you can work out whether this is fair, abundant and achievable.
It will probably take a bit of jiggling the price to hit the sweet spot, and this sweet spot may vary based on what pricing strategy you are using.If this pricing guide seems overly complicated, then download our free product pricing spreadsheet. It will walk you through the steps included in this pricing guide, calculating each cost. And once you feed in your costs, it will automatically calculate the final wholesale and retail prices.