pricing your work

Separating the Amateurs from the Professionals

Nothing is more difficult, for both newcomers and old hands alike, than pricing. It gets to the guts of what it's all about. Incorrect pricing, either charging too much or too little, usually is the single greatest cause of business failure. When we look at pricing, we are examining a very complex matrix of associated issues. There is the question of perceived value versus intrinsic worth -- the worth of Shakespeare's plays cannot be measured by their value to the commercial theater. There is the question of the competitive situation in determining your pricing strategy -- with a new product for which there is no competition and a high-perceived value; you can hang the moon. But watch out, your booth neighbor at the very next show might have craft widgets that look suspiciously "derivative" of your work. What about the price elasticity of demand -- higher prices mean fewer sales, while lower prices mean more sales -- can we pinpoint that spot on the curve that maximizes our overall cash? What is the real value of your personal labor -- are you content to be a starving artist, or is there a lifestyle to which you would like to become accustomed? How should your time outside the studio be compensated for?

Having set the stage, here is a simple cost-based pricing formula. Use it to calculate a notional selling price and then compare that price to similar products produced by you or others. This is not scientific, but it does give you a benchmark.

Take your direct costs for producing one item, including an inputted labor rate for you of, say, $20 per hour. These direct costs should include your materials, supplies, purchased findings, etc. Double them -- that's your wholesale price. Double your wholesale price -- that's your retail price. If you can indeed sell your craft widgets at these prices, you will no doubt make a decent living no matter what your distribution method. If you primarily wholesale your work, then you spend the majority of your time in your studio producing large orders to fulfill the requirements of your gallery customers. On the other hand, if you retail on the arts & crafts show circuit, then you need that added margin to cover your higher selling costs and to compensate you for time not spent in your studio. This is a "real world" formula based on a survey I took of craft professionals in various media. Direct costs averaged 50%, overheads/expenses averaged 25% and pre-tax profits were 25%. Here is a table showing the ratios for various media:

Media:
T. Mann formula
Fashion jewelry
Fine jewelry 
Fiber arts
Art Glass
 Mixed media
Revenue 
100%
 100%
100%
100%
100%
100%
Direct cost
 -34%
-50%
-55%
-40%
-40%
-50%
Margin
66%
  50%
45%
60%
60%
50%
Overheads
-33%
-30%
-25%
-40%
-30%
-25%
Profit
33%
20%
20%
20%
30%
25%


Let's take an example. Say you can make five craft widgets an hour, and you have $1 in each of them for materials etc. With your inputted labor rate of $20 an hour, you have $4 in labor in each piece, for a total direct cost of $5. Double that for a wholesale price of $10 and double that again for a retail price of $20. Now take a look around. Are you making coffee mugs that normally sell on the retail circuit for $12? If so, then you're in trouble and you had better take a look at your costs and practices to see where you can save time and materials. Are you making jewelry that normally sells for $40? If so, then raise your price and start a college fund for the kids. You are lucky/clever in the craft you have chosen.

So what's with the other $5 -- the wholesale price of $10 less direct costs of $5? That's called margin/gross profit and is used to cover overheads and provide funds for growing the business and entrepreneurial profits.

Study the matrix below for a bit of insight on the relationship between prices, costs and profits. There will be a test; unfortunately the real world does not grade on a curve.

UPDATE: When I originally wrote this, it was customary for retailers to "keystone" their prices, i.e., retail was merely double the wholesale price. Many, if not most, craft galleries are now using a 2.3X or more markup. It's not unusual to see a 2.6X bump in the price, and I have seen rare, but extreme examples of a 3.0X markup of my own work. Jewelers are used to these higher ratios. So, the idea of keystone as it pertains to price spreads is going the way of the Keystone Kops -- it's just so 20th Century! You'll have to be the judge here, but I highly recommend that you review my rant on the price elasticity of demand before you set those retail prices for your shows. -- John

     

   
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