Pricing – The Formula

There is no perfect formula for pricing. What works for one person might not work for another. The formula presented today is in standard use and even if you don’t end up using this method exactly, figuring out your prices this way will give you a baseline from which to start.

Here is a basic pricing formula:

Materials + Labor + Overhead + Profit = Wholesale Price

Wholesale Price x 2 = Retail Price

To have a complete understanding of the formulas, you need to understand what each of the items in the formula above include. Materials are the raw supplies that you use to make a product. Fiber art materials might include wool, fabric, silk, dye, textile detergent, thread, resist materials, paint, embellishment fibers etc. If you are making work in a different media, whatever raw materials that you use to create your piece should be included. A nuno felted scarf might cost $3.00 for wool, $10.00 for the silk fabric and dyeing costs of $2.00 for a total of $15.00 material costs.

Labor is the value of the time needed to make an item. Many newbies do not include a labor cost in their pricing structure. I think this is a big mistake. What would it cost you if you had to hire someone else to make the item? When estimating labor costs, the lowest you should choose is minimum wage. Estimate an hourly wage and then determine how long it takes to make each separate item. For example, if your labor cost was $10 per hour and it takes you three hours to make a scarf, then the labor cost you use in the formula above for the scarf would be $30.

Overhead is costs that do not directly relate to a specific product. Many people who work at home tend not to include overhead costs. However, if you use water, electricity or other utilities, overhead expenses are necessary to include in the formula. Overhead could include rent, utilities, repair and maintenance on any equipment, telephone, computer use, credit card fees, bank charges, legal and accounting fees, subscriptions, memberships, continuing education, advertising, print media, packaging and shipping supplies, insurance and selling expenses. Selling expenses are things like show fees, display costs, travel, photography, samples and sales commissions. You can figure out these numbers by looking at your bills for one year’s time. Then figure out how many hours you work in a year and divide the total overhead by that many hours. This will give you an hourly overhead cost. This can be added to your hourly labor wage or you can apply it proportionately to each product.

Profit is not a bad word. Everyone should be making a profit from what they make. If you leave this out of the formula, you will never be doing more than breaking even. Your profit might be as low as $1-2 on each item but it still needs to be calculated into the formula.

Once you’ve figured out your labor and overhead costs, you’ve got the bulk of the work done. You only need to review these on a yearly basis to see if they need to be changed. For example, if you stay with the $10 per hour labor charge and come up with a $7 per hour overhead charge, the formula for a scarf that takes three hours to make would look like this.

$15.00 + $30.00 + $21.00 + $4.00 = $70.00 wholesale price

$70.00 x 2 = $140.00 retail price

Go ahead and work out the pricing for all of your items that you make. Compare these prices to what you currently have your items marked? Is there a big difference? Can you see items that don’t really make sense to make in that they take an inordinate amount of time? Are there certain items that you think you can increase your profit margin?

A quick word about the wholesale versus retail price. Many people sell their items at the wholesale price in retail venues. They skip the last part of the formula. This is a real pet peeve of mine, when artists come in and tell me they sell work at local shows at a certain price but that is the same price “they need” from me before I mark it up in the store. It will be impossible to sell these items in a gallery because the customer will just wait until the artist is selling at a local show and the customer will get the item for half the price they would pay in a gallery. Galleries will be unwilling to work with you if you price this way.

Next time, I’ll discuss other pricing methods and some general tips for pricing. If you have any questions, please feel free to ask. I’d love to hear your comments about how you figure pricing and what seems to work best for you.

This entry was posted in Marketplace Mondays and tagged , , , , , , , . Bookmark the permalink.

13 Responses to Pricing – The Formula

  1. Lyn says:

    Sage advice and clearly explained – it’s amazing how many artists have no idea at all on pricing.

    With regard to your pet peeve, the artists who sell at wholesale prices haven’t thought things through.
    Firstly, it costs (sometimes highly) to sell at a show so that’s an extra overhead to the usual wholesale price which means they are really selling at under their wholesale price.
    Secondly, if the artist were to charge the same prices as the gallery, the artist would be making a lot more profit on each sale.
    It’s a no-brainer really isn’t it?

    • ruthlane says:

      Thanks Lyn. It is a no brainer but people just can’t seem to figure it out. Selling costs add up quickly and that definitely needs to be included in pricing your work.

  2. zedster66 says:

    That’s a lot of good info, Ruth, thanks :)
    I wouldn’t have considered some of those things.

  3. zedster66 says:

    I’ve been thinking, how do you account for what people expect to pay for certain things, what they think should be a more expensive item? For example making a notebook cover from felt could use more materials and take more time, (especially with all the cutting, measuring and sewing involved) than a nuno felted scarf, but I doubt anyone would pay the same for a notebook as for a scarf.

    • ruthlane says:

      Good question Zed. You are talking about perceived value and that is a very difficult thing to overcome. I think it is important to still work out the price and then see if that will work with what people might expect to pay. One way to increase the perceived value is by including a hang tag with information about the process and the work involved. You also have to look at your process and make sure you are making it as streamlined and simple as you can. If you are selling a range of items, sometimes you can make more on items that have a higher perceived value but actually take less work. This can make up for the items that you have a lower markup/profit.

  4. Very interesting and informative. I know I have not worked out my costs as exacly as I should. You didn’t explain how you decide on the profit for a peice. A question isn’t the hourly rate what you are being paid for your peice? so you get your hours and your profit. So in your example you get $34 for your scarf wholesale or am I confused? so if I sell my own scarf at retail I make $104.

    • ruthlane says:

      Ann – No the hourly rate is not what you get paid for your piece. The wholesale price as I’ve shown should be the lowest you would accept for your piece. So it would be $70 in my example. If you sold your piece on consignment in this example at 60%/40%, you would take the retail price of $140 and multiply by 60%. Therefore, you would get $84 if you sold the scarf on consignment.

      I didn’t explain how to figure profit because it is usually different for everyone. It could be a set percentage such as 5% of your wholesale price. Or you can do it by looking at your price after you’ve added up everything else and see what you think the market will bear. Does that make sense now? If not, we could start a discussion on the forum so people might feel more comfortable in adding their opinion or asking questions.

  5. Sorry I am not being clear in what I mean. I didn’t mean the actual amount I get paid from the store but the amount that isn’t a true cost you have to spend. When you pay yourself that is what you are paid for making the peice and then you add the profit, If I retial it myself then I also make everything over the wholsesale price. That part I really like.

  6. Thank you Ruth for a very informative post. Even though I have been a self sustained fibre art business for a few years now, pricing things, especially prototypes, still remains a frustrating exercise. I sometimes find ways around it through bartering, in goods or services such as dyeing. Anyhow, I am still learning new twists from all my fibre friends! Thank you!

    • ruthlane says:

      Glad you found it informative. Pricing is not easy for sure. I think the most important part is to keep learning and paying attention to when something doesn’t work, you can really learn from your (and others) mistakes.

  7. jane says:

    Good informative post Ruth, glad I am not alone in finding pricing difficult. I think the issue of perceived value is a very tricky one also. Very good timing as I have been struggling with pricing some things that I am going to list on line, I think I often undervalue my craft and this is a timely reminder and straight forward formula that might help me not to.

    • ruthlane says:

      Thanks Jane. I think that many people undervalue their work. I hope that this formula will help with making pricing slightly easier :)

We love comments and love to hear your opinions. Thanks for stopping by.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s