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Pricing – The Formula

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.

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