{Handmade Business in 31 Days — Day 31, How to accurately price your handmade items.}

Day 31// About this time one year ago we realized two huge somethings: if we didn’t change the way we made and priced our handmade items we wouldn’t remain profitable, and if we didn’t change these things we wouldn’t be in business for very long. Gussy Sews is my full-time job, the blog + shop take equal dedication and I absolutely love my job. There’s hardly enough time to describe all that it’s done for our family, others, and lastly, myself, so ensuring we make smart choices is super important. Lastly, Gussy Sews supports our family, not the reverse.

We took a few months {let’s be honest, it wasn’t a quick activity} to review our processes, pricing and overall goals. And what we realized is that we weren’t headed down the path we thought we were. We needed to act quickly and so once we had shipped all Christmas orders we took a short break from the biz to rest. In early January we re-grouped and worked incredibly hard to design, create + photograph a new line of Gussy products. We reworked our pricing guidelines and made sure our overhead costs were accurate. And then lastly we created some buzz to help with the upcoming launch.

Pricing your handmade items correctly is just one aspect of running a successful handmade business. You must perfect the art of saying “no”, you must know your goals + elevator speech, and you must take some time to rest, among other things.

LET’S TALK HOW TO ACCURATELY PRICE HANDMADE ITEMS. Here are some key factors you must know:

• What is the cost per material item? {calculated down to the exact amount of material you use}
• How much time does it take to make a finished item? {account for each step of the process}
• What is the rate of pay to make a finished item? {include all positions/process steps; will you pay per hour worked or per finished task/piece}
• What kind of profit* % must you make to remain a sustainable business?
• What kind of overhead costs do you have? {your salary, accounting costs, newsletter subscriber fees, site hosting fees, basic office supplies, travel costs, site design fees, giveaways/donations, rent/utilities + more}

*The amount of profit you make could cover overhead costs {how you actually configure how to pay for overhead can vary {example: add it in to the product price like an expense/material; know how much product you have to sell each month in order to break even with your overhead costs}.

Oftentimes shop owners under-price their handmade items. This could be because they haven’t adjusted their prices as their experience/style develops, they don’t feel confident asking for what they deserve to be paid, or they don’t want to “compete” with neighboring shop prices. Here’s how I feel about that: you absolutely cannot compare yourself to other shops {for all you know THEY are underpricing your work, now you’re really losing money}; your story is uniquely yours therefore your prices are uniquely yours; if you don’t know what it costs to make an item how {seriously, how?} do you expect to stay in business?

Most handmade business aren’t properly priced, and actually — many lose money. The difference between a business and a hobby is a business makes money. One of the major problems facing our industry is handmade is expensive to create. A handmade shop owner has to set their prices higher than a big box store in order to reach profitability. However, the trade-off is a more unique shopping experience for the customer.

Knowing where to shop for materials was a huge reason we were able to go from a made-to-order to pre-made process in January of this year. Yes, we were suddenly buying larger quantities of materials but we could afford this simply because we knew we were getting the best price on the quantities we needed.

SO LET’S DRAW UP A SAMPLE PRODUCT PRICE FOR A ZIPPED POUCH:

Shop Owner A: your product retails for $9 and the total cost of all materials used is $2. Somewhere you heard you should triple the cost of materials to determine the retail price, so that’s what you’ve done. Your shop has been open for 6 months and while you’ve sold a fair amount of items since opening you have just enough money to cover your next batch of items but you’ve saved nothing and you have no capital set aside {for funding large projects, investing in new supplies + more}. Final grade: F

Shop Owner B: your product retails for $20 and the total cost of all materials used is $2. You also spent $2 making the item, bringing your total costs to $4. Now what about the time it costs to photograph, edit, list for sale + promote said item? Yup, you’ve got $16 left to cover all of those costs, not to mention have enough leftover to cover your monthly overhead expenses which remember, covers paying yourself! Your shop has also been open for 6 months and you’ve sold the same amount of items since opening as Shop Owner A, but you’ve been able to save a set amount each month as well as build a decent amount of capital. Final grade: A+

So… what’s the difference between Shop Owner A and Shop Owner B?

Having an accurate understanding of what it costs to run a business will immediately set you apart from others, but knowing + implementing what you know allows you to run your business much more easily.

Above is a list of some key factors to accurately pricing your items. Now, let’s talk in greater depth about this…

KEY FACTORS YOU MUST KNOW ABOUT PRICING HANDMADE ITEMS {for consistency purposes we’re basing the instructions on making a zipped pouch}:

• What is the cost per material item? {calculated down to the exact amount of material you use}
  • Take that zipped pouch you are working on. Here’s a breakdown in materials you use: outside fabric, inside fabric, interfacing, thread, zipper, embellishments, name tag {for example}.
    • You buy the outside and inside fabrics for $5/yard and the interfacing for $4/yard. To determine how much material in the outside and inside fabrics you use, figure out how many finished pouches you can make from 1 yard of fabric. Let’s assume you can get 12 pouches from a yard of fabric, making each outside/inside fabric cost you $0.42.
    • Apply this same formula to determine the cost of interfacing used, noting that the outside/inside fabrics are doubled over and the interfacing is not, meaning you use twice as much interfacing per yard than you do of outside/inside fabric.
    • Thread probably costs you pennies {if that} per finished piece, and while this dollar amount seems insignificant it is important to include it in your costs.
    • Use the same formula to figure out the cost of the zipper, any embellishments you use and name tag added to every zipped pouch. For example, if you buy a lot of 12 zippers for $4 then each zipper costs you $0.33
      • You now know the cost of all materials needed to make your handmade item — yeow!
  • Repeat this for EVERY ITEM you sell in your shop. Each of your items has unique measurements, material uses + costs, so taking the time to determine a unique price for each is an absolute must! Hint: use a spreadsheet to create a formula that’ll allow you to simply plug in your item measurements, material prices + production times to determine a suggested retail price
• How much time does it take to make a finished item? {account for each step of the process}
  • Prep work: 2 minutes {includes cutting and ironing fabric}
  • Sewing: 7 minutes {start to finish, the amount of time to sew 1 zipped pouch}
• What is the rate of pay to make a finished item? {include all positions/process steps; will you pay per hour worked or per finished task/piece}
  • Prep work: $10/hour {may also be paid per finished task}
  • Sewing: $12/hour {may also be paid per finished piece}
• What kind of profit % must you make to remain a sustainable business?
  • You’ll have to work a few scenarios to know which % is the right amount. Start with 50% — are you able to pay yourself, cover overhead costs, and save/pay for anything additional with this number? What if you bumped your profit to 60%? How about 70%? Running a handmade business, like any business, is extremely expensive. It’s important to keep this percentage in perspective, realizing there are many expenses we don’t account for {due to infrequency or inexperience}.
• What kind of overhead costs do you have? {your salary, accounting costs, newsletter subscriber fees, site hosting fees, basic office supplies, travel costs, site design fees, giveaways/donations, rent/utilities + more}
  • Breakdown quarterly AND yearly costs so they become a monthly expense {site hosting fees, accounting fees, etc.}
  • Will you include a fraction of your overhead costs with each product you list, or will you focus on reaching a specific sales goal in order to cover your overhead costs? Or, consider covering your overhead in a way that works best for you!

The bottom line is accurately pricing your handmade items will push you towards success whereas using a set formula, like “3x the cost of materials” will quickly pull you towards failure. It may sound harsh, but the reality of not accurately pricing your items is harsh. It’s exactly what challenged us to change the way we made and priced our handmade items. And, it’s what’s allowed me to take some time off over the summer as well as in September when we moved from Minneapolis to Los Angeles.

 NOTE: This post explains how to accurately set retail prices, not wholesale prices. Wholesale is another language entirely ;)

Homework// If you haven’t already done some, revisit your pricing formula and make appropriate adjustments. If you’re concerned about the difference of what you currently sell an item for to what you should being too dramatic, increase your prices in small increments. Remember, your end goal is profitability + sustainability :)

Any questions? Let’s chat in the comments!

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