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How to calculate the cost of a handmade product

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Whatever project you decide to create, sooner or later you will come across the question of the price of your services or products. For most start-up entrepreneurs, this topic is quite complex and delicate: not everyone has an economic education or many years of business experience, and asking questions about money is not quite decent.

In this article, we have gathered some general pricing tips that will help to understand this difficult topic even for those who have considered themselves a creative person all their lives, completely far from monetary issues and financial schemes.

Be competitive

Studying the existing market will help you not to go beyond the current prices and understand the approximate range in which services in your area are evaluated. Make inquiries about your competitors and try to find out what they offer this or that price for: what is their experience, how professionally they perform their work, how is their service different and how, finally, all these factors affect the brand’s popularity? Be prepared to set the price the same as that of a well-known competitor in the market, you will not succeed right away. But you can always focus on your uniqueness and improve the quality of execution and the level of service so as not to underestimate the price.


Find out the cost of your products or services

The most general pricing formula looks like this: cost value + profit = price. If this formula were universal, price formation would not raise so many questions among entrepreneurs. The most difficult thing is to determine the value of your own work. In this matter, its specificity is very important. Determining the material value is not so difficult. Suppose you sell unique products for the creation of which you spend (in addition to your time) a certain amount of materials, purchase tools for work, consume water, electricity or gas. All these components cost you a very specific amount of money. In addition, you spend extra money on transport or courier services. It turns out that the cost of delivery also includes the cost of delivery of all necessary materials and the finished product. Consider all costs, add them up and calculate how much one unit of goods costs you.

If you offer services (for example, as a photographer or designer), you can calculate how much your order costs. It is important to take into account the cost of equipment, and, if necessary, the rent of a room for work, transportation costs and other additional costs (for example, printing photos and packing them).

Knowing the cost, you can immediately determine the lower limit of the price, which will not allow you to work at a loss.


Remember indirect costs

To create the image of your product, additional funds are also required: from creating a corporate identity to a beautiful tag on the package. Internet promotion, photographer's services, advertising, better and more expensive equipment - one day it will become clear that this is important and necessary for your project, but it requires certain costs. Even if you decide to invest money in the development of your business gradually, consider these factors from the very beginning.


Set yourself a financial goal

Having a clear goal (for example, to earn a certain amount per year), it will be easier for you to determine how much your services cost. If you divide this amount by the number of working days in a year, you will find out how much you need to earn every day. In the same way, you can calculate the cost of your working hour, and based on the numbers received - draw up a work plan. In the end, you will understand how much work needs to be done per unit of time to achieve the desired result.


Find your customer

Be prepared for the fact that there will always be people to whom the price will seem too high. It’s impossible to adapt to everyone, so don’t be afraid to hear about the rejection of your services because of their cost and be able to say polite “no” to such customers in response to a request to “make a discount”. Know: if your product is of high quality and really worth the money, it will find its buyer.

Here is another interesting phenomenon of customer behavior: even if the customer pays a little, he waits in return for a service performed at a high level, and asks you for quality, forgetting about the modest price. If you, as the creator of the project, are sure that your product can really claim to be of high quality, not to mention its uniqueness, then do not intentionally lower prices to attract a buyer.


Appreciate your work and professionalism

A matter in which one puts all one’s soul and true professionalism should be appreciated. In such cases, a price slightly above average may emphasize your professional approach and attract new customers. Remember that your project is your pride and cost you considerable time and work.

HOW TO SET THE RIGHT PRICE FOR HANDMADE PRODUCTS?

This is a million dollar question. Surely, you have read a lot of articles and tips on how to form a price for your products. Once I also searched the entire Internet and searched for exactly what suits me.

In fact, there are many pricing formulas. Each handmade product is created in different ways, using different techniques. Some jewelry (in my case) can be made with expensive elements (precious stones, gold, silver), and some made of polymer clay. Some products take 20 minutes to assemble, and some are manufactured within a week.

This article is intended for those who create handicrafts. I will share with you different pricing methods.

When you begin to set the price for your handmade products, you must take into account not only the cost of the materials spent, but also your time spent on the manufacture of the product.

When a hobby is just a hobby, we don’t think about the cost of materials. No, of course, think! But not for future sales 🙂 But when we decide to turn a hobby into a business and take it seriously, cost control should be paramount.

CALCULATION OF PRODUCT COST

In other words, how much it will cost you to create one product. In order to calculate the cost, you need to consider several elements.

Consider absolutely everything that you use when creating the product, every element, even small details (trimming ribbons, printing a small image, etc.)

COST OF YOUR TIME OR HOW MUCH YOU PAY FOR YOURSELF

If you sell only in your region, country or local store, you can calculate the hour of working time, starting from the average monthly salary in your country. That is, you take the average salary, divide it by 22 business days, then divide by another 8 business hours. This formula is not correct in terms of the number of working days and working hours, I gave them as an example. Thus, you can calculate the cost of an hour of your work time.

If your customers are in Europe or the West, then you already set the hour of your worker yourself. Many sellers set themselves $ 5-10 per hour. But in America, most choose a minimum rate of $ 10 per hour. Here it all depends on experience and skill. If you are a beginner, then you can safely take $ 5 per hour of working time. And vice versa, if you are already an experienced master, many buyers already know your name, then the cost of an hour of working time is much higher.

PRICING

At a minimum, you should have a 100% mark-up to the cost of goods. But it's even better to multiply the cost by 2.4 or 2.5, as many sellers do. That is, if the cost of your product is $ 10, then the cost of the product will be $ 24 or $ 25. This $ 14 or $ 15 includes all associated costs. You do not need to think that this is net profit, since you still need to buy packaging, pay for electricity, Internet, advertising, commissions, etc.

OTHER FACTORS INFLUENCING COST

You already researched the market and your competitors? You approximately see what price your competitors offer. There is no point in competing with them in price, that is, by trimming their value. There is a buyer for each product! And in order to successfully sell your products and create a sustainable brand (so to speak), you need to very well research the market and create your own USP (a unique selling proposition). Buyers who purchase your product expect high quality work, which is reflected in the price. If the price of your products is low, the buyer might think that the quality of your work or materials is not very good.

Once you have compiled the retail value of your product, it’s easier for you to plan the number of sales to make your target profit.

CREATE YOUR PRICE FOR YOURSELF

  • Develop a pricing formula that is right for you, and stick to it.
  • Be aware of price changes - the cost of materials and the economy as a whole.
  • Your prices should always reflect quality. If you made some product with less perfection, let this also affect its price.

As I said above, there are many formulas for pricing. They are all different, but you can choose one for yourself or create your own.

PRICE CALCULATION FORMULA № 1

[(time x $ / hour) + 2 (cost of materials)] x 1.1 = wholesale price of the product

Wholesale price x 2 = retail price

In the first equation, we calculate how much time is spent on creating the product, and multiply it by the cost of an hour of working time that you set for yourself. We multiply the cost of materials by 2. Why? Surely, you are using some small details, the cost of which is not so easy to calculate. Or glue, you will not begin to calculate the cost of a drop of glue? For this, here we multiply the cost of materials by 2. Next, add the resulting cost of time and materials and multiply everything by 1.1 (in this case, this is a 10% depreciation charge: electricity, gas, water, etc. and profit). As a result, we get the wholesale value of your product.

Multiplying the wholesale price by 2, we get the retail price. When multiplying, all other minor expenses are already automatically taken into account: payment of a commission on the sale, advertising, Etsy listings, packaging, etc.

If you are a little shocked by the resulting value, this is normal. Of course, if your product is, for example, a necklace with flowers made of beads, and you spent a total of 12 hours making it (working hours without interruption, I sometimes use a timer here), and an hour of your time costs $ 10, then the price is really may shock you a little. Again, it all depends on your skill and product quality. But on the other hand, do not forget that if the buyer fell in love with your product, but he himself cannot do this, most likely he is ready to part with the amount of money you indicated.

HANDMADE PRICE CALCULATION FORMULA No. 2

Materials + time spent = cost of goods

Cost of goods x 2.2 (you can multiply up to 2.5 depending on what kind of profit you want to get) = Wholesale price

Wholesale price x 2.5 = Retail price

Download the product cost calculator, it will save time when pricing.
(Excel file download will start immediately)

These two simple formulas are quite flexible, and you can customize them to your needs.

I used to calculate the cost of a product like this:

  • cost of materials
  • working hours
  • commission, interest
  • packaging
  • delivery (even though I had free delivery in the store 🙂)
  • % of the profit I wanted to get
  • gas (if it was work with polymer clay - the oven must still be heated before baking)
  • electricity
  • the Internet

All this I summarized and received the cost of the product. But now I mainly use the second formula.

And how do you calculate the value of your products?

I hope this article has been helpful to you.

I wish you good, and most importantly, regular sales!

What base products take into account:

  • Bread, pasta, cereals in terms of flour
  • Vegetables in terms of potatoes
  • Gourds (cabbage)
  • Fresh fruits (apples)
  • Sugar and confectionery in terms of sugar
  • Meat products (beef meat)
  • Fish products (fresh fish)
  • Milk and dairy products in terms of milk
  • Eggs
  • Vegetable oil, margarine and fats (vegetable oil)
  • Other products (salt, tea, spices) in terms of tea

The calculation is made at the prices of products from the base "Price".

The volume of products is selected according to the minimum volume of products of the grocery consumer basket (Federal Law of the Russian Federation of December 3, 2012 N 227-ФЗ).

By law, a grocery basket is the basis for calculating the total value of the entire consumer basket:
Consumer basket (100%) = grocery (50%) + everything else (50%) (housing and communal services, service, clothing, transport).

Method 1 The Real Cost of Food

  1. 1 To find the real value of food, use this formula:

  • Food value% = (initial stocks + purchases - final stocks) / food sales
  • 2 Count the stocks of food you have. Start with the starting stocks for the current period, they are equal to the ending stocks of the previous period.

    • For example, at the end of the previous week you had stocks of $ 10,000. This will be your starting stock for this week. (Initial stocks = $ 10,000)
  • 3 Add all purchases for this period.

    • For example, let's say that this week you bought products for $ 3,000. Add this number to your initial stock. The sum is $ 13,000. ($ 10,000 + $ 3,000 = $ 13,000)
  • 4 Subtract end stocks when all sales for the current period are completed.

    • For example, after sales you have $ 10,500 stock left. Subtract this number from $ 13,000. It turns out the theoretical cost of food for a week at $ 2,500. ($ 13,000 - 10,500 = $ 2,500)
  • 5 Divide this number by the number of sales.

    • For example, your sales for this week were $ 6,000. You divide $ 2,500 into sales of $ 6,500. The percentage of these sales is calculated for the cost of food. We get 0.38 or 38%. That means you spent 38 cents on every dollar or 38% of the cost of food ($ 2,500 / $ 6,500 = 0.38 or 38%)
  • 6 Determine if the cost of food is too high or low.

    • If something worries you, find out what the problem is. Maybe there was an error when calculating the reserves or the matter was a discrepancy in prices, inaccurate presentation of invoices, or some transactions were not recorded as expenses.
  • Method 2 Potential Food Costs

    1. 1 Calculate the potential cost of food using these formulas:

    • Unit value multiplied by the number of units sold = total value.
    • Sales value multiplied by the number of units sold = total sales
    • Multiply the total cost by 100, divide the result by total sales.
  • 2 Compare potential food prices with real ones. Ideally, they should match. If not, check to see if there are any problems on your system.

    • If your total value is $ 3,000 and your total sales are $ 8,000, then the potential value of food is 37.5%, which almost matches the value of food in 38% from the previous example.
  • Method 3 Maximum Allowable Food Costs

    1. 1 Calculate your current budget and find the following data:

    • Salary fund and related expenses (salaries, fees, benefits and privileges, taxes).
    • Overhead (utilities, maintenance and repair, advertising, stocks excluding the cost of food).
    • Target minus tax.
  • 2 Calculate how many percent of your budget this is, then add up the percent. For example, if 26% of your budget is a payroll, 20% is an invoice, 15% is a profit, 61% is obtained. Subtract this number from 100 and you get the maximum allowable cost of food, in our example - 39%.

    • If your food expenses are less than the maximum allowable, then you are fine. In our example, your food costs of 38% are slightly less than the maximum allowable of 39%.
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