Craft Pricing Formula

Some people will debate the value of using a craft pricing formula when pricing crafts. They say it oversimplifies the complexities of craft pricing issues. I believe that using a formula, particularly in the early days of your home craft business, can be extremely helpful.

There are so many subjective issues related to pricing crafts. People often set their craft prices too low due to insecurity about the value of their work. Using a craft pricing formula can be extremely helpful in eliminating a lot of the tricky psychological issues related to pricing crafts. Once you've applied a formula, you can take into account other issues such as your target market and competitors' craft prices. But, in my opinion, a pricing formula is a very useful starting point for pricing crafts.

There are a few different formulas that are typically used. The one outlined below is the craft pricing formula that seems to be most commonly used, but if you want some alternative ideas, check out some online forums where professional crafters gather and ask or search for discussions on craft pricing formulas.

Here is a fairly standard formula that many people use when determining their craft prices:

Cost of Supplies + Labor + 10-15% Overhead = Total Costs
Total Costs x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price

For example:

If you designed and made a tote bag that used $5.00 worth of materials and took 30 minutes to complete, assuming you paid yourself $14.00 per hour of labor, the pricing formula would be as follows:

$5.00 (Cost of Supplies) + $7.00 (Labor) = $12.00
Take 10-15% of the combined supply and labor cost to get your overhead
10% of $12.00 is $1.20 ($12.00 x .10)
Total Costs = $12.00 (Cost of Supplies and Labor) + $1.20 (10% Overhead)
Total Costs = $13.20

$13.20 (Total Costs) x 2 = Wholesale Price
Wholesale Price = $26.40

$26.40 (Wholesale Price) x 2 = Retail Price
Retail Price = $52.80

So, in this case, in order to ensure you are making a fair profit and giving your business room to grow, you could sell your tote bag to a retail customer for $52.80 or you could sell several tote bags to a wholesale customer at $26.40 for each bag.

There are a few things to notice in the craft pricing formula:

Labor Costs
Notice that the labor was calculated at a rate of $14.00 per hour. Be sure to pay yourself a fair wage for labor. Many professional crafters use a rate of $12.00 to $20.00 per hour to calculate their labor costs. When you determine you own labor rate, be sure to use a fair wage that allows you to grow your business and accounts for the skill required to make your product. Your time and skills are valuable. No matter how much you love making your craft, your labor is neither free nor cheap.

I actually once read a suggestion of using $5.00 per hour as the hourly wage for pricing crafts. In my opinion, using a rate like that would be grossly under-pricing the value of your labor. First, if you are making crafts of a saleable quality, then your skill is worth more than $5.00 per hour. Second, if you only allow $5.00 per hour for labor costs, you would really struggle to pay staff a fair wage and still make a profit yourself if you grow your business to a point where you need to hire a production assistant.

Overhead
Overhead covers expenses like tools and equipment, utilities, business insurance, packaging, office supplies, etc. These are the kind of sneaky, sometimes under estimated business expenses that can really add up. If they are not accounted for in your craft prices, they can really eat away at your profits and your ability to grow your home craft business.

Wholesale Price
Notice that the total costs were doubled to arrive at a wholesale price. Doubling the costs builds your profit into your craft prices. Some people make the mistake of not including profit in the price of their craft because they feel that the labor cost is their profit. Keep in mind that labor is not profit. You may be paying yourself for the labor for production time right now, but your business may not always be structured in that way.

Retail Price
The retail price is determined by doubling the wholesale price. This step in the formula accounts for a couple of issues. First, by doubling the wholesale price to determine the retail price, you are accounting for any selling costs you encounter such as booth fees at art and craft shows, web hosting fees or third party website fees.

Second, most retail store owners and buyers expect to be able to purchase your product at half of the retail price if they are interested in placing a large wholesale order. By doubling the wholesale price to determine your retail price, you are ensuring that you can afford to sell your work at standard wholesale prices and still make a profit. You might not be ready yet to accept wholesale orders, but if you don't build that factor into the price of your products, you will not be able to grow your business to a point where you do accept wholesale orders without significantly increasing your retail prices.

I personally really like the idea of using a craft pricing formula as a starting point for pricing crafts. It's a great tool that minimizes the guesswork and emotional complications of pricing crafts. So many people starting a home craft business tend to set their craft prices too low when they just estimate what they think the retail price should be. Using a craft pricing formula can give you a solid, objective basis for pricing your crafts.