Pricing Crafts
A Detailed Look at the Real Costs of Selling Crafts

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Pricing crafts is a complex and sensitive issue. Often people will attempt to compete on price when they first launch a home craft business. This strategy for pricing crafts is particularly common with artists who are selling in competitive and saturated markets such as eBay or other third party websites. They'll try to turn a profit on a slim margin and often neglect to consider all of the costs involved in producing and selling their craft.

Most established artists will tell you that competing on price is typically not a smart strategy for people who make original handmade work.

If you talk to established artists and professional crafters, many of them will say that the biggest mistake they made when starting out was setting their craft prices too low to make a fair profit. The pressure around pricing crafts quite low can be strong on some competitive third party sites like eBay. You see all of the 99 cent auctions, and after you finish wondering how someone can afford to sell a handmade amethyst necklace for 99 cents, then you start to wonder how on earth your own products can compete against such aggressively low craft prices.

That's when the temptation to slash your craft prices sets in.

When you really start to do some analysis, it's amazing how quickly your expenses add up, and how much you actually need to charge to make a fair profit. To help you convince yourself that you're not doing yourself or your business any favors by pricing crafts at unreasonably low prices, here's a bit of math to show you how expenses can impact your profits:

Imagine you're selling handmade purses on eBay. To keep things a bit simple, I'll assume you're charging $40.00 for each purse, and you're breaking even on your shipping fees. Let's say you just sold three purses on eBay. If you used 'buy it now', and no other features, you'll owe eBay (as of this writing) $3.20 for each $40.00 purse you sell (that's $9.60 for all three purses that sold, and you keep $36.80 per purse). So, if you sell three purses on eBay, you might think, "Hmm, not bad, once I subtract the selling costs, I've made $110.40." Well, not quite…

Keep in mind you won't typically sell all of the purses you have listed. So imagine that you've used eBay's research tools and determined that 30% of all handmade purses that are listed actually sell (I've done the research, and that's a pretty reasonable percentage for certain categories of handmade items on eBay). That means, if you sold 3 purses, you must have had 10 purses listed. So you also owe eBay $1.40 for each purse that didn't sell, or another $9.80. Now you can say you've made $100.60. That still might sound great, but it depends on what your other costs were.

Imagine each of the three purses you sold took only 25 minutes to make and used $5.00 worth of materials. If you pay yourself $12.00 per hour to make the purses, that works out to a $10.00 expense for time and materials. In that case, your profit now sits at $70.60, which is still pretty good. So, it is possible to make a fair profit if you have been pricing crafts strategically.

However, imagine you've fallen into the mindset of pricing crafts to compete on price and trying to profit on very slim margins. If your purses are complex and they take an hour and a half to make, that's $18.00 in time (remember, this is a business, not a hobby - your time is not free!). And if your raw materials are just a little more expensive, they might cost you $7.00 per purse. Now your time and materials cost for each purse you sell is up to $25.00. But you're competing on price, so you've decided to still charge only $40.00 for each purse (it's eBay, after all; aren't people looking for a bargain?). Now you'll have to subtract $75.00 from your profit on the three purses you sold. Your profit is now down to $25.60.

So you think you've made a profit of $25.60 on your three purses. Not really. That figure doesn't account for the costs of business insurance, waste materials, merchant account fees, printing business cards, shipping costs or travel expenses for the raw materials you bought to make the purses and an endless list of other selling costs.

Here are some realistic numbers to consider when pricing crafts:

Imagine you pay $40 per month in business insurance; that's 50 cents per purse if you sell 80 purses a month. If you have a rate of 10% wasted materials (we all try not to mess up, but it happens), that's 70 cents per purse. Merchant account fees at 3% will cost $1.20 per purse. Your business cards cost 20 cents each, and the shipping fees you paid for the raw materials you purchased to make the purses averaged out to 50 cents per purse.

All of those incidental costs add up to $3.10 per purse. So now you're down to $16.30 profit for three purses if you were competing on price and slim profit margins. That's just $5.43 profit per purse. If those purses took an hour and a half to make each one, your profit works out to just $3.69 per hour of production time (I certainly wouldn't accept that kind of wage from any employer!).

If you're not appalled yet at the low profits when you use such slim margins for pricing crafts, consider this. When you set your very low craft prices, you might have (barely) considered the cost of time to actually make the purses, but at such a slim markup, you'd be hard pressed to account for the time to design the purses, choose the fabric and notions, source and purchase all of the materials, photograph the items and write up and post compelling descriptions for all ten purses.

I honestly don't know how long it takes a professional crafter to make one purse (it would take me forever, but I always spend more time fighting with my sewing machine than actually sewing!), but at just $5.53 profit per purse, you're going to have to sew and sell a heck of a lot of purses to make a livable income.

So, let's clarify all of this math. This chart compares and summarizes all of the expenses for the purses with $25.00 of labor and materials and the purses with $10.00 of labor and materials.

Expenses	Three Purses Retail Price $40 Require $25 of Labor and Materials to Make Each One	Three Purses Retail Price $40 Require $10 of Labor and Materials to Make Each One
Selling costs	$9.60	$9.60
Selling costs of items that don't sell	$9.80	$9.80
Cost of materials	$21.00	$15.00
Cost of time	$54.00	$15.00
Business insurance	$1.50	$1.50
Waste	$2.10	$1.50
Merchant account fees	$3.40	$3.40
Business cards	$.60	$.60
Raw material shipping expenses	$1.50	$1.50

Here are some final numbers to consider when pricing crafts:

Final Numbers	Three Purses Retail Price $40 Require $25 of Labor and Materials to Make Each One	Three Purses Retail Price $40 Require $10 of Labor and Materials to Make Each One
Selling Price for three purses at $40.00 each	$120.00	$120.00
Total expenses for three purses (from the chart above)	$103.50	$57.90
Profit on three purses	$16.50 (selling price minus total expenses)	$62.10 (selling price minus total expenses)
Profit on one purse	$5.50	$20.70
Time to make one purse	1.5 hours	25 minutes
Profit per hour of production time	$3.67	$49.68

When you're pricing crafts, keep in mind, even if you work at your business full time, you won't be able to do 40 hours per week of production. You'll probably spend half of your time on things like administrative tasks, marketing and designing (that might seem like a lot of admin, marketing and design time, but in my experience, I'd say it’s pretty reasonable, especially when you're starting out and building your business management processes).

So if half of your time is spent on non-production activities that are necessary, but don't directly make money for your craft business, then you'll have to divide your profit per hour of production by two to get a truer sense of your profit for each hour that you put into your business. In the example where the purse has been priced at a slim profit margin, once you account for all of the non-production time, you're now only making $1.84 per hour in profit. Where you've used a more fair price, you'd still be making $24.84 in profit. That's a pretty big difference that's worth considering when you're pricing crafts.

So you can see there's a pretty huge impact when you start lowering your craft prices or ignoring the cost of your labor when you're pricing crafts. It can actually get even more complex. I've had about all the math I can take for one article, but I haven't even factored in the cost of time and materials for any of the products that don't sell, or the cost of your tools or professional publications or the fact that wholesale customers expect to pay 50% of retail, so you can't wholesale a purse that cost you $25 when you're retailing it for $40. The list of expenses and considerations that impact pricing crafts can get pretty long.

Now, maybe you're still not convinced that pricing crafts on a slim profit margin is a losing proposition. You might be thinking, "Wait a minute, a lot of the expense is actually the time to make the purse, and I'm the one making the purses, so I'm also making that money; therefore it doesn't matter that I'm not making much profit." Remember though, that money is not profit; it's labor. You might be paying yourself that money right now, but you also might, in the future, want to grow your business and hire a production assistant.

If you haven't been pricing crafts from the start in a way that accounts for fair labor costs as well as profit, then you'll have backed yourself into a corner. Your customers will be used to certain price points, and you won't be able to afford the labor costs to hire an assistant and grow your business without significantly raising your craft prices or changing your product.

Tight profit margins might work for places that sell manufactured goods and can make up for it in huge volume. When you're selling handmade goods, you are limited by the amount of time it takes to make your products. It's important to consider how much profit you can make for each hour you put into your home craft business, because you can't substantially speed up your production process to make more items and sell extremely high volume (that's the nature, and a big part of the charm of handmade products). On top of that, you also have to commit time and money to marketing and selling the products, bookkeeping, sourcing raw materials, designing, and the list goes on. All of those factors impact pricing crafts to make a fair profit.

Although you can build efficiency into your production process, unless you have a really automated production line type of process (which is basically the antithesis of artisan work), you can’t make up for a very low profit margin by selling high volume because you just won’t be able to produce enough volume to make a reasonable income.

If you try pricing crafts low to compete on price with a handmade product, you’ll likely find yourself stuck at some stage of your business development, unable to grow and profit without really significant changes. If your pricing strategy is based on sound business sense, you’ll be able to make a good profit selling your crafts and have the flexibility to grow your home craft business in new and exciting directions.

 
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