By Lauren Venell
Pricing is one of the most difficult parts of setting up any business. It requires you to put a concrete monetary value on very subjective qualities like style, experience, and care. When writing up a business plan, many people think that pricing is part of sales or operations, but if there’s anything I want to you to get out of this post it’s this:
Pricing is marketing.
(Editor’s Note: Lauren is the Co-chair/Programming Director for the Conference of Creative Entrepreneurs, which is happening this weekend in San Francisco. If you’re local, you can still register for three days of crafty business education like Lauren presents in this article.)
Image by crinklecrankle.com
The perceived value of your products does not determine their price. No, my friends, it is the other way around. The way you price your products (along with your packaging, branding, etc.) determines how people perceive their value. A lower price, therefore, does not always lead to more sales. A product that is priced too low may imply a lack of workmanship or inferior materials to some customers, and may actually cost you business. Let me give you an example:
A friend of mine tried to ramp down her custom wedding invitation business by doubling her prices, because she thought higher prices would mean fewer interested clients, but still keep her income fairly consistent. To her surprise, dozens of brides-to-be, wanting only the best for their special day, immediately began clamoring to work with her. By pricing herself like the most sought-after designer in town, she became the most sought-after designer in town.
You see, folks? Pricing is marketing. Convinced? Great, let’s get down to brass tacks.
Image by Gilgongo, via Flickr
To figure out the right price for your products, you can take one of two approaches: the bottom-up approach or the top-down approach. Let’s start with the bottom-up approach:
Price = Freelance rate × Hours + Materials
Please note that the cost of your materials should include the cost of storing, shipping, and/or sourcing your materials, not just the cost of buying them. If you find that hard to calculate, you can just add a 10-20% mark-up to cover it.
I also suggest that you don’t guess what your freelance rate is, because you will likely underestimate it. Freelance rates are typically much higher than what you’d make working for a company, because as a freelancer you need to pay for all of your own overhead and benefits. I recommend using the freelance rate calculator at Freelance Switch. It’s nice and thorough.
Let say, for simplicity’s sake, that you only make gold spiderweb earrings. Each pair takes three hours to make and requires $5 in gold. You’ve determined that your freelance rate is $47 per hour. That makes your price $146 wholesale:
Wholesale price of one pair earrings = $47 × 3 hours + $5 = $146
To arrive at a retail price, then, you’d multiply this wholesale price by 2, ending up with $292 retail.
You can find a luxury market where that price makes sense, but what if you want to expand into more markets by charging just $150 retail/$75 wholesale? Enter the top-down pricing approach. It works like this:
(Price – Expenses) / Hours = Hourly Wage
If you take that $75 wholesale price and apply this formula, your calculation might look like this:
($75 – $5 materials) / 3 hours = $23.33/hour
But this is an incomplete calculation, since it only factors in your materials and not all of your business expenses. To get a more accurate picture of your hourly wage, we need to take a monthly view.
Image by Gary Peeples/USFWS
Let’s say you can make and sell 30 pairs of earrings a month, since the rest of your time is spent on billing, shipping, emails, etc. Since each pair takes you 3 hours to make, you spend 90 hours per month making earrings. Let’s also say that your business expenses, including all of your overhead, come out to $1,000 per month. In that case, at $75 wholesale:
($75 × 30 pairs – $1,000 – $5 materials × 30 pairs) / 90 hours = $12.22/hour
Yikes. Can you pay all of your living expenses on that wage? If not, you may need to diversify your business. Just like Chanel has several different lines, from six-figure couture gowns to $30 logo T-shirts, you might need to add different products to meet lower price points and still make a living. Perhaps you sell your intricate gold earrings in luxury markets, and you also release a second line of spiderweb earrings made from laser-cut wood, in order to bring down the cost of both labor and materials.
Creating Good Freelance or Wholesale Clients
Okay, now that you’ve done the math and arrived at your prices, let’s talk about how to get paid. A few best practices:
Always have a contract. Always. Before you sell your products or services to someone, you should have them sign a document outlining what you will provide and when and how much they will pay you. This doesn’t have to be complicated. You can simply add a signature line and some terms to the bottom of your order form or client estimate. Make sure to lay out the forms of payment you accept, what the penalties are for late or non-payment, and your return or cancellation policy. The exception to this is consignment contracts, which have significantly more rules since you are essentially loaning your work to a reseller. You can find a simple editable consignment contract here.
Always collect a deposit. In the case of client work, you can require a 25-50% deposit up front. In the case of retailers, you can require new accounts to pay with a check or credit card before receiving their first order. If they pay reliably, you can relax your payment terms for re-orders later on.
Keep good records. If you use accounting software like Quickbooks, then you can set up alerts or reports for when payments are due. If you’re more of a simple spreadsheet or pen-and-paper type, you can just create reminders in iCal, Google Calendar, or a paper calendar.
Image by Peagreenchick, via Flickr
Shall we pause for questions here?
Yes, you in the back with the awesome hat:
“What if I don’t need to make a living off my crafts? I have a day job and it seems weird to charge so much for something I do for fun anyway. I just want to make enough to support my hobby.”
If you support the idea that craftspeople should be able to make a living, even if you don’t need to, then I would suggest that you sell some of your crafts at a price that would make you a living, and give the rest away for free. Though you may feel generous by offering quality goods at a low price, you are actually threatening your fellow crafters’ livelihoods by consistently undercutting them. Better to get your good karma from donating your crafts to worthy causes than by underpricing them.
Yes, you in the yellow:
“Can I charge the same price to both my wholesale and retail customers?”
Not if you want to keep your wholesale customers. Retail stores need to mark-up wholesale prices (usually double) in order to pay their rent, electricity, employees, etc. If you sell directly to consumers at the wholesale price, you are unfairly competing with the stores who are taking a chance carrying your merchandise. Always charge the same suggested retail price you share with retailers and don’t put things on sale too quickly. It’s good etiquette and it makes you more money!
Yes, you with the rainbow stripes:
“I get approached by a lot of people wanting free work or free products in exchange for exposure. On the one hand, as a new business I feel like I need to ‘put in my dues,’ but I’m afraid of getting taken advantage of.”
Ah, yes. The age-old, “When should I work for free?” question. The answer, of course, is “almost never.” (And be especially wary of “spec” work, as illustrated in this excellent chart by Jessica Hische.) But there may be exceptions to this rule, so I will offer a couple of my own:
It is okay to donate products if it doesn’t cost too much and they will reach your target audience. When someone asked me to donate 100 “I love you more than bacon” buttons to the launch party for a magazine about meat, I said yes. For $25, I got introduced to 100 potential new customers, plus anyone who sees them wearing the button in the future. I did not, however, donate 50 meat-shaped toys to include in gift bags for a fancy party in the Hamptons. Even though the latter was a higher-profile event, my target audience was meat-lovers, not rich people.
It is always okay to work for free for yourself. Working on a self-initiated project you are passionate about will do much more for your portfolio (and your ability to draw the kinds of clients you want) than doing a free (or cheap) project you don’t love for someone else, just because they are a “real” client.
It is okay to work for free for the common good, to make new connections, and generally grow your business in intangible ways – as long as you have a way of measuring your success in these areas. You can read more about the ROI of Free in this great series of posts on CraftyPod.
Whenever you do work for free, it is a good idea to still have a contract, so that you cannot get roped into doing even more free work than you initially agreed to.
Okay, last question. Yes, you with the parrot:
“How often can I change my prices?”
Excellent question. Whenever you introduce a new product, you may want to market-test it to see if people will happily pay the price you’ve named. If not, you might need to find a new market or make some adjustments to your process. I recommend testing your prices in a retail setting before offering them up to any resellers.
You can put a product on sale once it stops getting interest from resellers, but I find that offering “combo deals” at reduced prices moves more inventory than simply cutting prices because it doesn’t imply that any of your products are old or otherwise unwanted.
If you are raising your freelance rate (which I recommend doing every year or two since you have more experience and are therefore worth more), the key is letting people have advance notice. Email any past clients with the rate increase before they book their next job. The notice will remind them that you are available and more successful than ever, because:
Pricing is marketing.
About the Author
Lauren Venell is an independent product designer, artist, and small business consultant from San Francisco. She is the co-founder and programming director for the Conference of Creative Entrepreneurs and teaches small business workshops around the Bay Area. Lauren is also a contributing “biz lady” for design*sponge, in addition to running her own blog.