Before we start looking at any advanced pricing strategies, let’s have a look at the basics of the costs of running your handmade business, and how we can make sure your bases are covered.
Variable costs are costs that increase with each product made/sold. This cost increases when you make new products.
Some common variable costs include:
Don’t forget to pay yourself in the process. Set yourself an hourly rate and see how much time is required to make an item. This method can help you come up with the labour cost of your products.
There are some costs that stay the same no matter how many products you make in a period of time. Some examples include:
To include them in the product cost, try this method:
This is a general method for dividing up the fixed costs. You can also put a bigger percentage of the fixed costs on higher priced items and smaller percentage on lower priced items.
There are a lot of pricing formulas online. All of them have their merits, but it’s not the approach that I use. Just using pricing formula runs into the risk of pricing for yourself, not the market. It’s likely that you would under- or over- charge your customers.
Instead, pricing formula is a way to find the “baseline price” that you need to charge to breakeven, but not to find the final price that you’ll charge.
All Variable Costs + All Fixed Costs = Baseline Price
To do that, add up your variable costs and fixed costs for each product to get your baseline prices. This is the price you need to know going forward to not go below.
In the later steps, we will look at ways to get the price you’ll charge to maximise the profit for your business.