Let’s talk about money. Yup, I’m going there. Although it’s usually considered a taboo topic to talk about, we’re all Nerd Burger friends here. We can be honest with each other about such topics, so let’s just cut straight to it, without the filler. More often than not, creatives undervalue their own skills and expertise and only charge what they think the market will pay. As an ex-accountant turned jewellery maker myself, I’m here to tell you, that if you’re not working with concrete and real numbers and you’re just going by your gut feeling of what you think people will pay, this is the road to a big fat failure. Luckily, there’s a formula you can follow and today we’ll break it down, bit by bit, so you can gain a better understanding of the numbers and how to apply the formula to the products or services you sell in your business.
The basic formula is:
Materials + Labour + Overheads + Profit = Wholesale price
Wholesale price x 2 = Retail price
When you first apply this formula, you might be alarmed at how high the retail price. I sure was! Doubts begin to pop into your head. There’s no way anyone would pay this much for my work?! There’s a couple of things you need to consider:
- Is there any way you can decrease your costs by making processes more efficient or buying more material in bulk for a lower price per unit?
- Are you just scared that people won’t pay this price? Take into consideration your experience, skills and the design of your product.
- Have confidence in yourself. Trust me, there are people who don’t have the skills to do what you do. They appreciate your talent and designs and will be willing to pay.
So let’s break it down and use an example to explain the formula. To help you implement this in your business, I’ve come up with a handy pricing template you can download below!
Let’s use making a necklace as the example.
If I buy 100 beads for $10 and pay $3 for shipping, an easy way of working out the cost of each bead is: $10 + $3 = $13/100 = $0.13.
So if I use 6 beads in this necklace, I should include: $0.13 x 6 = $0.78 into the materials cost of the necklace.
Similarly, if I buy 10m metal chain for $20 and $5 for shipping, how much do I charge, if I use 50cm for the necklace?
$20 + $5 = $25/10m
$2.5 = 1m
$? = 0.5m
$2.5/2 = $1.25 is the materials cost for the chain and so forth for all your materials used.
Don’t forget to include every little material no matter how small – even if it’s a jump ring, crimp or clasp – include everything! You paid for these materials, so they need to be accounted for and included in the price of your item.
The cost of labour can be a tricky component to calculate. The cost of labour should cover the things you need to live. To gain a good understanding of what components make up the cost of labour, it’s a good idea to look at the figure wholelistically on a yearly basis. Let’s have a look at the categories below and figure out how much you spend on average per week for these line items.
This weekly amount will need to be divided by how many hours you work during an average work, say 40 hours. This figure is the amount you need to charge per hour, if you wish to cover all your living costs.
After you’ve worked out these items on a weekly basis, you need to multiply this amount by 52 weeks. The reason I say 52, and not 48 is, if you’d like to take a 4 week vacation – you still got to have money to cover those 4 weeks you’re not working. Working out this 52 week figure, will enable you to see the bigger picture of how much you should be earning to maintain your current lifestyle.
To help you, my awesome Nerd Burgers, I’ve prepared a bonus worksheet you can download below. It includes a template with all the categories below and it’s all beautifully formula linked, so all you gotta do, is plug in your numbers and you’ll get your labour cost per hour, so let’s get started with an example:
Skye lives in Melbourne in a shared apartment with her best friend. She’s a jewellery maker and works in a rented studio space shared with a few other jewellers. She’s single and owns a car.
- Mortgage/rent – Skype splits this 50/50 and pays $250/week
- Bond – (4 weeks rent), $21/week
- Council fees – $42/week
- Strata fees – $34/week
- Utilities (Gas, electricity, water) -$12.5/week
- Telephone/Mobile – $15/week
- Internet – $15/week
- Insurance (Home and/or contents) – $8/week
- Petrol – $50/week
- Service charges – $120/6 months, $5/week
- Parking/Tolls – $20/week
- Insurance/Registration – $20/week
- Public transport – $20/week
- Taxis – $0-$15/week
Subtotal: $20 – $35
- Staple groceries – $80/week
- Snacks – $10/week
- Takeaway/Restaurants – $50/week
- Drinks & alcohol – $30/week
- Credit card annual fees – $2/week
- Credit card interest – $0/week
- Bank fees – $0/week
- Savings – $100/week
- Cosmetics/Hygiene – $10/week
- Clothes/Shoes – $20/week
- Newspapers/magazines – $5/week
- Books/Music – $10/week
- Entertainment – $40/week
- Gifts – $20/week
- Hobbies – $10/week
- Holidays – $50/week
CHILDREN – as Skye doesn’t have any children, this category is $0
- School fees
- Child care
- Extracurricular activities
- Pocket money
- Doctor – $0/week – covered under health insurance
- Dentist – $0/week – covered under health insurance
- Health insurance – $25/week
- Optometrist – $0/week – covered under health insurance
- Other health professional – $0/week
- Gym – $10/week
- Medicine – $6/week
$966.5/40 = $25/hour
(Remember we haven’t yet taken in account paying personal taxes yet! So really, your hourly rate needs to be a bit higher, because the $25 figure we calculated is supposed to be your take home pay, to (at least) break even with your living expenses)
Overheads are indirect expenses incurred to design, create or manufacture your product, that are not directly traceable to any individual item. Continuing with our example with Skye, here’s some examples of her overhead costs which might include:
- Professional service fees
- Bank fees/charges
- Rent/insurance/utilities for her shared studio space
- Web development
- Fair/market fees
- Display props
- Office supplies
- Packaging such a string, tape etc that is difficult to trace
Fixed overheads are generally costs that don’t vary that much from month to month, so they should be relatively straightforward for you to take an average over the last few months.
As for variable costs, since they vary depending on the volume you produce, take an average of your total over the last few months to give you a ball park figure.
Add the fixed and variable figures together and this is your total for the month!
Say Skye’s total overhead costs are $300/month. The simplest way to recoup these costs, is for her to estimate how many items she would sell per month and add a little of the overhead to the cost of each product. So if she sells 100 items of jewellery a month, she’ll add $300/100 = $3 to each item.
If you sell a variety of items at different price points, it might not make sense to add that same extra $3 to a lower price item and a higher priced item. Another method you can recoup your overhead costs is through product volume.
Skye would leave her product costs as is, and focus on reaching specific quantity sales goals. Skye’s overhead cost are $300/month. For simplicity sake, let’s assume that Skye only sells necklaces that retail for $100 and her materials and labour costs are $40.
- Sale of necklace # 1 = $60 towards overhead
- Sale of necklace # 2 = $60 towards overhead
- Sale of necklace # 3 = $60 towards overhead
- Sale of necklace # 4 = $60 towards overhead
- Sale of necklace # 5 = $60 towards overhead
- Sale of necklace # 6 = $60 towards profit
When you lay it out like this, you can see the importance of accounting for overhead. Without really analysing your costs, you’re tricked into thinking you’ve made $360 profit, but really, when you take into account overheads, you’ve only made $60 profit.
You may think it’s a little strange to include an additional profit component. You’re probably thinking: Isn’t that what the multiplier of 2 is? Although that is true if you are only selling at the retail price, note that in our formula for the Wholesale price, that there is no multiplier? If you want to start wholesaling, you need to include a “buffer” percentage that will allow for extra funds to cover personal development costs (what if you want to take a course to improve your marketing skills?), business growth, theft, breakages etc. Generally in retail, this ranges from 8 – 15% – so have a play around to see what percentage you feel comfortable with.
Don’t forget to add any sales tax or GST (if you’re in Australia) and postage costs on top of your final sale price!
That’s it! As always, not everything may be applicable to your business, so feel free to edit and add things as you see fit. I hope that this guide has been helpful and if you have any feedback or comments, I’d love to hear from you! Please share your thoughts or questions in the comments below. Also, if you haven’t already, go grab a copy of your pricing template to help you apply this pricing tutorial to your business!
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