Pricing Formulas


Bookkeeping for Crafters


Lesson Info

Pricing Formulas

Let's look at a couple of pricing formulas uh, I've got sort of two approaches when it comes to pricing, I've got the bottom up approach and I've got the top down approach. The bottom up approach is where I always started, where you basically saw us use the product profit calculator um, the price should equal you're freelance rate times the number of hours it took to make plus materials, so that was that cost that came up in the product profit calculator. So, um, you know, if we started with that with the small ham, my price would have had to have been around two hundred fifty dollars and outside of a gallery setting, and there aren't too many galleries having plush meet shows at any given time. Uh, that price doesn't really work, so uh, then I would need oh, I just want to make a little note here that, um when you're calculating the cost of your materials for this, um, it's good to be able to include, uh, any costs incurred to get those materials to you, so not just the cost of the ma...

terials, but what was the shipping on those materials? Or does it require you to take time out of your own day and go drive somewhere and picked them up that's part of your freelance rate to um so when you're calculating that materials cost it's not just the cost of the actual stuff, it's the cost of the stuff, plus what it takes to get it into your work space, right? Um, so some people just at a markup of ten percent to cover the materials costs if they're not going out and getting themselves of it's just shipping, um, but very often people include the shipping cost anyway, just a note in case you're not, um so then you look at that, you say, okay, I can't charge two hundred fifty dollars for a tiny stuffed ham to everyone in the world. I could probably only sell that a couple of times a year. Uh, what are these actually going to go for? And this is the top down approach. This is where you, um, where you are looking at the price that you think the market will bear, and when I say the market, I don't mean the general public that's, not your market nobody's market is the general public, unless you're like walmart or target or something, and no crafter is walmart or target, but you've gotta narrow this down at least atleast a little bit, um, so it's the price that you think your market will bear for this item, minus your expenses. Divided by the hours it takes to make you notice I wrote expenses there I did not write materials like I did in the first equation because this has to take into account all of your business expenses because here you're getting an hourly wage that this will hand you um this does not include your freelance rate in it already you're freelance rate includes your business and your personal expenses already this equation doesn't because this is spitting out an hourly wage so you need to take the price you think the market will bear subtract the expenses incurred to get there and I'll get into how we calculate that in a minute this is a little more complicated than the bottom up approach that's why I like to do the bottom up approach um divided by the number of ours you get an hourly wage so in this example I have earrings that I think I can price at one hundred fifty dollars uh the materials for those are twenty five dollars my business costs about a thousand dollars a month to run in overhead right? That's not those cost of goods sold expenses because that's already wrapped up in your materials but it's the rest of those expenses the marketing and selling the general administrative expenses um it takes me about three hours to make one pair and I can make thirty pairs per month um I'm figuring that I'm spending ninety hours a month crafting again, that's. One of those, like twenty hours a week, twenty to twenty five hours a week. Figures. So if I were to just take my materials and not my full expenses one hundred fifty dollars, minus my materials divided by three hours. Forty two bucks an hour. Not too shabby, right? That's pretty good. Um, remember, that was the seven dollars and forty five cents that I got on the very first lied in the very first segment of this class. What I actually need to be looking at is all of my expenses. Um, so we've got everything for the month. So if I make thirty pairs per month and I sell all of them, this is assuming I sell all of them. I can make forty five hundred dollars, minus the cost of materials. Times thirty, which in this case, is seven. Fifty, um, minus my business overhead. Those other expenses, right? A thousand dollars and then divided by one hundred and eighty. That comes out to fifteen bucks. Twenty eight an hour. That's. More realistic. So this is another way to sort of back into an hourly wage. If you already know what the price of your product is. So we covered a lot of this stuff in the product profitability section, which is why I love it's so so much. Um but if you already have products that you're selling at a particular price um and you want to find out like, well, what does that actually get me an hour? This is the equation that you can use for that. Um so how do you know what price your market will bear? Like how do you even know what price to a sign at the beginning of all this? Um, again, you need to do a little bit of market research. Um, in which case, you need to know who and where your market is. Do they shop at particular stores? Do they read certain magazine? Zor blog's? Um what do, uh what does other jewelry in those stores or other jewelry that's displayed in those magazines cost uh, what sort of the average there and where do you think your earrings compare to those other hearings? Are there on the higher end of things or are they on the lower end of things? Um, and then sort of guessing your price there, and then, of course, you will end up doing some market testing um you're gonna have those prices up there for a while and if things were going swimmingly you could test it you could bump it up a little bit um if they're not doing well, you could bring it down a little bit or if you don't think it's doing well because you're in the wrong market you could go to another market and like triple those prices right? Um marketing including pricing is unfortunately a little more of an art than a science um you know, there are equations that you can start from but figuring out the price for your goods is really based on making sure that you're reaching the right people in the right way and that all of the pieces of your marketing your product et cetera are all in harmony with each other that they all present a unified um, idea unified value proposition to your customer uhm nobody should look at your packaging and be like whoa that's a lot nicer than I expected to receive that lamp you know like or vice versa like this's really cruddy you know, I really expected you know this to look a lot better to sound a lot better or um you know, this customer service is terrible or whatever. Um it should all really be in line uh with each other so because you've taken your business expenses out of this already this hourly wage at the bottom um that is your sort of take home pay s o that would what that would be what you need to cover your personal expenses. If you were going to pay yourself as an employees. This is how much you could make an hour to cover your rent and your groceries and your clothing, your transportation and all that.

Class Description

It is common to be intimidated by math and money, but managing your business’s finances doesn’t have to feel overwhelming. Bookkeeping for Crafters with Lauren Venell will give you the confidence and skills you need to start and maintain your own small business ledger.

Lauren is an artist and educator committed to making financial solvency accessible to independent entrepreneurs. In Bookkeeping for Crafters you’ll learn the basics of managing your money and how doing it yourself can reveal important opportunities for your business.

You’ll learn about managing different types of income and expense accounts and how to painlessly prepare for tax time. Lauren will make predicting fluctuations in your cash flow straightforward and easy while helping you develop a system that is right for you – even if you prefer pen and paper over spreadsheets.

If you are ready to change your relationship to money and manage a ledger that is customized to the way you do business – this is the class for you.

Be sure to check out Lauren's other course Bookkeeping for Etsy Sellers.