How Much Should You Pay Yourself an Hour?
Hello everyone so we are on lesson three how much should you pay yourself an hour at question, right? Alright though today's goal is really simple, we're going to figure out how much you need to pay yourself an hour in order to make a living selling what you make right should be pretty simple again we're going to do a little math but it's cool so in the last lesson we set your monthly break even for the business right the number that you have to hit every month to break even and not just break even with the business but to pay yourself a cz well and we set your make a living number so the number you need to make in a year you're total sales to make a living selling what you make. So just to recap we are in session one set the foundation for your sustainable business and we're in lesson three how much did you pay yourself in our so here's? The reality pricing can make or break your business for lots of reasons right? If you're not pricing so that your profitable business isn't sustainab...
le the flip side in order to make a living selling what you make you need to sell your products, you need to sell products that people want to buy at a price they're willing to pay and you need to make a profit of that price so products that people want to buy and we're going to deal with that in some future lessons, toots that's really important, right? He will actually have to want to buy your stuff, but we want to make sure that we're setting it at a price that they're willing to pay and that that price makes you a prophet and you can't make a living selling what you make if you aren't paying yourself a living wage when it comes to pricing your product, this is where so many makers start off on the wrong foot to begin with because they're not pricing to pay themselves. They're certainly not pricing to pay themselves a living wage, so I want to start with our basic pricing formula. You guys have probably seen this or variations of this, and I can go on and on about why I hate all of the other ones, but we're going to work on this one. This isn't set our final price, but it establishes our bottom line benchmark. It tells us where are prices need to be above in order to make a living so in our pricing formula materials plus labor plus overhead plus profit, all of those get us to a wholesale price, the wholesale price times at least two is your retail price now I know some of you are probably watching this online and thinking, but meghan I don't ever want to sell wholesale, right? So I can skip this step, right? What you going to dio if anthropology calls, you write like, hey, I love your product, I need your wholesale price plus a thirty percent discount. I know people this has happened to, and I want a thousand of them. They was anthropology, right? You can't say no, they didn't make any money, they worked really hard to lose money. They would have been better off not making the product at all. So I don't care where you think you're going to end up, make sure you've got the wholesale price in the retail price. That's really not what we're talking about today today, I want to talk about this labor peace because it's one that people don't always dive into and really understand and frequently undercharged materials are pretty easy to calculate, right? You can figure that out labor that's a little trickier, so labor is, simply put, your production time times your hourly rate. Now, I know that for some of the people watching this and even some people in the audience, you're not doing the manufacturing yourself, and we're going to deal with that. We'll come back to that one because it's a separate circumstance, but if you're doing any of the making of your product, you need to live and die by this right laborers production time times hourly rate so that's what we're gonna work on today is setting the hourly rate but it's also really important to just kind of understand for the big picture of your business who is making the product right? So if you are making the product or sometimes have to make the product are you getting paid enough to make it worthwhile? So I have a production assistant who works for me, but a couple of years ago I did a sale on one king's lane on their website. I had five days to shift everything that's sold in the sale and they wanted it they believe was thirty percent off of my wholesale price. My assistant got sick that week. You made all of those pieces may but because I had done the math, I made money that week, even at thirty percent off of my wholesale price, right? I made money, I did all the work. I'm not gonna lie. It was it was pretty one week, but I got paid for that week, right? So even if your goal is eventually to hand off production to assistant, if you're making your products here, chances are at some point or another, you might have to make something we wanna make sure that you're getting paid for it, right and if someone else is making your product, if you're getting things manufactured, are you getting paid for all the time that you're putting into the other areas of the business looking at monica and this one she's shaking her head here, right? So you still need to figure out how to make sure that you get paid on every product that is sold. And so typically, one of the reasons that I liked calculating your own hourly rate because even if you're not making it, chances are an employee is getting paid less than you write. So usually if an employee's making something, you're still getting paid well, comeback teo people who aren't making it all in a minute, but we want to make sure that you're getting paid for all the time in your business. And so if you think about it in your business, you could really divide up your time into production time and non production time write the time that products are getting made, whether it's about you or someone else and the time that's spent on all of the other parts of your business. I know a lot of us. When we started, we had this fantasy right going to be in my studio all day, we're gonna take whatever I want somehow money is just gonna look fall from the ceiling. If you figure that one out you come up here and teaches class for me because I haven't got that far yet right? You have to balance those other parts of your business or you have to make enough money to pay someone to handle those other parts of your business right? But we're talking about pricing production time is what I call your billable hours so if you look at the law field billable hours are any time when they work with a client law firms one billable hours that brings the price up right? So for you guys production time is your billable hours you can't say to a customer well, you should pay me more for this product because I spent ten hours marketing it right? You can't do that truthfully you can't say to the customer you should pay me more this product because I spent ten hours making it the reality is you can't you have to demonstrate the value other ways but you can at least calculate those ten hours you said making it into your in your time so when I ask you guys a couple questions now you can go ahead and work in your workbooks all these questions are in here because they were going to help us do the math that we need to dio to figure out your hourly rage wage so how many hours do you spend a week on your business how about you guys? How many hours you spend one hundred business? Give it a couple of examples I'm working at least for now, at least forty to sixty okay, yeah, all right. And for any of you aren't full time and it sounds like everything everyone in here, regardless of whether they have another governor, are putting in that full time. If you're not full time if you were full time, how long would you be spending on your business? And again be realistic? Like, quit my day job and spent ten hours a week in my business and sit on the beach the rest of the time can if you figure that out you come, you go hang out with me here, then once you know how many hours you're working, you need to figure out how many hours of production do you do in a normal week. Normal is really hard, right? But think about how many weeks you're actually around, you know? So for me, I do a lot of travel, so all those travel weeks out, so when I'm home and in the studio, how many hours my spending on production something hours you're spending on production week? Um, do you consider preparing the graphics for I mean, okay, yeah, anything that goes into making your product it's production time I don't know when I include that that's variable and so that's something you have to figure out, and I would say also, if you have specific sourcing needs for your materials, that should be included in there, too. You know, I started this new line where I'm working with a lot of stones, I spent a lot of times forcing stones. Now that has to factor into the hourly rate, so figure out how many hours of production you're doing in a normal week, anything that involves the making of your piece. So that's, your first step so we're gonna do now is we're gonna calcula calculate your hourly rate, and what we're going to dio is we're going to calculate your annual labor costs. We're gonna do that by going to your cost of living break even so, if you remember, in lesson to cost of living was the second number that how much do you have to pay yourself? Right? And since we didn't monthly, we're gonna most white twelve to get annually, but we're going to add back in our savings and profit and our taxes, because if you're getting paid, the government wants to get paid to write, so we're gonna put that in there and we'll hot seat this will break it down for you guys in a little more detail. It's also all in your workbooks too, so we're going to figure out how many normal weeks you have in a year so weeks where you're putting in a full time job fulton yeah full time job in the studio making products slash doing all the other parts of your business right? So fifty two weeks in the year minus vacation holidays if you're doing shows if your conferences your here a creative live with them drop that week out so figuring out how many weeks you're actually in there now again, all of this might change if you have employees were here outsourcing you know, for me I only have maybe twenty five thirty weeks of normal time, but I have an assistant who works for me she it's fifty hours a week she gets some vacation time too, so you know, there are other factors as well, but for you we're gonna start with just us how many hours you work in a week, then we're going to divide that so we're going to take your annual labor cost that's how much you want to pay yourself a year and divided by the number of normal working weeks in a year right makes sense so far that's going to get us to our labor cost per week how much you need to pay yourself every week on the weeks that you're actually making stuff cause and that's our billable hours so it looks a little something like this right? We'll come back to this in a minute when we hot seat so calculator labor cost per week annual labor costs divided by number of normal weeks per year and that gets you your labor per week and they were going to buy that up by the number of production hours you do in a week that's why that's really important to know again it's an estimate but we want to be pretty close better to overestimate your production of horse than underestimate them and that's going to get us to your hourly rate welcome little glassy eyed so we're gonna do some math so who wants to come up here for a hot seat? All right let's do our shell you look scared that guy though this is one of those things that makes so much more sense once you start crunching the numbers all right, so let's start with what's your annual labor cost how much do you want the business to pay you a year so not any of the business sense is just how much do you want to pay you a year? Um thirty thousand you have teo there's no wrong answer here, right? So that is your annual labor cost and how many weeks would you say are normal normal production weeks? I am where you're working on the business for the whole week full time probably fifty weeks do you want it to be fifty weeks question to write two weeks of vacation is not very much vacation right fifty two weeks a lot of time well my husband has a real job so he only gets two weeks of vacation vacation I want more than two weeks of vacation you want your children to sing I'll take four weeks ok you have forty eight weeks that you're working you will build you up to that one and you're not traveling any show is doing any other stuff where you're not in the studio so I actually come to creative life all the time right there are your number smaller how many weeks a year you hear hangout creative live learning from awesome instructor's let's say it's forty four weeks and I'm worried about you working forty four weeks that's better all right so that gets us to can't do math all stuck in my head so I have a handy calculator so you have to make six hundred and eighty one dollars a week okay right for your production weeks so actually the well your incomes then we'll hire because we have all those other factors into but to pay yourself you need to make some hundred eighty one dollars a week okay so how many production hours are you putting in a week and if you're not sure maybe kind of divide good work backwards how many hours are you kindling the marketing the the other aspects of your business and whatever's leftover becomes production hours you can also work it that way I'm not making any where near six hundred eighty dollars a week said that my production time ten hours a week I would say and so are you setting the rest of the time on marketing? Yeah okay, I would say that it's probably going to have to shift to get you to the number where you want to go I think fifty fifty is probably a better split because the other thing that I I want us to do to is obviously we have to spend time with all this business we have to market we have to do all those things but thirty hours a week on marketing and all that other stuff to not even be making this amount of money we want to shift that right way more efficient in your marketing so in the end you're probably going to spend more time on production so let's just say for now that we're going to cut it fifty fifty okay, right? So you doing twenty hours a week of production? I can't write, so that means take this number divide by twenty so you have to pay yourself thirty four dollars an hour are you paying yourself thirty four dollars I thirty dollars an hour so you're close? Yeah, I have to say from a personal standpoint even this number feels a little low to me um but it also matches up with the kind of your goals so does that make sense? Yes. Okay, awesome perfect. Thank you thinks anyone else want to run it? Yeah, we should do it with you because your numbers are a little differently. I think that'll be really good you know what they were before so the only thing that we really need is that what you want to pay yourself a year and I believe you said seventy five ok yeah. So your annual labor day a little better seventy five k and how many production like normal weeks where you just working on the business? Forty forty okay, so that means that we are so you need to be at that's what? You need to pay yourself a week based on your production week in the end, if you were actually drawing a salary it wouldn't quite be this number because he would draw salary every week. But in terms of calculating this number this is where we need to be at. So then how many hours a week are you putting in for production? About thirty. Thirty okay, someone divide the number by thirty so you have to pay yourself sixty two fifty an hour what do you mean sell fifty? Okay, see you bump it up a little bit tio hit your goal can I ask you absolutely when I was doing this calculation, I went back and looked at the numbers that we did before, like it's like a quarter of a million dollars, right? And then I did it tames the forty and did that whole thing that's like two hundred eight dollars an hour. But is that those aren't the real numbers that we want to use? Yeah. What's gonna happen is that eventually all those other numbers get factored into other elements of the price. So, yeah, that's a great question. So all of the business expenses, they're getting calculated anything that the material costs goes into the materials part of the pricing equation, anything that's, all of your other business senses goes into overhead. Profit actually can go into the prophet peace, right? And then then we also have an additional margin if you are selling pieces that retail price, you know, but your profitable wholesale you that the mark up from there too. So this is just making sure that the right the labor cost is paying you an hour and all of that other stuff gets covered in the other parts. Yeah, yeah, thank you. Good question, though, thank you for asking that you think that clarifies it for a lot of people, so when you guys run these numbers how does that differ from what you've been paying yourself you were pretty close you're pretty close right? So you have to come up a little bit but not too bad what about you guys? Do you feel like you're probably closer you off because I've taken a tick in your building and ground are awesome I know this is what my personal mission to get everyone to pay themselves more an hour so it's really nice to do this and see that we're at least kind of close to where you have to be to hit that number that you're working on so and if you're not that's what that's what you going to do is we kind of continue to shift your prices but now we want to know that we have a labor hours but if your labor price for hours if you're making the work you're getting paid and you're actually getting paid what you need to make a living right? So I want to just really quickly talk about a couple of other scenarios so if you have an employee or contractor doing production hours in addition to your regular production ours this is where it starts to get a little bit trickier and we're actually gonna come back and talk about this in the future when we talk more about building a production strategy but if you are then what happens is you get more billable hours in the week and then you can go ahead and shift out. You know what? You're getting paid, what? Your employees getting paid. So now you're number michael up, you have forty weeks, but instead of you're thirty hours of production, that might be sixty hours of production. Thirty from employees, thirty for you or seventy, maybe you're bringing that employees on full time, right? I would still keep this rate the same even if you're bringing in an employee. And the reason is just for that story. I told you guys the beginning, right? We'll get sick for the week. Guess who makes all the jewellery for the new one? King's lane order has to get out. I still get paid, right? And then the nice thing is, chances are your employees rate is going to be lower than this. Your employees rate should never be higher than what you're paying yourself an hour, right? You're you're the boss, you're in charge. We want to pay our employees well, but you're doing your math wrong if you're making less than they are. So, you know, you still calculated this rate and then years and have a little bit of extra profit when the employees makes things that's, actually, how we grow the best that's, right, and so it also shifts it so that you could theoretically do less production hours so you could spend more time on the other aspects of the business. Conversely, and we'll talk about this later, too. You could actually hire an employee to dio other parts of the business so that you can up your production ours right again. I would not advocate doing that to drive down this price. I would do that so that you could make more product and boost your sails, but it's another option for you. Now, if you're not making the products yourself and never will be who's in that boat, here you are, anyone else? Okay, so you're going to do this a little bit differently. We want to make sure that you are still getting paid, so you're inderal labor costs. What is the business? What you want the business to pay you a year? Once we've added in the savings and bubble block? Yeah, we're talking eighty six thousand five hundred, so we're your new? Yeah, so that's the cost of living plus your savings profit in texas, so eighty six and you're gonna figure out how many pieces you're going to sell per year, and you could do that by figuring out what you make a living number is dividing that by your average selling price, right? And it's it'll fluctuate cause you could actually do it by taking out your late like take your labor out of the making make a living number divided by your average selling point I tell you how many pieces you need to sell a year then you're going tio divide what you need to make by the number of pieces that you're selling year and add that number onto all of it that makes sense sort of so let's do it let's actually bring you up here? Because it's, just easier to even if we ballpark this number, I think it's going to make more sense if we just do it. Okay, so you need to make that much here. How much does the business need to bring in? The business needs to bring in at least sixty grand a year. You okay? So the business seems to bring in sixty grand and what's your average selling price about fifty five. Okay, so that means you need to sell, see that right thousand ninety pieces here? Totally doable, actually, right? But when you start to do things like this it's like that's achievable, I can't get there, right? Um but that doesn't factor in paying you right, so what we can actually do that is take you see, I'm doing this right, divided by so you would need to add in seventy eight dollars per piece that's gonna change your price significantly right so we're gonna we're gonna flip this we're going to dio we knew the math a different way so if we total these and then the guy but you're fifty five this is really where you need to be that's honey pieces you really need to sell a year but that's assuming that on the price per piece you are making enough profit so if we take this subtract your actual costs for the peace and figure out what your profit is that's got to get you to that does that make sense? Yeah yeah do you know is that does that work have you done about? Well the thing that makes it tricky is now that we have three items in the right so then that's what makes it right so you might have to actually sit down and run a couple different scenarios based on if we sell more of this if we sell more of that it's a little bit trickier when you're not making the product yourself because there's no hourly wage but you're kind of sit here and play around with these numbers to figure out where you need to be yeah so how does it compare to what you're currently selling um yeah we're not wait that number up yeah you're awesome totally got perfect thank you great and so really at the end of the day and this is where it comes in with you and the really work comes in with everyone the final price needs to reflect what the customer is willing to pay right? So we're going to run these calculations we're going to set your new hourly rate but then we're going to come in in our next couple of lessons and we're actually gonna look at what the who the customer isn't what they're willing to pay because what we're charging has to be less than what they're really tight right? We have to actually make sure that we're making some money there so that's as our final price but our hourly make sure that we're getting paid so I want you guys to plug your new hourly rate into the pricing formula and see how it impacts your price so let's figure how in your pricing formula how long's it take you to make a bag um two and a half hours okay so what's that in your new labour that's just sewing sorry um I it's about six hours six hours naked back and I gotta pick my job off the florida uh so what's that what we say your labor it wass sixty to sixty two okay, so what is that? Yeah, you get a calculator? Yeah, so six hours times sixty two so your labor cost per bag three hundred seventy two dollars what are you and then what your what? Your materials, uh, initially came out to about sixty dollars, so just for labor and materials were at four. Thirty you what's the price. Your bags right now. Seven fifty retailer wholesale that's retail. Okay, so you're not quite profitable wholesale, right? We're a little because of your half year. You're a little less than that. So you might have tio come up a little because the thing is, you know, that ten dollars, difference when you're setting six hours on the product that's sixty more dollars that you have to account for. So that's something to keep in mind. So you're probably going to come up some. Yeah, yeah, definitely. So the thie customizable bags that usually take a lot more time. I'm kind of averaging the both together. Hey, I charge a lot more for those, okay? And the just the basics you know, I charge seven. Fifty for those. Okay, so the the basics don't necessarily take you the six hours. No, not perfect. Okay, that's good. So when you guys are calculating labor costs don't average out. If you have pieces that take you very different. Go per piece you should know, especially in the beginning, what each, how long each piece takes you to make you guys probably some of you have taken my classes have heard me talk about this you know when I was first starting out I had a clipboard in my studio time in timeout when I made how many pieces I could tell you down to the minute how long it took me to make a pair of earrings name in a pair of earrings that's a fifteen minute pair of earrings you should be able to do that in your business for every single product in your line. The good news is that you don't have you that forever right once we do it once we've established your baseline once we've established your value based prices you could wiggle it a little right we might come in and check on it every once for all that you can wait let but don't averaged out no per piece because while you might have some that are making you more money you want a room to wiggle another price a different way so it's really important to know that for every single piece so is anyone running these numbers and getting a price that scares them well feeling okay you're looking a little uh I only need to press okay, what do you have feeling really right right now uh right now I believe fine okay, but they're pretty labor intensive of okay, so you're maybe calculating our labor right? But you're not actually putting it all in there like a good thing that the other piece right? So if you know how much I mean to pay yourself you have to be firm and pay yourself so what do you currently charging for like one of your like bigger necklaces make a lot of houses the black one on top of sixty really yeah sixty, sixty dollars and how I was taking to make that I actually haven't calculated good who okay, so you have yeah to go back in there and really look at the labor right on that because I'm guessing that if you're trying to pay yourself seven five dollars an hour and you have all the other factors you're not paying yourself enough I would venture a guess that you're you probably should be at least double if not triple where you're at right now so then if you have to adjust your prices that much, the next question is does it price you out of your current market? Where you selling right now? Um I'm not actually selling anywhere yet I just started the business so I'm trying tio get in touch with boutiques that would be a good market for me okay, so that's a good sign that you haven't really started yet because it makes it so much easier to read those prices but also if you're retailing that for sixty your wholesale price is going to be thirty we're really most critiques are gonna want to mark up a little more. See my movie? I like twenty five twenty eight. Are you making any money at that wholesale price? No. Okay, yeah. So I think in your case the good news is that you are probably looking at the right markets, but your prices not there that's something even mine, but it's very possible that as you're raising your prices that it's going price you out of the current market, I see this with a lot of people. I particularly see this with a lot of people who started a maxi the nature of the game when you realized where your prices need to be. It kind of brings you out of that marketplace. So if the market can't support the price that you need to charge to make a living, selling what you make and it's not the right market for you, this is really, really important. I don't care if you love it. I don't care if there's some nostalgia it's what launched you and blah, blah, blah. If it can't support the price, he needs to charge to make a living. Selling what you make, not the right market for you. And that's, why we're gonna be talking about in the next two lessons so we're going to get to know your ideal customer that we can figure out where they shop and what they're willing to spend on your product that we could make sure that you're actually getting paid what you need to get paid what about your homework for this lesson? I want you to calculate your new hourly rate, right? That's the that's, the big piece how what should you actually be paying yourself an hour in order to make a living and then using your new hourly rate? I want you to adjust the price of one of your products just start with one for now. Eventually we're gonna overhaul them all, but I want you to start with one and I want you to share that product on social media with the hashtag make love cell that's our hashtag and where it can be purchased, so I want you to go ahead and just put that product out there with that new price that's how we're going to get worse going to rip the band aid off here, right? So figure out your hourly rate, adjust the price and put it on social media make sure to use our hashtag and I'll see you guys in the next lesson.