Posted: Tue 11th Aug 2020
Selling homemade goods? How you price your products can be the difference between a business with potential and one that remains a hobby.
Pricing is one of the biggest challenges for new business owners. If your prices are too low, you won't make a profit and your business might not be sustainable. Price your business too high and customers will go elsewhere.
As Joanne Dewberry points out in her book, Crafting a Successful Small Business, businesses that sell homemade goods have the additional hurdle of competing with people who aren't selling full time. Many sellers on Amazon, eBay or Etsy will price their creations cheaply because they're not registered as a business and only sell for fun.
"This can make it harder for those who play by the rules and, more importantly, know their product's value. Do not be lured into lowering your prices - remember you are crafting a successful small business," Joanne writes.
There are a lot of pricing formulas that you can experiment with. However, when you're making homemade goods, it's essential to choose a formula that factors in the cost of your own time.
An example pricing formula would be:
(Base production cost x Mark-up)
+ Labour costs
+ Seller fees
= Product price
Your base production cost is how much it costs you to make a single item. This is a vital part of pricing, because it lets you know the minimum price you can charge without making a loss on your product.
The first step is to sit down and make a list of the materials you would use to make a single product.
If you make bags for example, this list might include fabric, buttons, labels, swing tags and string. Remember to include any materials you use for packaging and postage too.
Then, you need to think about the amount you use per product.
For items like labels or buttons, the calculations should be relatively simple because you can count how many you use each time. Materials like paint or thread can be much harder to measure, but try to estimate how many products you can produce from a single order.
The next step is to look at the price of each item on your materials list. You can use the last unit cost you paid or, if the price fluctuates a lot, look at your purchase history and calculate an average.
Remember to factor in hidden costs like shipping into your materials prices or your cost of production will seem lower than it actually is.
Multiply your unit price by how much you use per product. This gives you the total cost per material.
For example, if your unit price for a button is £0.021 and you use four per bag, your total cost for this material would be £0.084.
Your last step is to add up the material costs to get your base production cost. That means you'll understand exactly how much it's costing you to make your product.
Your mark-up is the amount added to your production cost to decide on your selling price. A mark-up is usually a percentage.
"I didn't get it right to start with, but it's trial and error," said Sarah Turner, founder of Little Beau Sheep.
"Once you've mapped out your overall cost, roughly you need to double it to obtain your wholesale price and then double it again to reach your retail price. If you're not bothered about wholesaling then these figures can be adjusted. Everyone's idea of what is acceptable profit is different, so there isn't really a hard and fast rule."
It's easy to ignore the time you put into your business when you're creating something you love. But that can mean there's not enough left over to cover your wages.
You can calculate your labour costs by using the formula: Manufacturing Time x Hourly Rate. If it takes you three hours to make a product and your rate is £10 per hour, your labour costs are £30.
Following a pricing formula like the one above will help to make sure you can sell your homemade products and make a profit. However, it's up to you to research other sellers, find out what they're charging and tweak your product markups where relevant.
Some questions to ask:
How much are competitors charging for a similar product?
How does the quality compare to your product?
Are they using sustainable materials or organic ingredients that might justify a higher price?
Do they charge for shipping or incorporate the cost into the overall price?
For businesses making homemade goods, your unique selling point (USP) is that each item has been made by you and it's not mass produced. Your prices should reflect the quality of your own work, so don't undercharge just to match other sellers. If your price is too low, customers won't feel confident that your product is well made.
The market for original and homemade products is thriving. The huge success of Not on the High Street demonstrates that many consumers value high quality, bespoke items over cheaper options.
If you want to sell for a higher price than the competition, there are a number of ways you can make your items feel premium and attract customers who are looking for something special.
Include a short, handwritten note with each order
Delight customers by including a gift box or beautiful packaging
Offer bespoke options at an additional cost, like the chance to include a personal message on your product's label
Make your packaging eco-friendly to attract sustainable shoppers
Include a small gift with orders above a certain amount
If you want to turn your passion for homemade goods into a profitable business, it's important to spend time finding the right prices.
"Some people love to create and are just happy to have their creative item go to a new home. I was a bit guilty of that to start with. But if you want to sell in shops and make it a proper business, then you have to get your prices right," Sarah said.
Sarah reviews her pricing annually to benchmark it against material costs, but she recommends reviewing it every month or two when you first start out.
Platforms like Etsy are useful because the costs are low if you aren't selling anything. That gives you plenty of space to test what works.
"See what happens and test and learn. Just have a go and see where it leads you!"
Take the first step to successfully starting and growing your business.