The Price is Right --- 3 steps to making sure you’re making money!
Have you given intentional thought to the way you price your products?
Do you know how much (if any) money you’re making on each product you sell?
Is your pricing structure worth the time and energy you put into what you create or is it time to raise your prices?
If you haven’t already, it’s time to put give some thought to your pricing structure.
While this task may seem daunting, we have good news! Michelle from @MadeByMichelleCo is an expert in pricing handmade goods and has put together a simple yet informative Mini-Course to teach you how to price your products effectively. So, without further ado, let’s learn from Michelle!
Hello! I’m Michelle of Made by Michelle, a children’s apparel and monogram shop. I’m also a mama to two very little boys who inspired the creation of this little shop (do you know how hard it is to find cute boy clothes??).
We’re all experts in our crafts here. However, if you have opened shop already you know that owning a small business is MUCH more than creating your products. How do you price your items? Are you actually *making* money? What are all those Etsy “fees?” And what about custom requests? Should you charge more? These are some of the questions we’re going to look at today, including how to calculate your profit margin-- basically, a percentage that shows how profitable something is compared to how much it sells for. By the end, you’ll be ready to set up a few simple spreadsheets to organize your expenses and calculate your profitability!
Take a deep breath, and open up a good, old-fashioned Excel spreadsheet or use Google Sheets (my preference) to organize all this information.
1. Calculate your expenses
First, you’re going to need to calculate your expenses. Make a list of all the supplies you normally buy in one column (vinyl, t-shirts, fonts, supplies for my Silhouette Cameo, etc.) For each item you’re going to calculate how much it costs you per unit and put that in the next column--either for 1 item, cost per square inch, or “lifetime” costs.
Some of these will be easy to calculate, but then there’s the more discreet supplies that you absolutely use and pay for that are harder to quantify per unit--for me, mats, blades, my Silhouette Cameo, and fonts or graphics. For these, you’re going to think in terms of lifetime and divide by the cost per day. For example, the lifespan of a mat might be 3 months. Let’s say I buy one for $9-- the cost per day is about $.10.
You’re not going to be able to get a perfect list for all of your supplies. Many of my fonts and graphics I download for free (if you do this, make sure it has a commercial license!) or I buy and use on multiple designs, making it difficult to calculate the exact “cost per unit.” Instead I’ve estimated a “font allowance” of $.25-$.50 per order.
2. Find your production cost
Now you can easily calculate the cost of producing each item you sell. Let’s look at the cost to produce one of my Where the Wild Things Are shirts as an example.
Here’s a list of all my expenses. For this example I pulled out my shipping supplies, but don’t forget about those. You’ll use your cost per unit to find your cost of materials--each square inch of Heat Transfer Vinyl costs $.02. For this design, I need a 5.75” x 5.75” piece of black HTV--find the area (about 33 square inches) and divide by the cost per square inch ($.02) to get my cost ($.66)
If you sell on Etsy, don’t forget to include the fees involved with that! Each listing costs $.20 to publish. If that listing sells, you’ll pay an Etsy transaction fee of 3.5% of the sale price and a Payment Processing Fee of 3% (including tax and shipping costs)+ $.25 (in the US). (note: Etsy will be changing its fee structure in July. They will be 5%, including the shipping costs.) Here’s a really easy calculator from Craftybase that will find those for you-- I still recommend keeping track of them in your spreadsheet for quick reference. https://craftybase.com/etsy/fee-calculator
(note: If using Craftybase Calculator, make sure you change the transaction fee to 3% and the fixed fee to $.25. It already includes the $.20 listing fee I mentioned as part of the “Etsy fee,” so don’t double count that.)
"As your business grows, so should your profit margin."- Michelle, @MadeByMichelleCo
3. So how profitable am I??
Here’s where it gets fun-- we’re going to find your profit margin! Profit margin is the percentage of your revenue that you get to keep. The formula for this is: (Revenue-Costs) divided by Revenue or (Gross Profit)/Revenue.
Here’s what I mean-- this shirt sells for $17, but it costs me $6.13 to produce. $17-$6.13= $10.87. Divide $10.87 by $17 to get my profit margin-- 64%
This does require a bit of effort initially to calculate for your items, but once you get a good spreadsheet going it becomes much easier (hello, copy+paste!) Why does this even matter? Great question.
Use this process to see which of your products are most profitable for you and weed out the items that are least. Use it in reverse when you’re trying to decide on a price for your items, adjust for custom requests, or offer a bulk discount. Pick your target profit margin and work backwards to see how much you would need to sell it for to hit that percent.
It’s tempting to think purely in terms of dollars, but it’s more telling to look at percents.
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Pricing is tricky, and the bottom line of “How much should I charge?” is “How much is someone willing to pay for it?” You can compare with other sellers to get a jumping off point, but make sure that makes sense for YOUR expenses and expectations. As your business grows, so should your profit margin.
MEET OUR MAKER
I’m Michelle, mama to 2 little boys, wife, and craft enthusiast. I’ve always enjoyed making things- sewing, knitting, paper crafts. A few years ago I decided to put a hold on my teaching career and stay home, which led to me making clothes for my then 1 year old. With some encouragement, I took the leap to turn my hobby into a business selling Children’s apparel, Monograms & Custom designs!!
You can learn more and connect with Michelle here: