Whether you are a hobbyist woodworker or a seasoned professional, setting the price for an item you have completed or plan to fabricate can sometimes seem like a form of black magic. Some of you may have seen formulas that base your price solely on the cost of materials multiplied by a certain factor. This may work for some of you, but for most of us, doing a more elaborate calculation may uncover opportunities to be more competitive and possibly even make more money. This is not to say that with more experience you can't develop your own formula that will greatly simplify the pricing process and get you to where you want to be. But with a more detailed analysis, you will at least understand everything that goes into the making of your masterpiece.
If your pricing exercise is for a craft you just completed, hopefully you kept track of your time and materials as a basis for your price calculations. If you are in the planning or job quoting phase, then you need to estimate your time and materials by breaking down the job into various sub-tasks with effort and material estimates for each. To help with the accuracy of the estimation process, some entrepreneurs will draw up detailed plans since this will uncover all the intricacies of the build.
Pricing your crafts can sometimes seem like a daunting task. But this does not have to be if you take the time to go through a methodical pricing exercise as outlined in this article.
The objective of the Pricing Exercise is to:
The base selling price is the starting point of your pricing exercise and is used as an initial guide:
Base Selling Price = Cost of raw materials + Shop materials + Overhead expenses + Salary + Profit
Methodologies and final adjustments
As you will see in this article, we propose 2 methods for you to calculate the costs of shop materials and overhead expenses. These can either be based on having accurate and detailed records for these expenses versus estimates commonly used by other crafters.
We will also look at competitive price analysis as a basis for adjusting your final selling price.
Let’s get started!
The first thing you must determine is the cost of the raw materials that go into fabricating the craft. This is one of the most important components of your pricing exercise and should be fairly easy for you to determine by keeping track of all your material purchases. Alternatively, the type and quantity of raw materials needed for a project can be derived from your detailed plans.
This includes all purchases for raw materials such as:
A quick note about bulk purchases:
Bulk purchases have the advantage of reducing the costs of your materials per item produced and should always be considered if you plan to build multiple copies of the same craft. Calculate your cost per piece used in your craft.
Shop materials are those incidental items that you use in the fabrication of your craft. These items are often purchased in bulk and are used in many projects. These must be accounted for in your total cost of materials.
Shop materials include consumables such as:
Method 1: Actual cost of shop materials
If you are one of those rare crafters who tracks all the purchases of these consumable materials and can fairly determine the actual quantity used and their associated costs per craft produced, then this is the preferred method to use.
Method 2: Estimating cost of shop materials
OK, so you used a handful of screws from a box of 200 you bought a while back; used about 2 ounces of stain from a 1 quart can you had laying around from previous projects; a smidgen of glue; a quarter sheet of sandpaper you bought on sale, and so on....
How do you account for all this stuff?
The simplest thing is to estimate the cost of shop materials as a percentage of the known cost of raw materials determined in step 1.
The percentage that we have seen used for estimating shop materials is 15%. This is in the range of 10-20% that we have seen with projects where shop materials were accurately tracked.
So, if the cost of raw materials determined in step 1 is $50.00, we estimate the shop materials to be $7.50 (or 15% of $50).
Caveat: You are the best person to validate if the 15% that you use in the formula makes sense for your project type and situation. If the estimate of $7.50 for shop materials as shown in the example above seems way off, you can perform a more detailed analysis to adjust the percentage accordingly. For example, if you are already tracking some of these shop materials carefully and have determined specific costs for these, the 15% might be too high for the remaining materials.
What the heck are overhead expenses?
An expense qualifies as an overhead (or indirect) expense for your craft if it is NOT a direct expense (such as the cost of materials determined in step 1 and 2) but is necessary in the production and sale of the item (such as your table saw).
Overhead expenses include items such as:
Caveat: Although the list above covers the most common overhead expenses, you will need to analyze your particular situation to determine if others might apply. Overhead expenses can add up quickly, so you need to be the judge as to whether a particular expense you incur is applicable according to the definition above. If, for example, your workshop is located in a multi-functional room in your home, you might decide that the expense for that space is not applicable.
Method 1: Actual cost of overhead
The objective here is to determine how much of the overhead expenses need to be reflected in the selling price of each craft you produce. One method is to allocate the expenses evenly across the total number of items you produce in a specific time frame. The second method is to prorate the expenses based on the construction costs of the crafts you fabricate.
The other thing you must consider is how to allocate those expenses to the crafts you produced. A monthly expense such as utilities and rent can be easily divided up by the number of crafts you produce in a given month. For instance, if you rent shop space at $200 per month and produce 25 items per month, the rent space overhead expense per item is $8 ($200/25).
Keep in mind that you have to allocate expenses directly related to the production of the item. If you pay $1000 per month to rent your home, you need to determine what percentage of your home is directly related to your business. If you use 20% of your home's space for your workshop, then you should allocate $200 ($1000 X 20%) as rental overhead.
The cost of tools can be allocated based on the projected lifetime of that tool. Of course, the lifetime varies based on the usage of that tool. The above 2 examples of overhead are more complicated to calculate, some crafters prefer just to deal with these type of expenses as described in method 2 below.
Lastly, if you produce different items at various costs in a month, you can allocate those overhead expenses based on the cost of materials used to produce the individual pieces. If you produce 5 crafts at $100 in materials each and 3 crafts at $50 in materials each, your total raw materials used in the month is $500 + $150 or $650. So, your $200 in shop rental fees can be allocated as 31 cents ($200/$650 rounded to the nearest penny) per dollar of raw materials used. The rental overhead on the crafts costing you $100, will be $31.00 ($100 * $0.31). The overhead on the items costing you $50 in raw materials will be $15.50 ($50 X $.031).
Method 2: Estimating overhead expenses
Another option in determining your overhead expenses is by estimating these as a percentage of the cost of raw materials determined in step 1. This method is also used when certain overhead costs are not easily calculated such as the allocation of the cost of tools used.
The percentage that we have seen used for estimating overhead is 20% of the cost of raw materials. This is a percentage considered average for most crafters and can range from 10-30% (sometimes more) depending on your circumstances.
So, if the cost of raw materials is $50.00, we estimate the overhead expenses to be $10.00 (or 20% of $50).
If the amount of overhead expenses calculated this way seems unreasonable to you, you can either do a more detailed analysis of the overhead expenses that are specific to your situation on a per item basis or adjust the percentage accordingly.
At the very least, this gives you a starting point.
Salary can be an interesting topic on it's own. There seems to be 4 schools of thought regarding how salary is viewed by crafters:
The reason salary can be a bit tricky in establishing your selling price is that on a competitive basis, some of your competing crafters may be faster than you in fabricating the craft due to experience or specialized equipment. If it takes you twice as long to produce a craft of similar quality and features as the next guy, does it make sense to charge that much more?
If your craft is unique in nature, you don't have the competitive element to deal with and can set your hourly salary to what makes sense to you.
In the end, you have to decide how you want to deal with salary. We propose that you do factor salary into the base selling price formula as a starting point. Once you do the competitive pricing analysis, you can either adjust your hourly rate or your targeted profits accordingly.
Labor activities include:
Tracking your time:
Tracking the amount of time to fabricate an item can be fairly straightforward. You can track your activities manually, use your smart phone's timer or download an app from your phone's app store.
Your labor costs per item can be reduced if you produce multiple copies of the same craft at the same time. Since there are significant time savings with fewer equipment setups and components fabrication, this is a sure way to help lower your selling price and increase overall profits.
Now that you have collected all the costs that go into producing your craft, profit is the last element in the base selling price formula. Give some thought to the following points when determining your target profit amount:
So, you've gone this far and you are now ready to plug in your costs, salary and target profit into the formula to obtain your base selling price.
You have built (or plan to build) a wood craft with the following information:
1. Cost of raw materials: $125.00
2. Shop materials* (15% of $125): $18.75
3. Overhead expenses* (20% of $125): $25.00
4. Salary (10 hours at $25/hour): $250.00
5. Profit (In this example, we are setting our profit margin to 15% of the 4 amounts above of $418.75): $62.81
6. Our formula: Base Selling Price = Cost of raw materials + Shop materials + Overhead expenses + Salary + Profit = $481.56 or $480 to round things out
*For illustrative purposes, we used the proposed percentages for determining shop materials and overhead expenses, but you can plug in the actual amounts of these expenses if you have them.
If your craft is a one-of-a-kind creation, then your pricing exercise need not necessarily consider wholesale pricing. But if you intend on mass-producing a particular item and having that item sold and distributed through a wholesaler, you need to adjust your selling price to reflect that. A wholesaler will expect you to sell them your crafts at a price significantly below your retail selling price so that they can then turn around and sell it for you at a profit to them. So in this case, your base selling price calculation from above becomes your wholesale price.
It is often proposed that your retail selling price should be twice the wholesale price. In the example above, your wholesale price would be $480, while your retail selling price would be $960. Establishing a retail selling price that factors in the wholesale price is a double edged sword. Of course, we all wish to one day distribute our crafts through a wholesaler, but that additional profit margin might make your craft's selling price less attractive on the retail market, but also more profitable if you can swing it. Keep in mind that your competition may have also priced their crafts with wholesaling pricing factored in. Conversely, they may not have considered wholesale distribution and will easily beat you in price.
So, you've done your homework, came up with your base selling price and are now ready to put up the For Sale sign.
Well, you are not quite finished yet, but almost there!
You see, unless you do a bit of research on the selling price of comparable products in the market, you might be way off. You might have either priced your craft too low with opportunities to generate more profits (or be more competitive), or too high with opportunities to optimize your fabrication processes. Like never before, the internet has provided prospective buyers with tools to easily shop and compare the offerings of different vendors. So, competitive price analysis (or sanity check) is the next step in finalizing your selling price.
Please read the sister article "Product Planning - Gathering Product Intelligence". This article will walk you through the process of finding competitive products and their respective crafters to gain a better understanding of the market you will be up against.
Now that you have calculated your base selling price and performed your competitive analysis, it's now decision time.
You can either:
1. Adjust your price
2. Position your product - In the article entitled "Pricing and the Human Psyche", find out how you can position your product in the market to demand a premium price. With a little creativity, you can be a leader in your chosen market segment.
3. And finally, decide if this is a good revenue opportunity for you. If after completing the pricing exercise, you feel that the market is too competitive and that you can't possibly compete, all is not lost. As a creative person with your skills and business acumen, you should consider other craft ideas that could better perform in the market and get you down the road to success. Peruse our monthly articles in the "Idea Probe" category to gain invaluable insights on what kind of wood crafts people are searching for.
Wow, wasn't that fun?
Well, just know that taking the time to go through a pricing exercise is an investment in your business success and beats guessing any day. Keep an eye open for an upcoming article discussing different pricing strategies to take your pricing to a whole new level.