The Right Way to Price a Handmade Product (Step-by-Step Formula)

Pricing handmade items is a subject that puts panic into many handmade business owners. They’ve heard their prices are too low, go looking for a pricing formula, plug their numbers in, and then freak out when they realize what their prices should be.

What you should be pricing your products at depends on so many variables, that you really can’t follow one basic formula to a T.

Multiplying your production hours by 2 can raise your prices unnecessarily high if you make labor-intensive items. Just because it takes you 3 hours to make an item, or you use materials that are expensive, doesn’t mean your overhead costs are just as high and require that big of a markup.

On the other hand, multiply production costs by 2 may not add enough markup to cover all your costs and leave you with a profit.

I’m going to share a different way to look at pricing that allows you to set prices based on what works for your business.

 

 

How To Price Handmade Items

Handmade items should be priced, first and foremost, to cover the costs associated with making your products and running your business (including your hourly wage). Then, you should add profits to your prices, and then add a markup to allow for wholesale pricing, customer discounts, or to help cover incidentals.

3 steps to price your handmade products are:

 

STEP 1: COVER COSTS

Your products’ prices must ensure you’re being paid back for the money you spend on your business each month. Not just your production costs, but all costs and wages.

Materials + Production Wages + Overhead Expenses + Overhead Wages = Costs

 

STEP 2: ADD PROFIT

Your business must profit in order to stay in business. Profits should always be built into your price and properly calculated; not simply multiplying numbers by two and hoping there’s profit left after costs are covered.

Costs + Profit = Base Price (this price ensures you’re covering all *known costs and earning a profit)

*You won’t know your sales channel costs (e.g. Etsy fees) until you determine your Retail Price and know how many items you’re listing and selling.

 

STEP 3: ADD MARKUP

Markup allows you to cover unknown overhead costs (e.g. Etsy fees), offer discounts, and it gives your business some extra padding. How much markup you add will depend on your business model, the sales channels you plan to use, whether or not you want to offer free shipping, how well you know your monthly expenses, etc.

Base Price + Markup = Retail Price 

 

Here’s a quick example of how I might price my scrunchies. 

>> I purchase my materials wholesale

>> I can make 12 scrunchies per hour & 312 scrunchies in a month (based on my available hours)

>> I am paying myself $15/hour for my wages

• Step 1 – Cover Costs = $3.50
  • Production costs per scrunchie = $1.70 ($0.45 material costs + $1.25 wages per scrunchie)
  • Overhead costs per scrunchie = $1.80 ($0.55 overhead expenses per scrunchie + $1.25 wages per scrunchie for time spent on overhead tasks)
• Step 2 – Add Profit = $3.68 (Base Price)
  • $3.68 gives me $0.18 profit (Revenue ($3.68) – Cost ($3.50) = Profit ($0.18)
  • 5% profit margin (Profit ($0.18) divided by Revenue ($3.68) x 100 = Profit Margin (5%)
• Step 3 – Add Markup = $7.36 (Retail Price)
  • $3.68 x 100% markup = $3.68
  • Base Price ($3.68) + Markup ($3.69) = Retail Price ($7.36)

To learn how to calculate markup for your desired profit margin and markup, read the details under each step below.

 

THE WRONG WAY TO PRICE HANDMADE ITEMS

Before we get into the details of the 3 pricing steps, let’s take a look at why the traditional pricing formula doesn’t work for many handmade business owners.

TRADITIONAL PRICING FORMULA

• Materials + Labor = Production Cost
• Production Cost x 2 = Wholesale Price
• Wholesale Price x 2 = Retail Price

The traditional pricing formula starts off right, by calculating the production costs for a product.

But then that number is multiplied by 2 in an attempt to cover overhead expenses and add a profit.

This doesn’t work for a few reasons:

1) It’s not based on what your overhead expenses actually are.

2) Just because your production costs are high doesn’t mean your overhead costs will be too (or visa versa).

3) You can’t be sure you’re profiting or calculate how much you’re profiting.

 

Let’s look at my scrunchie example using the Basic Pricing Formula:

Materials + Labor = Production Cost: $1.70/scrunchie

Production Cost x 2 = Wholesale Price: $3.40/scrunchie

Wholesale Price x 2 = Retail Price: $6.80/scrunchie

When I actually calculate my overhead costs, I determine my total costs per scrunchie (production + overhead) are $3.50. If I were to charge $3.40/scrunchie when selling wholesale, I wouldn’t even cover my costs, let alone make a profit.

I would be losing money when selling my scrunchies wholesale using this basic pricing formula.

Now imagine I make labor intensive items like quilts and it takes me 10 hours to sew a quilt (being paid $15/hour). I buy my materials in bulk and at wholesale prices and spend $100 on materials/quilt.

Materials + Labor = Production Cost: $250/quilt

Production Cost x 2 = Wholesale Price: $500/quilt

Wholesale Price x 2 = Retail Price: $1000/quilt

Let’s say my overhead costs per quilt are $150 (that includes everything; packaging and shipping materials, Etsy fees, trip to the post office, etc.). My total costs are $400 (Production Costs: $250 + Overhead Costs: $150).

Revenue ($1000) – Costs ($400) = Profit ($600)

Profit ($600) divided by Revenue ($1000) x 100 = Profit Margin (60%)

That basic pricing formula gives me a 60% profit margin, which is extremely high.

Great if consumers are willing to pay $1000 for a quilt, but it likely prices me out of the market.

I don’t need that much markup on my quilts. Just because I spend 10 hours sewing a quilt does not mean I need 10 marketing and selling hours to sell one quilt.

Now that we understand why the traditional pricing formula doesn’t work for a lot of businesses, let’s look at an alternative way to price your products.

 

STEP 1: COVER COSTS

There are many ways to categorize costs to properly file taxes, but for the sake of keeping things simple when pricing your products, we’re going to look at your business’s costs as:

A) Production Costs

B) Overhead Costs

 

A) PRODUCTION COSTS

Think of production costs as the money you must spend to create a product so it’s ready for market. Those costs may be:

• Materials
• Hours to make the item
• Price tags
• Packaging/labels

Production costs must be tracked with a little more detail so you know how much to charge for one product vs. another.

For example, if I make jewelry, I can’t simply buy a bunch of jewelry materials and split the cost evenly among earrings, bracelets, and necklaces. That would likely lead to overpriced earrings. Rather, I would add up the costs for my earring materials and divide that number by how many earrings I can make with those materials.

If I spend $50 on earring materials and can make 10 pairs of earrings, each earring would cost me $5 in materials.

You also want to track the time it takes you to make each item and multiply those hours by the hourly wage you want to be paid.

For example, let’s say a pair of earrings take me 15 minutes to make

If I want to pay myself $15 per hour, a pair of earrings would cost $3.75 in production wages.

Materials + Production wages = Production Costs

$5 in material + $3.75 in labor = $8.75 Production Costs

 

 

B) OVERHEAD COSTS

For simplicity, think of overhead costs as anything you spend money on for your business, outside of production costs. This includes your wages for marketing, selling, and admin tasks.

List all your *known costs such as:

• Yearly costs (such as a business license) that can be divided by 12 to find the monthly expense
• Photography equipment or tools
• Marketing material (e.g. business cards, flyers, posters)
• Shipping materials
• Tools and equipment, repair or maintenance
• Membership fees (e.g. membership to the fabric store to get wholesale pricing)
• Wages for time spent:
  • Photographing products
  • Creating listings
  • Answering emails
  • Packaging orders
  • Driving to the post office

*You can’t know your Etsy fees at this point because those depend your your final price, how many listings you create, and how much you sell. The same applies to craft show fees (you don’t know which craft shows you’ll be accepted to or how much they’ll cost). So these fees will be covered when we add markup.

You can get a general idea of your overhead wages (even though you haven’t worked them yet):

Consider how many hours you have to work on your business in a month (e.g. 52 work hours per month).

Every working hour cannot be spent making products.

For every hour you spend making products, you need to time market and sell them. A good place to start is allotting 1/2 your hours in a month to production and the other half to marketing/selling/admin tasks. As you track your hours you can find your right ratio.

If I have 52 hours to work on my business each month, 26 hours would be spent on production (and those wages are already factored into production costs) and 26 hours would be spent on overhead tasks (and I must calculate those wages).

With that calculation, you can also figure out how many products you can make in a month. 

If I have 26 hours to work on production and I can make 2 products in a hour, I can make 52 products in a month.

Let’s say I spend $50/month on overhead expenses and $390 on overhead wages (26 hours x $15/hour = $390).

My total overhead costs are $440/month ($50 + $390).

I know I can make, on average, 52 products per month.

$440 divided by 52 = 8.46

I would add $8.46 to my production costs to get my total costs.

 

Total Costs

Production costs (per item) + Overhead costs (per item) = Total Costs

For example:

$8.75 (production cost per item) + $8.46 (overhead cost per item) = $17.21

Of course, there may be expenses you don’t think of, ones that pop up, and there are also your sales channel fees. The markup you add in the last step will cover those.

Determine your Production Costs per item and your Overhead Costs per item and add them together to get your Costs (per item). 

Now we want to add profit.

 

STEP 2: ADD PROFIT

The first aspect of success when it comes to a business is profits. If you don’t have profits, or a plan to start profiting in the near future, your business cannot survive.

Profits may be used for different things, but you’ll likely use profits to grow your business or pay yourself more than an hourly wage.

Without profits, your business isn’t growing.

You’re simply spending money and then getting that money back. And, you end up being an employee of your business; getting paid for the hours you work and nothing more.

The reason I add profit at this point is because you want to ensure you’re profiting when selling wholesale. And Costs + Profit is often an item’s Wholesale Price.

 

What are profits?

Profit is the money that’s left once you deduct your costs. Not just the costs of the product, but ANYTHING you spend money on to run your business; that includes your wages.

You can get more detailed than this (gross profit vs. net profit) but we’ll stick with this basic definition for simplicity.

 

What are profit margins?

Profit margin is expressing your profits in a percentage. You determine your business’s profit margins by dividing your profits by revenue, then multiplying by 100 to get the percent.

For example, if I charge $100 for a product and $90 of that sale pays for expenses, I have $10 in profit.

10 (profit) divided by 100 (revenue) = 0.1 x 100 = 10%

My products have a 10% profit margin.

We’ll use a profit margin to calculate how much money to add to your base price.

 

What is a good profit margin for handmade products?

Profit margins vary depending on the industry, but a good range to fit within is 5% – 20%.

You may want higher or lower profit margins depending on your business model and how much money you want to invest back into your business for growth. Profit margins may also vary from product to product, and you may increase or lower them as your business evolves.

>> 5% profit margin is considered low

>> 10% profit margin is considered average

>> 20% profit margin is considered high

(source)

 

You can set your profit margins however you see fit; base them on the goals you have for your business.

If you’re focused on growth, you may aim for the higher end of that range (e.g. 20% – 25% profit margins) so you can invest more money back into your business each month.

If you’re a volume-based business (i.e. you sell lots of units), you may aim at the low end of the profit margin scale. Your profit margins per product may be low (e.g. 5%) but if you can sell 100 units per month, your profits overall will be high.

 

To work profit margins into your prices, follow these steps:

1. Determine what you would like your profit margins to be (e.g. 5%, 10%, 20%, or another percent)
2. Turn that percent into decimal form, by moving the decimal two points to the left (e.g. 5% -> 0.05, 10% -> 0.1, 20% -> 0.20)
3. Subtract that number from 1 (e.g. 1 – 0.05 = 0.95, 1 – 0.1 = 0.9)
4. Divide your cost per product (production costs + overhead costs) by that number.
5. The number you’re left with is your price with profits built in

For example, let’s say I can make 10 earrings per month and my costs per earring are $17.21. I may want 20% profit margins since I’m selling a lower volume of earrings each month.

1. 1. 20%
   2. 20% -> 0.2
   3. 1 – 0.2 = 0.8
   4. $17.21 divided by 0.8 = $21.51
   5. Profits per item = $4.30 (20% profit margin)

Profit ($4.30) divided by Revenue ($21.51) multiplied by 100 = 20% Profit Margin

Total profit per month = $43 ($4.30 profit per item x 10 sales)

 

Now let’s say I can pump out 50 earrings each month (and I have a plan to sell the majority each month) so I want to set a lower profit margin at 5%.

1. 1. 5%
   2. 5% -> 0.05
   3. 1 – 0.05 = 0.95
   4. $17.21 divided by 0.95 = $18.12
   5. Profits per item = $0.91 (5% profit margin)

Profit ($0.91) divided by Revenue ($18.12) multiplied by 100 = 5% Profit Margin

Total profit per month = $45.50 ($0.91 profit per item x 50 sales)

My profits per pair of earrings are much lower (20% profit margin $4.30 vs 5% profit margin $0.91), however, because I’m able to sell more units in a month at a 5% profit margin, my overall profits are higher. 

 

Decide on a profit margin and follow the formula to get your Base Price (Cost + Profits = Base Price).

 

STEP 3: ADD MARKUP

In this pricing strategy, I define/use “markup” a little differently than the traditional pricing formula that uses a standard markup (Productions Costs x 2) to get Wholesale Price and then another standard markup (Wholesale price x 2) to get Retail Price.

 

How much to markup handmade items?

How much you mark up your prices will depend on your business, the types of discounts you want to be able to offer, the sales channels you sell through and their fees (e.g. Etsy, craft shows, retailers, consignment shops, etc.), and how much padding you’d like for unexpected expenses.

Most handmade products should have a 100% markup so they have the potential to sell wholesale to retailers.

However, as mentioned, some business models/products aren’t a fit for selling wholesale (e.g. marking a quilt up by 100% is likely to price it higher than most customers are willing to pay, so wholesale may not ever be a fit). If you never plan to sell wholesale to retailers, you may set a lower markup percentage.

Marking up prices by 60% – 100% is typically a good range to be in for a handmade business.

*However, testing should be involved when choosing your markup. Test your price with the desired markup by running it through an Etsy fee calculator or estimating craft show fees etc. and ensure you’re covering all fees and being left with a profit. 

 

Markup in my formula is going to cover your sales channel fees (e.g. Etsy fees, craft show fees, transaction fees, etc.) and allow you to offer discounts (e.g. wholesale discount for retailers (50%) or run sales in your Etsy shop), or offer perks like free shipping to your customers.

Base Price plus your Markup will create your Retail Price. Retail Price is what the consumer pays, whether they’re buying your products on Etsy, at a craft show, or through a retailer.

How to add markup into your prices

1. Determine your markup percentage.
2. Multiply your Base Price by that percent.
3. Add that number to your Base Price.
4. Your total is your Retail Price.

For example, let’s say I’ve decided on a Base Price of $18.12 for my earrings (5% profit margin). I plan to sell through retailers so I need to be able to offer a 50% discount and must mark up my price by 100%.

1. 1. 100% markup
   2. $18.12 (Base Price of earrings) x 100% = $18.12
   3. 18.12 + 18.12 = 36.24
   4. Retail Price = $36.24

The retail price $36.24 allows me to offer a 50% discount and still cover all my costs and be left with my desired profit.

Let’s say I realize that selling wholesale is going to raise my price too high. I could go back and find a way to lower my costs, or I may decide to choose a different business model; selling directly to consumers. I still need markup to cover my fees when selling direct to consumers, and I may want to run the occasional sale without losing profits. I decide on a 60% markup.

1. 1. 60%
   2. $18.12 (Base Price) x 60% = $10.87
   3. 18.12 + 10.87 = $28.99
   4. Retail Price = $28.99

The retail price $28.99 allows me to sell my earrings through Etsy and earn a healthy profit after Etsy fees are deducted.

If you want to be able to offer “free shipping”, you may add a bigger markup (e.g. 150% – 200% markup).

Calculate your numbers with a few different markup percentages and then use those prices when calculating different sales channel fees (e.g. Etsy fees, craft show fees), as explain under “Test & Adjust”.

 

Why do I need so much markup?

Here are a few reasons you want to carefully consider your markup:

>> WHOLESALE (OR CONSIGNMENT)

When you sell wholesale to retailers, they expect to purchase your products for (typically) 50% off the retail price. That 50% discount then allows them to mark your prices back up to the Retail Price, and that markup helps cover their overhead costs and give them a profit.

If you have a product that is well suited for selling wholesale and you hope to have your products carried in retail stores, you’ll want to add at least a 100% markup to your wholesale prices (multiply wholesale prices by 2).

Consignment is a similar situation but often, shops that sell handmade items on consignment will only take 30% – 40% of the sale. You can learn more about the difference between wholesale and consignment here. 

 

>> CUSTOMER DISCOUNTS

If you plan to sell wholesale, marking your prices up by 100% will allow you to offer discounts when selling directly to your customers, so you don’t need to add more markup on top of your wholesale markup.

However, if you don’t plan to sell your product wholesale, you should still mark your prices up so you can run sales once and a while or offer promo codes to your VIP customers.

 

>> FREE SHIPPING

You may even use your markup to absorb some or all of shipping costs into your prices so you can lower shipping fees or even offer free shipping, without cutting into your profits.

 

>> GUARANTEES/REPAIRS

If you offer things such as a money-back guarantee or free repairs, you need a markup on your products to help ensure you’re not losing money when a customer decides to cash in on that offer.

The customer isn’t paying you any more money when you fix an item for free and you may be taking a loss if they return a product you can’t resell. But that little extra money you get from each order, on top of covering your costs and making a profit, helps cover those hours or losses (on returns) that only pop up once and a while.

Of course, this only works if the majority of your customers are happy with their products. If 9 out of 10 customers want a refund or need a repair, your markup would have to be extremely high to cover those losses/hours.

 

>> INCIDENTALS

Your markups can also add a little extra cushioning so you have extra money if you need to take time off work or have a one-time business expense pop up.

For example, if you use an expensive piece of equipment to make your products, and that equipment breaks one month, you can’t all of a sudden raise your prices to cover the cost of repair or replacement.

Markup can help you put a little extra money away each month to help you cover unexpected or occasional costs without having to dip into your profits or go into the red (loss/debt).

 

Test & Adjust

Before you take your number and run with it, plug it into a few different equations using the sales channel fees you’re likely to encounter.

If you plan to sell on Etsy, use an Etsy fee calculator to plug your retail price and costs in and see how much Etsy will charge you in listing and transaction fees.

If you plan to sell at local craft shows, gather some basic numbers such as how much the event organizer charges for a table, how many hours you’re going to have to work (on top of your allotted hours for the month…which are already factored into your costs), extra expenses you may incur (e.g. parking, food, mileage or gas), and transaction fees you’ll pay (for using a point of sale credit card reader like Square). Estimate how many items you think you’ll be able to sell per hour to get your revenue, then deduct all your costs and wages (production & overhead plus extra expenses and wages associated with the craft show) to ensure you’re likely to profit.

If you find that selling your item on Etsy and offering free shipping isn’t leaving you with enough profit, go back and test your prices with a higher markup or profit margin.

It’s important to set your prices correctly from the start so you’re not losing money (or losing sales because your items are overpriced). But it is okay to adjust your prices as you grow your business or as you get to know your business better.

If you’re 6 months into running your business and you realize you’re spending way more hours on it than you allotted, or you forgot a major expense, it’s okay to raise your prices to cover those wages/expenses.

 

What To Do When your Prices are Too High

If you’re finding, even with this pricing formula, your prices are higher than people are willing to pay, you have a few options.

 

LOWER COSTS

Your business’s costs are the starting point of your prices, so if they’re high, your prices are going to start high. There are several ways to lower your costs such as speeding up production, removing product features that are time/cost consuming but that your customer doesn’t place importance on/isn’t willing to pay extra for, buying materials in bulk or at wholesale prices, etc.

You can find more ideas to lower your costs here.

 

INCREASE PERCEIVED VALUE

Why are consumers willing to pay 10x the price of a t-shirt when they’re shopping at Gucci vs. Old Navy? Quality is obviously part of that factor, but another big factor is Gucci’s branding.

Through several factors, Gucci has increased the perceived value consumers place on their products. They believe their products are better and worth more money.

If you want to increase the perceived value of your products, so customers are willing to pay more money for them, you can work on your branding.

It’s also important to communicate why your prices are higher. Shoppers won’t know, unless they’re told, if you use a material that is better quality than your competitors.

 

CHANGE YOUR TARGET MARKET

Who you target has a big impact on how much you can charge.

If I make jewelry and I’m targeting a consumer who may wear my pieces when they go out for dinner, I can’t charge as much as I could if I target brides.

Brides will be wearing my jewelry on their big day, which makes the jewelry more important to them and makes them willing to spend more to get that perfect piece.

Once you find a profitable target market, you also must offer them the right product and experience.

For example, if I’m going to target brides, my jewelry must be bridal jewelry. And if I’m going to target brides willing to pay high-end prices, I must use high-end materials and make sure my business screams “luxury” every step of the way.

HOW TO FIND A GOLDMINE OF CUSTOMERS will help with this step.

 

GET OFF ETSY

Many people selling on Etsy aren’t running businesses. They’re trying to sell the crafts they make or test the waters to see if what they make will sell, and they’re basing their prices on what other Etsy sellers are charging. Not to mention, Etsy is saturated with business selling mass produced items (which allows them to set prices much lower than handmade items).

On Etsy, it can become a bit of an infinite loop with sellers trying to undercut each other and, in the end, no one is profiting because they’re just trying to get the sale (not build a sustainable business).

When people shop on Etsy, they see your competitor’s prices right next to yours. When given two similar options, most shoppers will go for the cheaper one, especially if there are no discerning features.

If your prices are much higher than your competitor’s prices on Etsy, it may be beneficial for you to start building your own website or selling through other sales channels.

A website will allow you to customize it to perfectly suit your brand (Etsy only allows so much customization). It also removes the competition when someone is looking at your products; they’re only seeing your products and prices, not hundreds of other Etsy sellers.

 

DON’T SELL WHOLESALE

Some products aren’t made for selling wholesale and that’s okay. If you focus on building your business and selling directly to consumers, you don’t have to worry about factoring in that wholesale markup. As mentioned, you do still want some markup, but it doesn’t have to be as big.

 

RECONSIDER YOUR BUSINESS

Although you love what you make, it may not create the best business opportunity. Usually, there is some way to simply alter your product or business model, but if you’re unwilling to do that, you may not be able to run a profitable business.

For example, if I make bejeweled quilts that take me 100 hours to create, but no one is searching for “bejeweled quilts”, there isn’t a target market willing to pay thousands of dollars for my quilts, no matter how great my branding is.

Some crafts have the ability to be more profitable than others. You can check out CRAFT BUSINESSES THAT MAKE THE MOST MONEY and CRAFT BUSINESSES THAT MAKE THE LEAST MONEY for more on those.

You must also know what people are searching for before you start creating and building a business around what you want to make. If you want your business to make money, it has to be about the consumer.

This article will help you determine keywords people are searching, which can help you create products you know are in demand (even if you don’t sell on Etsy).

 

 

I hope you’ve found this article on how to price your handmade items helpful 🙂