OK, before we get started I want you to take 3 deep cleansing breaths.
Ok, are you ready?
Oh, maybe just one more deep breath….in through your nose, hold and out through your mouth.
Alright, our topic, today, is one of the most controversial and confounding in all the handmade world….pricing.
I know, I know…please stick with me and we’ll get through this together.
I recently took a poll of my Instagram followers and discovered that many of you find this to be the most difficult part of your business so I want to help. We’re going to take this step by step and get a basic foundation for pricing that you can tweak to fit your individual business.
Common Pricing Strategies
First, let’s take a look at some of the most commonly held strategies for pricing finished crochet products:
- The Ridiculous Method (better known as the “3x Supplies” method): I almost don’t even want to waste my time talking about this method because it is so faulty. Simply put, don’t use this method because it devalues both you and your product. (ie. if you make a hat with $3 worth of yarn, this strategy suggests that you sell the hat for $9. So, for one hour worth of labor you’re making $6…and this is just hourly labor, it doesn’t take into account business expenses or profit margin). If you use the 3x method to price for your business, you will be out of business in mere weeks. Let’s just not even consider it.
- The Conventional Method: I think the most common method that I’ve seen touted on the internet is this conventional, Supplies + Hourly Wage = Wholesale x 2 = Retail strategy. While this method is better than the 3x method, it still appears to miss the mark by ignoring per piece business expenses and any profit margin.
- The Profit Minded Method: This method is the one used by the most profitable crochet businesses – when they can get their exorbitantly priced products to sell. The strategy itself looks like this: Supplies + Hourly Wage + Business Expenses x Profit Margin = Wholesale Price x 2 = Retail Price. While the method does take into account all of the important factors of supplies, hourly wage, business expenses, profit margin, and wholesale and retail pricing, it lacks sensibility for any but the most established and boutique brands.
Why These Strategies Don’t Work
How about two examples to make the lesson more concrete?
(A) The Baby Hat Example: Hypothetically, let’s say we’re selling a baby hat that takes $3 in yarn and one hour to make. We will charge an hourly wage of $12 (a range of $10 – $15 is reasonable for our purposes). After analyzing our monthly business related costs (website costs, workspace/office costs, marketing, etc.) and dividing them by our monthly sales goals, we will add a $3 fee to each piece sold (this amount will vary based on your costs and goals) and our desired profit margin is 50%. Using each method the price for the hat would be:
- The Ridiculous Method: 3 x $3 = $9
- The Conventional Method: $3 + ($12/hour x 1) = $15 (wholesale price) x 2 = $30 (retail price)
- The Profit Minded Method: $3 + ($12/hour x 1) + $3 (business expenses) x 1.5 (50% markup) = $27 (wholesale price) x 2 = $54 (retail price)
(B) The Beach Coverup Skirt Example: This time, we’re selling a lovely, lacy beach coverup skirt. This project requires $8 in yarn and 4 hours to complete. We will keep the per piece business expenses and 50% profit margin the same.
- The Ridiculous Method: 3 x $8 = $24
- The Conventional Method: $8 + ($12/hour x 4) = $56 (wholesale price) x 2 = $112 (retail price)
- The Profit Minded Method: $8 + ($12/hour x 4) + $3 x 1.5 (profit margin) = $88.50 (wholesale price) x 2 = $177 (retail price)
Looking at this example, you can plainly see why there are so many varying price points in the crochet world.
These prices are all over the board.
In the first example, the price is not enough to sustain a business. The seller will probably get sales from bargain shoppers, but will not be in business for long.
With regard to the second example, the wholesale price seems reasonable but does not completely cover the cost of doing business…especially as a business grows and starts requiring the hiring of contract crocheters. The retail price in this second example may or may not be a reasonable price based on what the seller’s target market will pay.
The third method, then, results in a price that is well above what most markets will bear. Outside the boutique market, products priced in this manner will simply sit on the shelf collecting dust….and that’s not a great business model!
So what should we do? How can handmade sellers calculate their prices in a way that values the time and skill of the maker, sustains a profitable and growing business and results in a price within the range that the target market will pay…therefore moving product off the shelves and profits into your bank account?!
A Crochet Pricing Strategy that Works
Well, keeping in mind that each business owner is going to have to work out the specifics herself based on her target market and business goals, here is how I have come to price my products:
The Balanced Method: Supplies + Hourly Rate + Business Expenses x 1.3 (30% Markup) = Wholesale Price x 1.54 (54% Markup) = Retail Price
Taking our baby hat example, this pricing strategy would yield: $3 + ($12/hour x 1) + $3 x 1.3 = $23.40 (wholesale price) x 1.54 = $36.00 (retail price/rounded down)
And our beach coverup example: $8 + ($12/hour x 4) + $3 x 1.3 = $76.70 (wholesale) x 1.54 = $118.12 (retail price)
As you can see, both of these examples, using The Balanced Method, yielded a price somewhere between those calculated by The Conventional Method and The Profit Minded Method. For my target market, these prices are both reasonable, viable and profit-producing. Yay! It always makes me happy when that happens!
But What if it Doesn’t Result in a Viable Price?
What if I work out my calculations and the price that I need to sell my product at is not reasonable and would never sell?
You want to know my honest answer?
Seriously, you may not want to hear this, but this is what I do….
If, after I’ve completed my calculations based on The Balanced Method, I reach a price that is neither reasonable nor viable for my market….
I simply don’t add that product to my regular inventory.
I may love the pattern. I may love the product. But if I can not produce the product in such a way that the product will sell with a price that is profitable, I don’t make the product…not to sell anyway. I will tuck that pattern away and use it for gifts, for charity donations or as a giveaway….but it doesn’t get placed in my regular product line.
And that’s the price of doing business…the necessity of making smart decisions.
Pricing Doesn’t Need to be Difficult
I know we’ve all been made to believe that pricing is confusing and frustrating, but by choosing a formula that works for your business, you make the process so much more simple!
Again, I have chosen to use The Balanced Method because it has worked for my business, even as I needed to hire an assistant and 20 contract crocheters, I still made a profit. This method computes product price in such a way that it is fair and competitive while also placing value on your skills and talents as an artisan and offering sustainability to your business.
I believe it’s the way to go.
In order to help you with your pricing, I’ve created a Balanced Method pricing guideline PDF that you can save to your computer or print out and keep on your office wall. Simple click on the title to opt in and download the file.
I really hope you’ve found this article helpful in moving your business forward toward sustainability and profitablity. Won’t you comment below and share this article with your artisan friends and help them grow their businesses as well?