There’s a famous saying that says that in every market there are 2 kinds of fools: one
charges too much, the other too little.
The problem is… it’s not that easy to find that perfectly “right” price - if
it even exists!
It’s a nice saying but when you create a product and decide to sell it, coming up with
a price for it can be… tricky. And it's a VERY important question because without
profit you don’t have a business (or not for long) - that’s business 101 - but when
selling handmade items, you are also limited by time. You can’t possibly run a successful
handmade shop with small profit margins, because that would mean you need to sell a LOT of
products to make a decent living and you’d have to aim for a high volume of sales - and
because it takes time to create your products, you can’t do that - you’d very quickly
run out of time in a day! To run a successful handmade business, you
NEED a healthy, fat profit margin for every sale you make.
So… the question becomes: How much are handmade products really worth? How can you charge
more while still making sales? And how to decide how much to charge?
Let’s dive in!
Bonjour! I am Deb, founder of Tizzit.co, a membership community for handmade shop owners
and makers just like your fabulous self. You can learn more about this wonderful community
below this video but right now let’s talk about pricing your products.
What I want to do today is to take you on a journey, the journey of pricing a product,
so we can look at everything that comes into play: the science and the art of pricing - and
how to make sure you can sell with a comfortable healthy profit so you’re not working 20
hours a day and paying yourself less than the minimum wage. We don't want that.
The first thing you’ll need to tackle - your first challenge if you wish - is answering:
what did it cost you to make this item? That’s the science part, and yes, I am afraid
it does mean doing math.
You have to cover your costs as a starting point, so you’ve got to calculate them:
supplies, packaging, labor, fees... it’s not a ton of fun but after some quality time
with your calculator and possibly a few spreadsheets along the way, you can absolutely get it done.
Once you’ve got your costs down, once you know what it actually costs you to create
that product, you still can’t use that as a price, right? That wouldn’t generate a
profit - you’d barely be covering your costs.
So what’s the next step? What’s going to take you from the cost of creating that
product to its final price?
That’s when you’re faced with challenge #2, which is deciding what your profit markup
will be. Because that’s the missing part right? You’ve your costs, and the difference
between your end price and your costs is your profit markup. So how do you go about calculating
that or deciding how much that should be?
Well, you’ll find a lot of formulas online that will tell you to x2 or x1.5 for wholesale
and then x2 again for retail and tada!
Most of these formulas are well-intentioned. They are trying to give you some sort of a
guideline as to what your profit markup should be.
The problem is that just “x2” your costs, so using x2 as your profit multiplier is an
oversimplification of what it really takes to decide what your profit margin and, therefore,
your final price, should be.
“What’s wrong with x2?” you may ask. Well, let me flip that and ask you: what’s
right with it? Why x2? Or x1.5? What is this number based on?
Let’s look at an example. Let’s say you are trying to price a soy wax candle and you
use a formula that gets you to x2 your costs to get to your end price. You put your numbers
in, costs are $6, you multiply it by 2 for wholesale = $12, then multiply by 2 for retail
and the figure you end up with is $24. You think ‘well that sounds about right’
and don’t think much else of it and start selling that candle for $24.
But what if your customers were actually willing to pay $35 for that candle? Was x2 the magic
profit markup number then? It sure was not! Because in that case, you’re
leaving $11 on the table with every single sale you make. $11 of profit. So instead of
making $29 profit, you’re only making $18 - that’s a pretty big difference.
Not just because you’re making a lot more money selling at $35 but because of what I
said at the very beginning of this video, remember? It’s all coming together here!
because that would mean you need to sell a LOT of products to make a decent living, which in turn means
a lot more time needed to create your products, eventually just making it impossible to make
a decent income with only 24h in a day without driving yourself mad.
To run a successful handmade business, you NEED a healthy, fat profit margin for every
sale you make. Big retailer brands with factories pumping out 50 items a minute out of a big
fancy machine can afford to have a lower profit margin because they can play the volume game.
You can not.
And this is where the “ART” of pricing comes into play - and to REALLY understand
this ART part, I’d like to give you another quick example.
Imagine a luxury, high-end designer handbag selling for $10.000. Like I don’t know - a
Chanel bag. Do you really think that their profit markup
is x2? If you reverse engineer what those cookie-cutter formulas tell you to do,
that would mean $10.000 divided by 2 gives you $5000 for wholesale
and divided by 2 again gives you a cost of $2500 per bag.
Now let’s be clear, it does not cost Chanel or Guerlain or Dior $2500 to create a bag,
it costs them MUCH MUCH less than that. These brands don’t take their costs and multiply by 2 and tada!
Their profit margin is MUCH higher than x2.
In fact, every single business in the world has a different profit markup.
For some it’s times 1.5, for others it’s times 4, for others it’s times 20.
Not ONE single business has the same profit markup strategy. So, let’s regroup.
Now that we know that times 2 as a profit markup is NOT a magic solution….
how are YOU meant to decide what your profit markup should be then?
The answer is in the $10.000 handbag example I just shared with you.
And before you say “but Deb, I am not Chanel or some luxury brand, I don't have all that
brand recognition behind me” - maybe not, but that’s not the point of that example.
The point I am trying to make here is that price is just another word for VALUE.
PRICE = VALUE So the question becomes: how do you quantify
value? Well, there are 2 types of “value”:
Objective value: that’s your costs, that’s the science part we just talked about - how
much “worth” is “in” that product in terms of supplies, labor and all of that.
And then there’s subjective value also known as PERCEIVED VALUE.
That $10.000 bag example? There are people in the world who perceive it as being worth
it that much.
I personally don’t. I am not right or wrong, they’re not right or wrong. Perceived value
is subjective.
That is KEY because those “benefits” and “costs” are going to be different for
everyone!
To me, the cost of getting a bag for $10.000 far outweighs the benefits of getting and
using that product. To me, it’s not “worth it”.
To someone else, the prestige, the shopping experience, the quality of the material used,
the status that comes from having such a bag might make it an absolute no brainer. Benefits,
in this case, outweigh the costs. They perceive it as valuable and worth that amount.
Understanding and using perceived value is by FAR the most important concept to understand
when it comes to pricing your handmade items.
Because you don’t need to be Chanel or Guerlain to use perceived value.
Perceived value is WHAT allows brands like Chanel to charge thousands for a bag that
does not cost thousands to make and perceived value ALSO IS the KEY to increasing your handmade
shop’s profit margins and simply put to making more money.
The higher the value a customer “perceives” in your products, the higher he or she will
be willing to spend on it.
You’re not going to sell a leather wallet to someone that's vegan - it’s very unlikely,
even if the price was $1. The “cost” of buying that product for that vegan customer
is not $1, it’s the cost of going against her or his values and ethics. Of course it
doesn't mean that the wallet isn’t worth a dollar, it’s just that in the eye of that
person, it has no value. Someone else might be willing to pay $150
for it because they VALUE leather as material, they VALUE the smell of it, the longevity
of it, the way it ages, and the craftsmanship behind your products.
When you try to work out the price of your handmade products, only the perceived value
of that product in the eyes of your customers truly does matter.
The objective value, the real cost of creating those products, does not actually matter to
your customers.
THE ART of pricing is the art of understanding, DEEPLY understanding who your ideal customers
are, who they absolutely are not, and what they value in your products so you can communicate
that value to them effectively.
Because that’s the part you absolutely can not skip:
For value to be “perceived”, it needs to be communicated.
Even the best of products, with the highest quality materials, the best of everything
will NOT sell itself: branding, copy and messaging, packaging, images, social proof, and many
more are ways you can and must use to communicate that value.
Here is the 3 step process behind pricing any handmade item:
1. The science, the math, the numbers, calculating your costs so you’re sure to cover them
- I have lots of done for you spreadsheets as part of a Pricing Handmade training that’s
available over on the Tizzit.co website that I’ll link to below this video if you’re
interested in getting help in that regard. 2. Set your profit markup. You can use the
x2 if you’d like as a first guideline but PLEASE do not settle for it without thinking
it through, doing some market research and deep-diving into your ideal customer desires
and psychology. You can’t sell to a high volume of people at higher prices - that’s
not what you should go for. It will not work. Some people will care deeply about your products
- others won’t. Focus on those who do care. What is it they truly care about, what is
it they value? How much is that value worth to them? That perceived value, that’s your
price. If that price is x2 your costs, well that should be a coincidence. If that’s
x3 - it does NOT mean you are overcharging. The right price is the price your ideal customer
is willing to pay for. 3. Step 3 is to communicate that value so
it can actually BE perceived by your customers. Here again, there are many ways to do so - and
this is something we also dive into in the Handmade Pricing training I’ll link below
so please do check it out.
When you learn how to price based on perceived value, not just on costs, you not only can
have a very successful business that does not require you to work 20h a day, but you
also start selling to the most beautiful of customers, who love and cherish your products
and know your products are worth what you’re charging for them.
That’s a beautiful position to be in.
So check out the training I’m linking below, take care, and until next time… aurevoir!