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So, you’ve decided to start a small business selling handmade products? Brilliant!
You are using upcycled materials to make your products too? Fabulous – just what I like to hear.
How much are you selling them for?
It’s a tricky one for a lot of new (and sometimes even experienced) small business owners.
There are a lot of factors that come into play when pricing your handmade or upcycled products. And I’m not just talking about the hard and fast economics of it all, I’m also talking about the demons in our own heads, like imposter syndrome or a misguided notion of having to ‘start small’.
Too many small businesses I have consulted with have not taken the time to properly work out their pricing and they’ve regretted it later. Sometimes when we’ve looked into it we’ve found they’ve actually been losing money when they thought they were doing well!
I get it – pricing isn’t exactly fun and it definitely isn’t sexy. You are a creator and a maker and that is where you want to spend your time.
BUT….if you want to make sure your small business is sustainable or that you can one day turn that side hustle into the full time gig…you have to get the pricing right! You just have to!
Spoiler alert I have a free Product Pricing Cheat Sheet that you can download at the end of this post. So if you just want to skip straight to it feel free to scroll down and get it now.
If you want to hear a little bit more about why we’ve highlighted the things we have in the Cheat Sheet then read on!
The Difference Between Upcycled and Handmade Products and other types of products
So what is the difference between pricing your upcycled and handmade products vs. pricing a product that is made in bulk with new materials?
- Scale – if you are a solopreneur or even part of a small business with a handful of employees you just will not have the scale it takes to produce 100s or thousands of products at once like a large company or factory can. There are huge savings involved for a business owner in being able to churn out products in bulk. You can’t benefit from that – which means that you need to keep an even closer eye on the costs that you do have to make sure you are not loosing money.
- Buying Power – so here I am talking about the power to bulk buy the materials to make your products. If you are making individual products by hand, whether it is from upcycled products or not you are unlikely to have the buying power of larger businesses that can bulk buy the materials they use to make their products. There are again huge huge savings when you can scale up and buy the m aterials used in massive quantities. You won’t be able to do that even if you do have some money to invest in your business.
- Cost of Labour – as you will no doubt be aware a lot of the goods we consume are made in countries with lower costs of living than yours. Which means of course the people who make those products can be paid less per hour than you would expect to be paid for the same job.
I am not telling you all this to get you down and make you feel like you can never compete. I am telling you this as a reminder of why you shouldn’t be pricing your goods to compete with mass produced new items.
If you are looking at your ‘competition’ as a reference point make sure you are looking at other upcycled and handmade product businesses. There is a big difference between the cost of producing a one of a kind makeup bag made of upcycled scrap fabric and the cost of producing a polyester makeup bag in a production line of 10,000+ pieces in one run.
I will say it again so it is clear – you do not need to directly compete with mass produced sellers on price. So stop trying!
So if you shouldn’t be comparing your prices with the big brands out there, how should you be arriving at your prices?
We will return to your competition a bit later, but right now what you need to start with is your costs. So let’s dive in:
One definite benefit to running a small upcycling businesses is that you are canny enough to be using base materials that you can often get for free or very cheaply – because they are items that other people don’t place a value on, like old tin cans, an orange pine dresser, or old clothing.
But that doesn’t mean you have no materials costs for your business does it? Do you use other materials to transform your base material into something new? Paint? Thread? Nails?
You get the idea. You need to take an honest look at the products you produce and try to get a handle on how much you spend on materials to make them.
This can feel difficult if you largely make one of a kind products, but most small upcycling & handmade businesses are at least in a niche, such as furniture painting, jewellery making or fabric crafts. And if you are in a niche like this, chances are you are using some of the same materials to make your products over and over again – even if the end result is different every time!
What I want you to start off with is to look at the things you buy to make your products and try to work out how many products you can make with that material before you would need to buy it again.
Here is an example:
Let’s say you make tote bags out of secondhand men’s shirts:
Cost 1: Bundle of 5 secondhand men’s shirts for £6
Cost 2: 3 spools of recycled thread in white, black and purple for £10
Cost 3: 2 metres of interfacing fabric at £3
Total Cost of materials: £19
Now how many bags can you make with these materials? Let’s say you use the whole of one shirt to make a bag – so you can make 5 bags with the bundle of 5 shirts. But most likely you won’t use up all those spools of thread or all that interfacing fabric on just 5 bags.
Cost 1 divided by number of products produced (5) = £1.2 per bag.
Cost 2 divided by number of products produced (100) = £0.10
Cost 3 divided by number of products produced (9) = £0.33
Total cost of materials per product = £1.63
Go through this exercise for all the products you make and all the materials you purchase to make them with. Then move on to the next step.
What’s your salary?
The next cost is of course your labour costs. And that means you! How much are you paying yourself an hour?
As of April 2020 the hourly minimum wage for people over 25 in the UK will be £8.72/hour. The minimum wage in the United States is currently $7.25/hour.
How much you choose to pay yourself is a personal decision and you may not be able to arrive at a final decision on this one until you have looked at the rest of the factors that should be built into your pricing.
But for now I would like you to at a minimum accept that you should be paying yourself an hourly wage (you would be surprised how many small business owners don’t do this!) and that it should be at least at the minimum wage level.
When deciding on whether it should be higher than the minimum wage you can consider a few things:
- How much training did you do to learn how to make the products you make? Did you pay for that education or training? If so, consider raising your hourly wage to reflect your skill level and expertise.
- What hourly wage feels fair to you in comparison to other work you could be doing to cover your living costs instead?
- What effect will paying yourself a higher hourly wage have on your tax liabilities? You may wish to consult an accountant to help you determine the best wage to pay yourself for tax purposes.
The next cost you need to consider is the cost of advertising your products in order to sell them.
I know some small business owners, especially in the upcycled and handmade space are allergic to the word advertising. BUT…if you want to really make a go at your small business, side hustle or hobby business it is 100% necessary in one form or another.
Here is what I would include as possible costs under the umbrella of ‘Advertising’
- Booking Fee for Craft Fair Stalls
- Cost of renting display space in a local shop (or the transaction fee charged per sale)
- Ads in local publications
- Printing costs for flyers (distributed locally or used as inserts in product packaging)
- Etsy Advertising
- Pay per click for Amazon Handmade listings
- Facebook Ads
- Instagram Ads
- Promoted Pins (Pinterest)
- Google Ads (Shopping or Text)
- Website Hosting Fees (Even if your main marketing strategy is SEO through your website there is a cost to this – include it!)
- Any other cost you incur for getting your product or product listing in front of a potential customer.
Okay, once you are clear on what you are actually spending to acquire customers divide that number by the number of sales that brought you.
So for example in our Men’s Shirt Tote Bag Business example, let’s say we booked a local craft fair stall for £20 and on the day of the fair we sold 5 bags and the following week someone ordered a bag online and mentioned in the checkout notes that they had first seen our products at the craft fair. So that’s 6 bags sold as a result of that craft stall booking.
Craft Fair stall booking fee £20 divided by 6 bags sold = £3.33 cost of advertising per sale.
Some of this can get complicated if you try to add in too many variables or you don’t have a good system in place to keep track of how you acquired customers.
Also as you might already be thinking – this stuff changes over time doesn’t it?
Yes it does, if you take the craft fair example you may not always sell 6 bags at a fair, sometimes you might sell 3 and others maybe 9. This pricing exercise is probably something you should go through once or twice a year just to check that your prices still reflect your costs. Using just one craft fair or one day’s advertising on Etsy or Amazon as your benchmark is not going to be as accurate as looking at it with a month or two worth of data under your belt.
To simplify this part of the pricing process, start by keeping track of your biggest advertising costs and going through this process with them once you have a month or two worth of data. Overtime this should also help you to determine which advertising methods are the most lucrative for you so you can double down on them and cut back on the ones that aren’t reaping rewards.
The other point to note here is that if you think you can’t ‘afford’ to advertise your products this exercise should help to demonstrate to you that if you build the cost of acquiring customers into your price you can. When you find the advertising method that works for your business and you have built that cost into your prices you will have the recipe for growing your business and moving you further down the path to reaching your goals.
So above we covered all the costs to produce your product and we included a salary for you.
So you might be asking – why would I also build a profit margin into my price? I don’t have share holders for pete’s sake!
Here is why –
- The time you spend on your business isn’t limited to making products so you need to be paid for the rest of the time you spend growing your business not just the hours we are building into producing one product.
- Your Profit Margin is your safety net (see below)
- Your Profit Margins is your catapult (see below)
Profit Margin as a Safety Net
Your profit margin acts as a safety net in that it protects you from changes in your costs. So if for example the cost of your materials went up or you had a month where your advertising efforts were not fruitful you have this cushion to brace you from the impact of that on your business. If you hadn’t built in a profit margin you might quickly find yourself losing money when unforeseen things arise – which they almost always do!
Profit Margin as a Catapult
Your profit margin acts as a catapult as this is also where you will most likely fund investments in helping your business to grow.
So for example if you decided to move your workspace out of your dining room and into a studio space that you rent, that is an overhead cost that needs to be funded from somewhere – your profit margin is the logical place for this to come from.
If you work from your home and use simple techniques that don’t involve expensive machinery you may have few overhead costs to begin with.
As you grow these overheads might increase as you look to buy machinery or training that helps you to produce more or higher quality products. When that is the case you may need to find the money to pay for these investments by taking a small portion of your per product profits.
In our cheat sheet we’ve given a huge range (10-50%) of possible profit margin’s to build into your per product price. If you don’t have many overheads you can afford to be on the lower end of this profit margin, if you do have lots of overheads have a play about and see what your prices look like compared to your competitors if you build in a higher profit margin.
Okay so lets go back to the costs you’ve already calculated and come up with an example price.
So above our Men’s Shirt Tote Bag Business came out with a cost of materials per bag of £1.63 and a cost of advertising at £3.33. Now let’s say Molly the bag maker has decided to pay herself the minimum wage of £8.72/hour and it takes her an hour and a half to make one bag.
She has also decided to build in a profit margin of 20% so her initial price per bag (before the next step) is: £21.64. That’s I kind of an odd number so she plumps for £21.99.
Now – how do you know if that is the price you should actually charge? Well the last step is to look around at what price other’s are charging and what price people are actually buying similar products for.
Here is the rub. You can’t price your products in a bubble. You need to have a look out there to see what similar products are selling for.
You need to have an honest look at other sellers products and judge how yours stacks up to it in terms of quality, quantity and sometimes branding and presentation.
Even if what you make is super niche and unique you can still do some competitor analysis by looking at other products someone might buy instead of yours. So for example if you make hanging stain glass art made from upcycled broken glass – you aren’t going to find lots of competitors to analyse, but you could ask yourself, why would someone buy my product? For themselves? As a gift? What kind of gift? And then use those search terms on platforms like Etsy, google, Folksy or Amazon Handmade to find your true competitors.
When you look on these platforms, you want to look for a couple of things.
First, only look at the products being displayed on the first page of the search term that best describes what you are selling. Products that are actually selling well get displayed closest to the top of page one of the search results on any online sales platform. There is no point looking at products on page 2, 3, etc.
Second, look for products that have reviews – ideally a lot of reviews, and ideally recent reviews. Without paying for product research software this is the easiest way to judge if the seller you are comparing yourself too is actually selling at the price they are charging. A listing with 0 reviews most likely means they have 0 or close to 0 sales. Don’t use that seller as a benchmark!
Now how does the price you have calculated stack up with what your closest (successful) competitors are charging? You need to be honest about how your product stacks up and ask yourself if you saw Competitor A & B’s products next to yours with their prices and the one you have calculated – which one would you buy? Do you need to adjust your price? See below for more.
PRICING IS AN ART
Pricing is an art and not a science. You will notice from this post and from the cheat sheet that there are variables within the variables!
If the price you come up with seems high compared to your competitors have a look at whether there are other elements of your costs that you could control.
Could you buy base materials in bulk?
Is your hourly wage too high?
Are you spending too much on advertising?
Could you lower your profit margin and still make the business worthwhile? Your answers to this will be personal ones.
BUT, I’M NOT SELLING
What if you are not making the amount of sales you want?
If you believe that both your quality and your pricing is equal or better than that of your competitor you have a few other points to consider.
You may not be spending enough on advertising. Or you may be advertising in the wrong places.
In the beginning you may need to forgo some of the profit margin you have built into your price and allocate it to experimenting with different methods of acquiring customers whether that involves booking stalls at different kinds of craft fairs, trying your hand at facebook ads, or promoted listings ads on Etsy and elsewhere.
If you are in this experimenting/growing your business stage, then consider that profit margin as the maximum money you should spend to find new ways of finding customers. Not all of these will pay dividends, but when you find the one that works for you, double down on that one and stop paying for the others.
Okay, are you ready to dive into sorting out your product pricing?
You can download our upcycled and handmade product pricing cheat sheet below.
If you are looking for more help to get your new business off the group you can also check out our Quick Start Guide for Upcycling Businesses.
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