Are you charging enough? 7 easy steps to calculate how much your product will cost

Do you know the cost price of your product?

Do you know how much it will cost you to create one product?

Many designer makers don’t really know how to calculate their cost price, and undercharge for their products. You can then be really busy, but still earn less than the minimum wage and barely make a living.  That’s not what we want you to do!

It’s crucial that you know how much it costs you to produce your products. These calculations are the foundation of pricing your products.

In this popular post we will go step-by-step through the calculation of a milliner making one hat.  It is based on a one-person business, but can be adapted for a partnership too.

Step 1: Calculate your hourly overhead costs

Start with identifying your annual business overheads.

Overhead costs are costs that need to be paid regardless of sales, so for example include your studio rent, phone and mobile, insurance, utilities, marketing, storage, business rates.  These are the invoices that you pay often on a regular basis.  Don’t include your drawings/salary or raw materials.

You can find your business overheads by checking your monthly or quarterly invoices, identify the various overhead costs, and list them all in a spread sheet or on a piece of paper.

For our example we use £12K p.a. as your total annual overheads. (PS your figure will not be as perfectly round as this!)

Now we need to work out how many hours per year she actually spends on average making hats. This is the time spend on making products that can be sold (and therefore generate income), so don’t include your time here that you spent on marketing, admin, meetings and the like.

Be aware that in your first years you do well if you spend 40% of your time physically making products that can be sold. I would expect a more established maker to be able to spend between 50 – 60% of their time on making for sale.

Let’s say that the milliner has 4 weeks off (for holidays, illness and slack time), and that she works 40hours per week, so the total hours/year making work would be: 48 weeks x 40hours x 40% = 768h/year.

The hourly overhead costs will then be £12,000/768h = £15.62

It’s very likely that your overheads, in particular your studio costs, is one of the biggest costs for your business. It’s often higher than the salary you want or need! Therefore it is really important to keep your overheads as low as possible, especially when you are just starting out. See if you can share a studio or work from home to minimise your costs and to get your business off the ground.

Step 2: Calculate your hourly wage

How much do you want to earn?

Let’s say the milliner wants to earn gross £22K p.a.

This is her ‘salary’ to cover her personal outgoings such as rent, food, clothes, holidays etc. This is a gross figure that includes national insurance and tax etc. The salary that she would get in her purse would be less as she would pay tax over £10K of profit in her business. For exact details see the HMRC website in the UK.

How much salary you need or want depends on many personal circumstances, such as your expectations, additional income, where you live and with whom you live, and what you want or need to have the lifestyle you want.

We use the same hourly figures as previously: 48 weeks x 40h x 40% = 768 hours, so that makes an hourly wage requirement of £22K/768 = £28.65

Step 3: Calculate your total hourly rate

This is your hourly overhead costs + hourly wage = £ 15.62 + £28.65 = £ 44.27

Step4: How long will it take you to produce one product?

If you don’t know the answer to this question, don’t guess! 

Check out with a time sheet and keep a time log. You might be surprised how different your guess is from the reality!

Hopefully you have made your production more efficient and effective by combining various jobs together and produce products in small batches.

Remember to include all production processes, including cutting fabrics, sewing,  finishing and packaging.

Use averages e.g. you cut 6 hats in 2 hours, resulting in 20 min per hat on average.

Let’s say total time spend to get 1 hat ready is  2.25 hours x hourly rate of £ 44.27 = £99.60

It is always good to calculate backwards too:

If you indeed make 16 hours per week, then this calculation means that you should be producing 7 hats per week: 16h/2.25h per hat = 7 hats.

Is this true? Do you want to create more or less hats?  Use this calculation to improve your own management and start checking out if you need to look at outsourcing too.

Step 5: Calculate the total material costs

Add all the costs of the materials to produce one hat.

Don’t skimp, it really is important to have a bit of contingency, and don’t use the cheapest materials.

For our example we will use £22.

Don’t use the cheapest materials: Think about the value that you add with your materials and make sure that the costs are lower than the perceived value. Is it worth it?

If you use a very cheap zip for example your overall product will look cheap, but the chances are that it will break sooner too, and the cost of replacing a broken zip are far higher than using a good zip in the first place.

Step 6: Add contingency

Contingency is ‘just in case’ and we suggest a contingency percentage of around 10%. If your product is very expensive you might go for a lower percentage, or if you have a lot of experience with similar products you can lower this figure too.

Contingency will allow for mistakes, hidden extra etc, and will allow you to offer discounts or special offers.

We will use 10% in our example.

Step 7: Calculate your total cost price

Add step 4: £ 99.60 + step 5 (material costs): £22 x 110% (contingency) = £133.76

This is the amount that it cost to produce one hat.

That’s it! You have just calculated your cost price!

 

Some important notes:

So what do you think about your cost price?

Be very aware of the cost terminology and markups.  If you would sell to retailers then you normally would double your cost price to get to your wholesale or trade price, and they would add 200-300% commission to get to their retail price.  So your cost price of £133.76 would lead to a RRP of around £535 – £800.

Is it too expensive?

In this case I used an example of a milliner in London, who would have been going for a while, and who would have her own studio space. Therefore her overheads and salary expectations are higher. If you have just started out and work in a different part of the UK then your studio costs and overheads might be far lower.

She also might decide that she wants to create unique, commissioned hats and not work with retailers, so she would not have to deal with the potential markup of a retailer. She might sell directly at consumer shows, open studios or by appointment to clients in her own studio. She could sell her unique hats for £600 – £950 (therefore having a profit margin of £450 to £800 per piece). This price level is not expensive, it’s what I would expect to pay for a unique commissioned hat in London!

If she wanted to sell at a lower rate then she would have to make more hats that are similar, to bring her production costs down and the quantities go up.  She would have the same income, but her business model would be very different!

Use your calculation as a starting point to calculate backwards. 

How many products would you need to sell per year to cover your annual overheads, salary/drawings and direct costs/raw materials? Is that do able and do you feel comfortable with that, or is it far too many or far too few?  What kind of business do you want to run: very bespoke and at the high end, or sell a lot more products but then at a lower price point? Do you want to sell directly to your clients or through retailers? How would you produce your products if there are lots of them, and how would you market and sell them too?

Are you still worried about being too expensive? Read this blog posts to get some alternative responses to clients who say that you are too expensive.

If you want to avoid being a starving creative then read this blog post.

Also, costing is just the first part. 

The second part is pricing your products!

You can learn more about different ways to price your product here.

If you are looking at how to cost your services and in particular your hourly or daily design rate, then click here.

 

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25 Responses To "Are you charging enough? 7 easy steps to calculate how much your product will cost"

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    • Patricia says

      Thank Kristina. Your comment meant that I have added a note at the end of the post to explain a bit more in detail.

  1. Ari says

    My daughter makes beautiful polished rosewood bracelets, some accented with turquoise. She sells at farmers’ markets and the like. I’ve been teaching her about costing, pricing and margins. One significant cost your excellent article omits: hours spent sitting at a table, selling the product!

    • Patricia says

      Hi Ari
      Thanks for your comments. If it takes hours to calculate how much it costs I would be a little worried to be honest. That would mean you spend less time on the making, which means indeed that the hourly costs would increase. So indirectly this would be included that way.

  2. Jane says

    A good overview of all the pricing process but this concerns general milliners. What about a theatrical milliners who make hats for shows and theatres? Sometimes a one-off’s. Do they have to use the same structure?

    • Patricia says

      Hi Jane
      The example is given here is for all crafts people who design and make products. It is essential that you know how much your products cost you, and that you need to include the hidden costs such as overheads and marketing costs in your products too.
      The next stage after knowing your cost is deciding on the actual price – see the blog post about ’14 ways to price your work’ for that.
      As a theatrical milliner you still need to know how much your costs are, but in a way you will be commissioned as a designer to create something. You will be more likely to have to work within a given budget, and then see what you can deliver for this.
      You will need to look at how many theatre projects per year you expect to get, and at what rate. And compare that against your costs, to see if this is feasible.
      I hope this helps.

  3. sally says

    This was just plain silly! It might work for hats where there is a big mark up but it doesn’t work at all for items that take huge amounts of time in other crafts and have a lower perceived value. For instance try giving yourself such a huge salary and allowing for overheads if you are knitting. A pair of socks takes 20 plus hours. No one would ever pay what they cost you to make. Same for most sewing and embroidery. This post made me laugh wryly it is so pie in the sky.

    I am coming to realise that far from maths giving accuracy and security, it can often be a nonsense and lead to a very false sense of the situation. Sometimes it seems a more intuitive approach is actually the more realistic one. Take the question ‘how many will you sell in a year’? A total projection of such figures no matter which way you arive at it is totally inacurate. It’s a false hood to pretend to the bank that we know. We don’t and we can’t do. Marketing and research can tell you so much, but it will not give you the answer to how many can you sell. Yet everyone pretends it can and everyone requires the information. I will sell as many as I can sell and as many as I can produce. That’s it, the only accurate answer.

    • Patricia says

      Dear Sally
      I’m really not trying to be silly here. Our site is aimed at people who want to run their own craft or design business, and want to create at least an income for themselves, if not more. I know from personal experience that that isn’t always easy. Through The Design Trust website I share my 15+ year experience of working with 100′s of crafts and design businesses.
      When craftspeople struggle to get the price they need for their items (such as potentially hand-knitted socks) I would ask my clients to check firstly how long it would take them (by keeping an exact time record). We would look at different options at each of the stages of the making process if there were opportunities to make them quicker. If that isn’t possible or ideal, I would suggest to look at other higher valued items, or for example larger socks (e.g. Christmas stockings) or very special socks (e.g. highly decorated, or expensive materials), which have a higher perceived value and for which you can charge the appropriate price.
      With items that cost relatively a lot to make I also would focus on selling directly (e.g. online or through markets), as it would be hard to sell them wholesale.
      When working creatively with these financial figures you can start giving yourself some direction to what you want to do and to help you set goals: ‘Do you want to run a hobby creating 20 socks per year, or do you want to create 100 per year, 500 or a 1,000?’ Each option is perfect for somebody, and depending on the answers you can start creating the kind of business you want to create. You can start looking at the making and labour costs, the hours you have available to put in your business, what you would like to earn, what turnover you want, what marketing you need to do, what sales channels you need to use to achieve the goals that you have set yourself, etc. From working with this costing exercise like this a lot of further business decisions can be made.
      Running a business isn’t an exact science, but setting yourself targeted goals will help you to get where you want to be.
      And I am definitely want to help people to run a sustainable business in the long term, who don’t undercharge (increasingly common!) or overcharge for their products.
      You will be very busy, but it won’t be a business, and the fun will go out of it if you set out that your creativity should pay you an income.

    • says

      It’s important to know what these numbers are and what your costs are, and what you need to live on. What you sell at is a different calculation. Doing these at the beginning, and periodically, gives you a solid structure on which to base what you do charge and your range of products and business model. Once you know your numbers a lot more can be done intuitively.

      Also, I’ve paid £30 for a pair of hand knitted socks. They were for a friend for a Christmas present and one of her favourite items of clothing. Nothing else keeps her feet as warm in the winter.

      A person is unlikely to make a living selling hand knitted socks as you say. They could make a living selling videos/the pattern/help to people wanting to start doing knitting/other crafts and needing help. There is more to it than just making products, creating can be information to others, it’s just as creative and can enable people to really ‘get’ what you’re doing and pay more as they can easily establish a relationship with someone who reaches out more.

      (Writing as a buyer of lots of handmade items from socks to soap to skin care).

    • Patricia says

      Dear Rosie
      Thanks for your comments, and great to see that accountants are reading our costing posts too! ;-)
      I strongly suggest that people read this post in conjunction with our pricing post: http://www.thedesigntrust.co.uk/calculate-how-much-your-product-will-cost/ which discusses much and more of what you mention here.
      Also our Business Club members can watch our webinar recording on ‘creating more creative income streams’, which gives a clear overview in 90min on all the different income streams creatives can add to their existing business to generate more income.

  4. says

    Thanks for this informative piece. I don’t think your article is silly at all.
    I have just discovered this website and it is really useful. It is very helpful to be realistic about all these things.
    I started making gifts for friends then began doing craft markets and selling through Etsy. Last year some local shops approached me and asked to stock my products. I have done this on a fairly casual basis (and sale or return), but have just decided to take a rain check and go back a step and work out my costs properly, as I was finding that I was working like a maniac, and for very little reward.
    It is very tempting when people admire your work and ask to stock your work to go follow those leads a bit blindly, but I’m realising now that I have to have a proper sense of my business plan, costs, work time available etc.
    So thanks for this, it was just the article I needed right now!
    One quick question – would you advise that if you do supply shops with products, that you also sell yourself online or directly at craft events, that you price them the same? I hear a lot of conflicting advice about this. Thanks.

    • Patricia says

      Hi Susie
      Thanks for your comments. It was more the question about the actual pricing that I wondered if that was silly, then the whole article :-)

      Concerning your questions: I STRONGLY suggest that if you sell both direct (e.g. craft fairs or online) and to retailers that you keep the prices for both more or less the same. There could be a slightly lower price (say 10%) but no more than that. Imagine if you were a gallery owner and you would work really hard to promote people’s work, how would you feel if the work would cost far less if bought directly? It is one of the quickest ways to lose your trade clients!
      Make sure that you understand how cost and retail prices relate (double your cost price and then double/triple it again). This will mean that you will have a very healthy profit margin if you sell direct if you can get that price.
      But if your wholesale price is too high for the market then that might mean that you need to wait a little and focus on direct selling yourself to bring your cost price down.
      You can find more details in the following blog posts:
      http://www.thedesigntrust.co.uk/what-price-to-use-when-talking-to-retailers/
      http://www.thedesigntrust.co.uk/should-i-participate-in-a-contemporary-craft-or-design-fair/ this one explains about wholesale pricing too as you might be too expensive when you start out.
      Good luck!

  5. says

    Hi Patricia,
    Thanks for the useful summary, and for many thought-provoking articles.
    However, I don’t understand why the cost price should be doubled to calculate the wholesale price for retailers, when the salary for the maker has already been accounted for in the cost price? I understand that a maker can add an extra profit margin as they see fit, in order to expand or invest in their business or simply to increase their personal income if they are fortunate enough to be able to sell at their final price point. But I just don’t think it could be feasible to double the cost price of most genuinely hand crafted products except perhaps those that have a high perceived value such as jewellery in precious metals, or makers who have already made a name for themselves in the collectors market.

    Also, should a direct selling price not potentially be almost equivalent to a shop / gallery retail price, given that a maker selling primarily directly will need to spend extra time dealing with individual customers, packing products and marketing their online shop / promoting their work to individual clients? The idea of selling through a shop or gallery is that they do the job of attracting a larger number of customers and selling the product for you.

    I hope I don’t sound like I’m picking holes, but pricing can be such a confusing yet crucial topic, so i think it’s important to clarify and discuss.

    • Patricia says

      Dear Nicola
      Thanks for your comments, and indeed there is some leeway here. But it seems to be the recommended mark up to cover hidden costs, breakages, stock damage and as you won’t sell all your work.

      If you have done your calculations thoroughly and kept an eye on how you spent your time then you can decrease this %.

    • Patricia says

      Dear Jane
      Very good question, you are the first!
      The slight issue is (as you probably had already noticed) I use images on The Design Trust site rather sparingly. Rather a lot of creatives comment on this. But I actually only want to include images if they make sense, and I rather dislike those images of coins when it is about money, or birds when it is about Twitter. So to be honest, if I can find a good image, I will include it. In the meantime, you might have to send your students just the link …
      (PS I am increasingly using images and videos, but then they are by or of the creatives, galleries, trade shows etc.)

  6. says

    What about an infographic? It isn’t too literal and you could use the same colours and typography as the website. I agree that it would create an opportunity to pin articles on pinterest.

    • Patricia says

      Although this isn’t an infographic, our Business Club members can watch our webinar recording taking them through the pricing stages visually step by step.

    • Patricia says

      Dear Jane
      That’s really great to hear. One of the best comments, as we love to get people into action here at The Design Trust!

  7. Swatee says

    Dear Patricia, I am a regular reader of your website and find it very helpful. I have a question though. I am starting a business of sourcing handicrafts and selling it online. Can you please tell me how should I price my products since I would be sourcing it from different artisans?
    Thanks

    Swatee

  8. Claire says

    Hi Patricia,

    I did find your article very informative but I couldn’t help but notice that you hadn’t calculated a profit margin, unless that is in with the contingency??

    Regards,

    Claire.

    • Patricia says

      Hi Claire
      This is about calculating the cost price, which is the basis for knowing how much it cost you to produce one product. On the basis of this cost price you calculate your wholesale (about 2 x the cost price, but depends on your quantities and price levels) and retail price (about 2-3x wholesale price)
      The profit is included in doubling your cost price. For more info see http://www.thedesigntrust.co.uk/what-price-to-use-when-talking-to-retailers/
      I hope that explains how your include the profit.

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