How to calculate the cost price of your creative products: a 7-step guide for makers
Do you charge enough for your creative products to cover your costs? Do you really know how much it costs you to make one of your handmade products or are you guessing? In this popular, in-depth blog post we will show you how to calculate the cost price of your creative products.
Why is calculating your cost price so important? Because if you do not know what the costs are, then you do not know if you are making a profit or a loss on your sales! And although you might be selling loads of handmade products, if you are not charging enough you will be losing money with every sale. And you simply can not afford that!
In this practical guide we will take you step by step through the 7 stages of calculating the cost price of a handmade creative product (in the UK). I have used this calculation for many years in my work as a creative business adviser and trainer in London for professional creatives.
Throughout the 7 steps I will use one example: a self-employed milliner making hats. The figures are deliberately simple so that you can follow the calculation and then replace them with your own.
Quick answer: How do you calculate the cost price of a handmade product?
In simple terms, your cost price is what it actually costs your business to make one product. For a handmade product this normally includes your own making time, your hourly rate, a share of your business overheads, the materials used in the product, and a contingency for wastage, mistakes and unexpected costs.
A useful formula is:
COST PRICE = (MAKING TIME × TOTAL HOURLY RATE) + MATERIAL COSTS + CONTINGENCY
Your total hourly rate needs to include both the wage you want to earn and a contribution towards the overheads of running your business.
Be aware: Your cost price is not your selling price. It is the starting point for working out whether your wholesale or retail price is commercially viable.
Make sure you keep all your receipts to claim them back for your tax return
Are you ready to calculate your cost price?
Step 1: Calculate your annual overhead costs
Start by identifying your annual business overheads.
Overheads are the costs you need to pay regardless of how many products you sell. A useful way to think about them is: which business costs would still exist if you were ill, on holiday, or had a very quiet month?
These might include studio rent, phone and internet, insurance, utilities, website costs, software, marketing, storage, accountancy, business rates and equipment. If you buy an expensive piece of equipment that will last for several years, spread that cost over its useful life rather than putting the whole amount into one year.
Do not include your salary (or ‘drawings’), or the raw materials used to make your products, at this stage. We will get to those later.
The best way to identify your overheads is to look at your actual monthly and annual invoices, and your accounts. If you are very new and have not incurred all these costs yet, research what they are likely to be. Don't guess.
For our example, our milliner has been working in London for a couple of years. She has a studio, attends three trade shows and two high-end consumer events each year, and has calculated that her annual business overheads are £8,500.
FAQ: What if you work from home?
Working from home does not mean that your business has no overheads. You may still use additional heating, electricity, internet, storage and other household resources for your business.
If you are self-employed in the UK, HMRC provides guidance on claiming expenses for working from home, including simplified expenses where eligible. Check the current rules here:HMRC: simplified expenses for working from home
Use the method that is appropriate for your circumstances and check with an accountant if you are unsure.
Step 2: identify your annual salary
We start this second step with a very personal question: How much do you need to earn from your creative business?
This is a very personal question and depends on your expectations, circumstances, age and many other aspects. Take some time to research what you need to cover your personal expenses, such as your mortgage or rent, food, clothes, holidays, pension contributions and the lifestyle you want to have.
However, when I started The Design Trust, I did not pay myself a wage for the first three years. I was fortunate that my husband had a regular income and could cover our mortgage and household bills. Many new business owners reinvest most of the money they make in the early years, but that does not mean your own labour should be free.
Many small business owners have a parttime job to make sure their bills are paid. If you have additional income then deduct this from how much you need to earn from your business.
For our example, our milliner wants the business to generate £20,000 a year for her before personal tax.
This is an example figure to make the calculation easy to follow. Your own figure might be considerably higher or lower. The important question is not 'What should a maker earn?' It is 'What does my business need to generate to pay me what I need and want to earn?'
Step 3: Calculate your total hourly rate
How many hours do you actually spend making work you can sell?
A common mistake is that creatives think that their total hours in the year are: 52 weeks x 40 hours = 2,080hours.
Instead, the number you need is: the amount of hours in a year that you realistically spend designing and producing products that can be sold.
You will be spending many hours on research, marketing, social media, professional development but none of that time directly contributes to sales - only your production does. So, do not include the time you spend on marketing, admin, bookkeeping, meetings, professional development or sourcing.
REALITY CHECK: In my experience as a creative business adviser working with 1,000s of designer makers, I have become aware that my sustainable creative clients spend around 40% of their working time making products they can sell.
They also spend about 30-40% their time on marketing and selling their work, 10% on professional development and research, and 10% on finance and admin.
This is a useful planning benchmark, not a rule. A more established creative professional with a strong reputation, regular collectors or established gallery relationships may be able to spend more time producing. A newer business may need to spend even more time initially building visibility, relationships and sales.
But, if you currently spend 80% of your working week making, ask yourself: when are you doing the marketing, selling and business development that will generate enough sales?
So, back to our milliner,who takes 4 weeks away from the business each year (for holidays, illness and slack time) and works full-time at 40 hours per week.
If 40% of her working time is spent making saleable hats:
48 weeks × 40 hours × 40% = 768 making hours per year
Using the same 768 making hours per year:
(£8.5K + £20K) ÷ 768 hours = £37.11 per making hour
This £37.11 is the amount each productive making hour needs to generate before we even add the materials used in the hat.
Reality check:
Your hourly rate as a self-employed person needs to be much higher than somebody who works PAYE, simply because you will have far less hours available to create work that you can sell.
If your prices only work because you are paying yourself very little - or nothing - for your making time, the product is not as profitable as it appears. You are subsidising it with your own unpaid labour.
Step4: How long will it take you to produce one creative product?
If you don't know how long it takes you to make something, don't guess. Keep a time log for a few weeks. Time the whole production process, not just the most obvious making stage. For our milliner that might include preparing and cutting the fabric, blocking, sewing, trimming, adding feathers or other details, finishing and packaging.
If you make in batches, calculate an average. For example, if our milliner cuts the fabric for six hats in two hours, that stage takes an average of 20 minutes per hat.
Let's say that, once all the relevant production stages are included, our milliner takes 2¼ hours to make one hat:
2.25 hours × £37.11 = £83.50 labour + overhead cost per hat
It is also useful to calculate backwards. If she has 16 productive making hours per week (40% of a 40-hour week) then: 16 hours ÷ 2.25 hours per hat = just over 7 hats per week
Does that match what she actually produces? If not, where is the difference? Is the making time inaccurate? Is there more finishing or preparation than she realised? How could she become more efficient?
Step 5: Calculate the total material costs
Now add up all the materials used to make one hat.
For our milliner this might include: the main fabric, lining, thread, wire, elastic, feathers, trims, labels and other components. She calculates that the materials for one hat cost £22.
Keep good records of your material costs and update them when suppliers change their prices. Small increases across several components can make a noticeable difference to your cost price.
Also think about quality and perceived value. The cheapest material is not always the most commercially sensible choice. A poor-quality fastening, lining or trim can reduce the perceived value of the whole product - or create much more expensive problems if it fails later.
Step 6: Add contingency
Making is rarely perfectly predictable. Materials get damaged. A piece has to be remade. You use slightly more fabric than expected. A supplier puts up its prices.
There are always small costs that are easy to overlook, so we need to include some contingency.
I recommend adding around 10% contingency. Depending on your product, experience and price level, you might decide that a different percentage is more appropriate.
Contingency is not your profit margin, and it is not there so that you can offer discounts. It is there to give you some protection against the real-life variability of making.
Step 7: Calculate the cost price of your creative product
We now have everything we need:
Our milliner's making time including labour and overhead contribution is £83.50.
Step 5: Her materials cost £22.
Step 6: Add 10% contingency.
£83.50 + £22 = £105.50 x 110% = £116.05
The cost price of one hat is therefore £116.05.
That's the amount it costs her business to produce one hat using the assumptions we have made.
And this is the crucial point:
YOUR COST PRICE IS NOT YOUR SELLING PRICE.
Costing tells you what the product costs you. Pricing is the next commercial decision.
Your calculation is mathematically correct. But does the product work commercially?
This is where costing becomes much more useful than simply filling in a spreadsheet.
You might calculate your cost price and realise that you are expensive … but that doesn't automatically mean you have done the calculation wrongly, and it doesn't automatically mean that you are 'too expensive'. Instead, use this number to ask better business questions:
Could you make several similar hats together and reduce the making time per piece? Is there a labour-intensive detail that takes a lot of time but adds very little perceived value? Could you reduce the number of variations? Often your labour is the biggest cost in your cost price!
Could you increase the perceived value of your handmade products by improving your presentation and branding? Where you show and sell your work?
Do you need to market yourself more regularly, and to people who are interested in what you do and who understand that handmade products will be more expensive than machine-produced items?
Would selling directly to clients only make more sense than wholesale?
Could this become a more distinctive, higher-end product rather than trying to make it cheaper?
Could you buy frequently used materials in sensible quantities at a better unit price?
Could you reduce wastage?
And what if none of those things work? Perhaps this particular product is simply not commercially viable at the price your market will accept. That is useful information too.
Your cost price is not simply an answer. It is a decision-making tool.
What could our milliner do with this cost price information?
Our milliner's cost price is £116.05. She now needs to decide how and where she wants to sell, what profit the business needs to make, and what customers will realistically pay.
If she wants to work with galleries or shops, she will need enough margin between her cost price and wholesale price for her own business to be profitable, while also allowing the retailer to apply their retail markup. This is why it is so important to understand the difference between cost price, wholesale price and recommended retail price.
Alternatively, she might decide that her strength is unique commissioned hats sold directly to clients through appointments, events or her own studio. She could make fewer pieces at a much higher price. Or she might develop a more repeatable collection that can be made efficiently in small batches.
None of those models is automatically right or wrong. They are different creative business models.
Ask yourself:
How many products would I need to sell each year? Can I physically make that number? Is there enough demand at this price?
Do I want a high-volume business or a smaller, more bespoke one with lower quantities?
Do I want to sell directly, through retailers, or both?
What needs to change in the product, production process or positioning for my numbers to be viable and profitable?
A brief note about outsourced manufacturing
This guide focuses specifically on designer-makers who physically make their own products. If some or all of your production is outsourced, your cost calculation will be different. You may need to include sampling and development, manufacturing charges, minimum order quantities, freight, import costs and other production-related costs. Do not simply use this handmade-product formula without adapting it to the way your products are actually produced.
A brief note about VAT
VAT can affect both the costs you use in your calculations and the final price your customer pays. If you are VAT registered, you may be able to reclaim VAT on eligible business purchases, so you need to be consistent about whether your calculations use VAT-inclusive or VAT-exclusive figures.
Do not simply add VAT into your cost price without understanding how it applies to your business. Check the current HMRC rules and speak to your accountant if you are unsure.
FAQ about calculating your cost price
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Add the cost of your productive making time - using an hourly rate that includes both your wage and overhead contribution - to the materials used in the product, then add an appropriate contingency for wastage, mistakes and unexpected costs.
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For the cost price itself, include your making labour, an appropriate share of overheads, materials and relevant contingency. Your eventual selling price then needs to allow for profit and the realities of your route to market.
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Yes. Your own time is a real cost to the business. Even if you are not currently drawing the full wage you would like, ignoring your labour can make an unprofitable product look profitable.
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First calculate your annual business overheads, such as your studio hire, insurance, website or mobile phone costs.. Then divide them by the realistic number of productive making hours you have in a year. This gives you an hourly overhead cost, which can be included in the hourly rate used to cost each product.
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Packaging that is specifically required for each product should normally be included somewhere in your costing. Be consistent about what you treat as a direct product cost and what you include within your general overheads, so that you do not forget it or count it twice.
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Your cost price is what the product costs your business to make. Your wholesale price is the price you charge a retailer or trade customer and needs to include profit for your business. The retail price is what the end customer pays and needs to allow for the retailer's markup where relevant.
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Don't immediately reduce your wage or assume you need to charge less. Look at what is driving the cost: Can you make your making process more efficient, batch more effectively, reduce wastage, change a low-value but time-consuming detail, review overheads, sell more directly, or position the product differently? If the numbers still do not work, the product itself may need to change, or you need to do more regular marketing to the right people.
Costing is only the first part: next, work out your price
Once you know your cost price, you can start making informed decisions about your wholesale and retail prices, your profit margin and the kind of business you want to build.
Do not start with what you think customers will pay and then squeeze your costs into that number. First understand what the product genuinely costs you. Then look at the market, your positioning, your route to market and the profit your business needs.
That is when costing becomes useful: not just as a formula, but as a tool to help you make better creative and commercial decisions.
Did you find this post about how to calculate the cost price for your creative product useful? Did you use the formula to calculate your own craft or design products? Do let us know in the comments below to share your insights.
