Craft Pricing Formula

A craft pricing formula you can use to calculate how much to charge for the crafts you make to sell.

There are a few methods you can use to price your crafts. Each approach to pricing comes with its own set of pros and cons, and different methods will be better for different situations.

Why should you try this pricing formula?

Beyond helping you determine the right price for your products, this formula can help you determine if your business is set up to be profitable. It can be helpful to work through these calculations even if you end up using a different method to price your handmade items.

We're going to use a common method called Cost Plus Pricing as the basis of the craft pricing formula.

Keep in mind, there's no single, perfect formula that will work for everyone in all situations. I've used this formula because it takes all of your expenses into account, and it includes some flexibility, allowing adjustments for individual circumstances.

Once you have an understanding of how the craft pricing formula works, you can try it out for your own products with this online craft price calculator.

Craft Pricing Definitions

There are a few concepts you'll need to know to help you understand how to apply the craft pricing formula and why it's set up the way it is.

Labor Cost

Labor cost accounts for the amount of time it takes you to make your products. You'll need to track your time making items to work out this cost.

Be sure to use a reasonable hourly wage to calculate labor costs. I can't tell you what hourly wage is reasonable because it will be different in different circumstances. I'll use a rate of $20 per hour for the examples throughout.

For example: If it takes 30 minutes to make an item, and you use a rate of $20 per hour, your labor cost for that item will be $10.

Cost of Goods Sold

Materials Cost + Labor Cost = Cost of Goods Sold

Cost of goods sold refers to the direct costs involved in making your product. For craft business owners, those expenses will typically include the cost of materials you use to make your product and the cost of labor required to make your product.

I'll refer to "materials cost" and "labor cost" most of the time to keep things simple. I won't refer to "cost of goods sold" a lot because the phrase isn't as intuitive for people like me who are not accountants, but it can be helpful to know the phrase.

Overhead

Overhead refers to all of the other business-related expenses that don't fall under cost of goods sold or selling expenses. I've written a detailed list of business expenses many craft business owners incur to help you think through your own overhead items.

Overhead typically includes a lot of items, and you probably won't have a good sense of the full extent of these expenses until you've been in business for a while.

That's why we won't add up all of your overhead expenses individually - that approach would be far too labor-intensive in most situations.

Instead we'll calculate overhead as a percentage of your materials costs plus labor costs.

People typically add somewhere between 10% and 25% to cover overhead. You can choose the percentage that works best for your situation (more on that later).

Wholesale vs. Retail Pricing

If store owners want to buy large volumes of your product on a wholesale basis, they will typically expect to pay half of the retail price (i.e. the price regular customers pay).

Step two of the craft pricing formula has you calculate the wholesale price of your product. In step 3, you'll double that amount to calculate the retail price.

Step 3 makes it possible for you to sell your products to wholesale customers at half the price you would charge retail customers at venues like craft shows or on Etsy.

Market Price

Market price is the price that similar items typically sell for.

For example, if you make handmade soap, you might learn that other people who sell handmade soap in your area price their items at $7-$8 each. That's the market price.

Market price is the price range shoppers will have in mind if they are comparing your products to other similar products.

Craft Pricing Formula Breakdown

There are plenty of considerations that go into craft pricing. In fact, there's a good chance you won't end up using the exact price the formula calculates once you take other factors into consideration.

However, I believe a formula is a smart place to start. It gives you a good, objective foundation to determine your prices and helps ensure your won't under-value your work.

Step One

In this step, you will add up all of your direct costs to make an item.

This number is your break even point to MAKE your product. That is, it shows you the bare minimum you need to charge to recuperate the costs of making your product.

Step one does not include any profit, and it doesn't account for labor involved in SELLING your products.

Remember, overhead is calculated as a percentage of materials + labor (10%-25%) to keep things simple and efficient.

The percentage you decide to use will depend on your overhead costs. If you have low overhead costs but high materials plus labor costs, you can go with a lower percentage for overhead. If your overhead costs are high relative to your materials plus labor, look at using a higher percentage to calculate overhead.

Please keep in mind, I am not an accountant, or a bookkeeper or a lawyer, so any information on this site is not intended to be legal advice or to replace the advice of professionals. Please use your best judgment to determine for yourself when you need to consult a lawyer, accountant or other professional.

Bonus Information: Tracking Expenses

You can skip this part if you want to keep it simple! Just scroll down to step two.

While you don't need to add up all of your overhead expenses every time you want to calculate how much to charge for an item, you do need to track all of your business-related expenses. You'll need this information for tax purposes and to help you find ways maximize profit.

As you track your expenses, keep the cost of goods sold separate from other expenses. You'll be able to quickly compare your cost of goods sold to your overhead expenses and more accurately calculate the real percentage of overhead vs materials and labor.

Step Two

In this step, you will add enough profit to your break even point to allow you to sell your product at wholesale prices.

This number is the price you would charge to a wholesale customer who buys large volumes of your product to sell in their own retail shop. It includes the cost of making your product plus some profit.

Break Even Point + Profit = Wholesale Price

The profit amount is calculated as a percentage of the break even point.

The percentage you decide to use will depend on how much customers are willing to pay for your product. Remember, wholesale price is half of retail price, so a realistic wholesale price is half of what customers are willing to pay.

You can see the differences are quite large. This is the step where the price starts to rise.

You'll need to use your market research and your best judgment to determine how much profit you can add while keeping the price within a range people are willing to pay.

Step Three

In this step, you will double the wholesale price to calculate the retail price. This step factors in labor to sell and selling fees.

This number is the price you would charge to retail customer who was buying single items or small numbers of your product in a retail setting such as a craft show or your Etsy shop.

Wholesale Price x 2 = Retail Price

Doubling the wholesale price accounts for your labor and expenses involved in SELLING your products.

Again, you can see this step increases the price significantly.

Once you do the calculations, you'll need to balance your results with what you know shoppers expect to pay for an item like yours.

Next Steps

Once you've calculated your price, you need to think things through.

Is your price realistic?

Ask yourself whether the price you've calculated is in line with prices shoppers expect to pay for a product like yours.

The craft pricing formula gives you an objective estimate of what you need to charge to build a business that is profitable and has room to grow. It doesn't tell you anything about your customers' expectations or the current market for your product, or the perceived value of your work.

If the amount you have to charge to be profitable is well above the amount you think your could sell your crafts for, you need to take a serious look at your business.

There's actually a lot you can do to affect the perceived value of your products. James Dillehay's book, How to Price Crafts and Things You Make to Sell has some excellent advice on that topic.

In the end, you might not use the exact price shown by the formula. It's not meant to dictate price; it's just there to give you a baseline.

The formula will allow you to make some smart choices for your business, and it will push you to avoid under-selling yourself.