Pricing
by Joel Peck, CPA, managing partner of Joel Peck and Associates, a firm specializing in serving the accounting needs of entrepreneurs, 212-382-2455
So now that you have some things to sell, how much should you charge for them? What factors are part of pricing? How much is your time worth? How much should you add for the materials which you purchased? What about the lost metal filings? Should you really add in something for the rent, the tools you use, the postage paid to send it to your customer, the fee your accountant charges each year, the paper towels and the light bulbs?
The answer is yes, yes, yes, yes, yes and yes. Include it all, or you will go broke. You either cover your expenses or you close up shop. Simple as that. The real task is to determine how much to add to each piece for the accountant's fee. It wouldn't be fair, and it would not work, to add $500 to a pair of silver earrings in order to cover your estate planning. But it would be right to add a little to each piece to pay for its share of these fixed expenses.
No matter what kind of system you use, the goal of pricing boils down to just one thing, setting a marketable price that covers your expenses, including yourself. The method is to create a worksheet listing all expenses so that you can calculate what it costs to make each piece. Here is how it's done. You may find it useful to print this entire file and use it as a work sheet.
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COST CALCULATION WORKSHEET
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Fixed Expenses
This is what it costs you to stay in business, whether or not you make anything or bring in any money. There are two parts:
* Capital Expenditures, what it costs you to set up shop; and
* Operating Expenses (or overhead), what it costs you to keep the doors open. |
This is the cost of tools and equipment divided by the expected life of the equipment.
For example, if it cost you $5000 to assemble a workshop full of tools that last for 10 years, then $500 is your annual depreciation, more or less.
Your annual depreciation ________
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Operating Expenses
Enter at right the annual cost for:
| Owner's Salary |
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| Rent |
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| Insurance |
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| Utilities |
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| Studio supplies |
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| Office supplies |
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| Advertising |
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| Legal fees |
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| Professional fees |
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| Stationery |
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| Telephone |
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| Postage |
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| Craft fairs (or whatever trade shows you exhibit in) |
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| Business taxes |
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| Transportation |
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| Other |
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| TOTAL (your annual overhead ) |
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Hourly Overhead
Divide the total annual overhead by the number of hours you work in a year. For example:
Let's say your annual overhead is $50,000.
Let's say you work 40 hours per week for 50 weeks. That totals 2000 hours.
Your hourly overhead is annual overhead divided by hours worked.
That becomes 50,000 divided by 2,000, or $25
Now calculate your hourly overhead and enter it here. |
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Cost of Sales
This is what it costs to make something. Each item takes a different amount of time and materials. Therefore, these calculations must be done for every single item in your collection. Again, there are two parts
* Labor, and
* Materials
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| Number of hours to produce the piece |
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| How long to design it |
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| Planning |
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| Sales |
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| Errands |
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| Daydreaming |
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| TOTAL hours |
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Hourly cost of labor depends on who is being paid.
If it is an employee, figure their hourly wage plus benefits, taxes, sick pay, bonuses, etc.
If it is a subcontractor, you should be given a per/piece or hourly price.
If it is yourself, you need to come up with a number. Consider such things as how much you would make at another job, how much you would pay someone else to do the work, how much you have invested in gathering your skills, what you need to live on, plus the cost of your own benefits, etc. This is usually the most difficult part for beginners.
Factor in these considerations and come up with a number for hourly labor.
Enter it at right. |
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| Gem |
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| Metals |
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| Findings |
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| Lost |
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| Materials cost |
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Now here is something else to consider: Aren't you entitled to a profit for risking your money and maintaining an inventory on these materials? If so, you might want to tack it on here.
Materials cost adjustment
TOTAL materials cost
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| Here is where we do some math with the numbers calculated above. |
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Production cost
Your production cost is the total of two things multiplied together. One is the combined hourly overhead and hourly labor. The other is the total number of hours needed to make the item.
Production cost = (hourly overhead + hourly labor) x number of hours needed to make the piece.
Example:
hourly overhead is $25;
hourly labor $30 per hour
it takes 10 hours to make the piece
Add $25 and $30 to get $55
Multiply that by 10 hours to get $550 which is your production cost.
Now calculate your production cost and enter it here |
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Net cost
Production cost + Materials cost = Net cost
Simple enough.
Your Net Cost |
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Profit factor
Here is another chance to add something for risking your capital on overhead, materials and labor. If you put the same amount of money into a bank, stocks, horses, craps, what would you expect to earn? By investing in yourself, which is perhaps a greater risk, shouldn't you earn a greater profit? Think about it. And don't bother asking other designers what their profit factor is -- they won't tell you. It's different for every designer and something of a personal question anyway.
When you have finished pondering this one, figure out what your profit factor should be and enter it here. |
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Final cost
Net cost X Profit factor = Final cost
Your final cost |
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But wait, we're not done yet!
Take a look at this number. It is your cost for producing the one item in question. It may not include a few things. If you use a commissioned sales rep, that commission is not included. Is this final cost wholesale or retail? Most retail outlets which buy work from manufacturers at least double their costs. To be fair, if you are selling direct to the consumer, so should you.
As you can see, there are a lot of variables, especially from this point on. As you reach a selling price, do some comparison shopping and compare it to prices of similar items in stores. Do you want your price to be higher or lower? There are no absolutely firm rules about how you set your prices, but you should keep all of the variables in mind as you reach the ultimate balance that works best for you.
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