Fiona Pullen, author, crafter, founder of The Sewing Directory and all round nice person, is explaining the elements you need to think about when setting up a creative business. In Part 2 of this four part series she is looking at the importance of getting the pricing right.
In her own words:
Following on from my post about planning your creative business, I want to talk about the financial side of things today. The key element of any successful business is making money, so how can you check if your business idea will turn a profit?
Firstly, you need to know exactly what your products cost. I’m not just talking about raw materials, but time and other costs like selling fees.
Start with the raw materials cost. For example, if you are planning to sell handmade bags you need to note down the cost of your fabric, thread, wadding/bag foam, interfacing, zips and hardware. Ideally you want to be buying these from a wholesaler to bring your costs down. Take a look at my useful list of UK craft wholesalers.
Next, you need to factor in your time, how long does it take to make the bag on average (including preparation time)? What is a fair hourly rate for your time? You are a skilled worker so you should be looking at well above minimum wage. For some businesses, such as long arm quilting, time may be your main cost. This bit is where many creative businesses struggle, often undercharging for their time and experience.
Then we need to think about costs like packaging and selling costs like Etsy or Paypal fees. There are also overheads like electric, rent (if you rent premises for your business), stationery, website hosting, insurance, tools etc. You need to figure out the total monthly cost for those overheads and divide it by the number of products you anticipate you will sell each month to find out how much to add to each product.
Finally, you need to add your profit in, generally around 15-30%.
Combine those figures and you should have a retail price for your product.
There are two further things you need to consider at this point:
1) Going back to our competitor research how does your price line up with other similar items on the market? If you are vastly below then you could probably get away with adding some more profit in. If you are well over think about your USP, can you justify the difference in price because of the way your item is different from others? For example, people often expect to pay a little more for organic or fair trade materials. Or can you target a more affluent market who are happy to pay more? If not then you really need to think twice before taking your business idea any further. If you are selling the same product, to the same people as your competitors (who don’t forget are already up and running and have an established customer base) but are charging more why should people buy from you?
2) Are you planning to sell wholesale, either from the outset or any time in the future? Say you are launching your own range of quilt patterns, in the future you might want to approach quilt shops asking them to stock your patterns. Most retailers expect to pay around half the retail price for a product. So, if you plan to sell wholesale you need to multiply the figure you ended up with when calculating your retail price by two and that will be your new retail price. The original figure will be your wholesale price.
Eg. If your original pattern price was £5, that’s the price you will sell it to a shop for, your wholesale price. When the shop sells it (or you sell it direct to consumer) you will need to charge £10. You need to keep your retail price in line with the retailer’s price because they will not want to sell your patterns if the consumer can buy it cheaper direct from you. Once you have figured out your new retail price for the products you plan to sell wholesale, go back to point one above.
Join me next week when we look at selling your products or service.
Fiona is the author of the bestselling Craft a Creative Business, the newly released Making & Marketing a Successful Art & Crafts Business and the founder of The Sewing Directory.