Welcome back to Craft Venture, where we work and learn together about how to manage our independent online small businesses, particularly those with a handmade or vintage focus! We’ve been talking about all the components that go into determining your prices, like overhead expense and direct costs. Today, we’re going to ask the most difficult question of all: how much are YOU worth?
In other words, how much do you think your time is worth for all the work you put into creating your creations, building and managing your business, marketing yourself, coming up with new ideas, the craft shows, all the joy and pain involved in YOU being a small business owner?
This is a very personal question. I don’t have an answer for you. I know what I’m willing to pay myself. But I’ll tell you the story of how I came to be at that point – I suspect you’ll find some of yourself in there.
Once upon a time, an arty and creative gal wanted to feed her artistic side, after long days of feeding her analytical business mind at the day job. That girl found Etsy, heard angels singing from high above, and opened a shop. She could create things, but how to set a fair price? It wasn’t an foreign concept, after years working in retail. Calculate overhead and direct expense, marketing, fees, taxes, oh, and um, one more thing, a wage.
Oh, I don’t want a wage, she said, I already have a well paid fulltime day job! As for the rest, I can’t imagine anyone paying more than $20 (US) for my widgit, so that’s the price I’ll use. Wonderful news! Her widgit was an instant success! She was making widgits day and night. OH, and now she has several wholesalers asking for wholesale orders at 50% of her widgit’s price! So she’s spending the same time, materials, labor to create even more widgits, but at half the money.
A small, slightly scared, voice asked a slightly scary questions from deep within her tired head: “how much money am I losing with each widgit I’m making?”
Indeed, she was losing money with every order
She hadn’t considered any expense other than the yarn and knitting needles she used to knit said yarn into a scarf. She sat down, courage in the form of chocolate in her hand), and plotted out the above table. Wow, she said. Her widgits were more complex than she’d imagined. Feeling very overwhelmed, she decided to sleep on it.
The next morning, refreshed, she took another direction with her table:
She knew she was on to something. She could see that she was heading in the right direction. She was tabulating what it cost to make her widgit! She could see that her materials totalled $15.80 (already a worrisome margin for profit, at a $20 selling price). She could see that she needed to continue to flesh in Overhead, and then decide on a methodology for charging part of the overhead total to her widget.
She could also see she needed to apply a dollar amount to the time she spent in the creating, listing, marketing and selling of this widgit. A wage. A dollar amount stating her monetary worth over time. Being a humble, while reasonable, girl, her first thought was to set the lowest possible wage. Then she thought of the 500 widgit order she needed to work on. Wasn’t her time worth more than a dollar an hour while creating 500 widgits?? YES! Absolutely and of course!
“Well, no one will pay me more than $3.50/hour, so that’s the number I’m worth.” Oh dear. Even California State sadly sighed, where minimum wage is currently set at $8.00/hour.
“I make $50,000/year, which breaks down, based on 2,080 working hours in a year, to, hmm, say, $24.00/hour, but I’ll round up to $25/hour! That’s my worth!”
Wowee! $599 for her widgit! Oops, we need to decide how to allocate the overhead – the expenses that benefit multiple items, not just this one.
So, realizing that she can’t change the cost of her materials, she decided to split her overheads and marketing efforts over the course of a year, for a daily number to put into her price structure. It’s not a bad decision, also not perfect, but it’s a start! By doing this, her widgit now comes out $330. If her materials are high end and her technique flawless, that might be the right price. But she quakes in her boots, knowing her wool/silk yarn is mid-range, not super luxurious, and she knit a rather plain scarf. $330 is ridiculous, she just knows it.
Back to the drawing board. Her last flexible variable is her hourly rate. Given the time intensiveness of her craft, can she – a newbie – really sell her scarves/widgits at the rates that she’s calculating?
So, she set her hourly wage at $10. Immediate and huge impact, resulting in a $150 scarf. I mean widgit.
Her original price, $20, didn’t even cover her direct expense. Her gut was right – she was losing money on these left and right! She still has many options for further reducing her expense: two hours to package and ship seems a lot. If she has a small postal scale, she can weigh her package at home and purchase postage via Paypal, Stamps.com, Endicia or even the USPS click-n-ship. She can make friends with her postal carrier, so that he or she knows to check her front step for packages to pick up (no more going to the post office!). On the way to work, she can drop off packages less than 13 oz into the local APC or letter box. As far as packaging, she can set up her tissue and ribbons efficiently, so that wrapping takes less than 30 minutes. Instead of driving to an office supply shop for mailers, she can order through online sources, like Uline, for all her packaging needs (including labels!), greatly discounted, and arrives on your step the next day.
With time, she will become more skilled at photographing and listing her widgits, wittling down her current two hours to just 40 minutes. Similarly, she’ll learn to knit more quickly, with fewer mistakes, so that a six hour scarf takes just three hours.
An exercise like this can be invaluable to complete. It may be fascinating … or horrifying … to learn how much money you’re losing with each sale. I hear folks say, “I can’t raise my prices! I’ll lose my customers!” Trust me, you may lose a few, but your loyal core will still be there. AND you’ll attract a whole new pool of customers looking for widgits in your price range.
So, do you complete a similar exercise for pricing? Do you pay yourself a wage? How did you determine the level of wage you pay yourself?
FINE PRINT: This is purely an exercise, made up on the spot and out of my own head. This isn’t a bonafide tool with which you may price your products. However, there are lots of tools available out there, for purchase or for free! And I’ll point out those types of tools, along with other tools that every seller should be aware of NEXT WEEK.
Image credit: Heybe matching birdie wallet by Ika Bags