There are two ways to set prices. You can take a market-based approach, and look at what other artists charge for similar work, or you can take a cost-based approach. I feel that many artists choose a market-based approach because they think it’s easier. It’s not. Market-based pricing is harder because it’s such a frantically moving target. I also believe that it is highly likely to be woefully inaccurate and so has the potential to be lethally damaging to an artist’s business.
Because many artists don’t know what it actually costs to produce their work, they don’t understand that their prices are unsustainably low and don’t see — until they’ve slipped beyond the threshold of recovery — that their businesses are hemorrhaging money.
The good news is that you don’t have to join the headlong rush over the fiscal cliff!
There are 4 basic parts to this lovely, straightforward pricing equation, and we’ll unpack them all below:
1) Your time + 2) direct costs (materials) + 3) overhead = 4) wholesale price
Part One: Your Time
The first step to pricing your work is to figure out what you should be charging for each hour of your time. If you have regular bills to pay for rent, food, utilities, clothing, car, taxes, etc., you can add all those up to find your annual living expenses. This number is your desired net income, the rock bottom amount you need to stay dry, warm, and fed for a year.
If, after paying for materials and business expenses, you end up with enough money to cover your annual living expenses, your business will at least keep you off the streets. Even better would be living expenses plus some amount to put into savings (20% of living expenses at a minimum).
Or, you can simply pick a number that you’d like to earn in a year, and add 30% to that for employment taxes. Since living expenses vary wildly, I’ll use the second method for my example.
EXAMPLE – Desired NET Annual Income:
Pick a number… say… $50,000
Add 30% (employment taxes) $15,000
TOTAL Desired NET Income $65,000
Once you know how much you want to earn, you have to figure out how many hours you’ll be able to spend on earning it.
You will only spend a small number of the 365 days in any year in your studio. Weekends, sick days, vacation, and indirect labor will all keep you away from your beloved bench. Indirect labor is the one that most artists neglect to include.
Indirect labor includes all the time you’ll spend to clean the studio (gasp!), order more materials, apply to shows, post items to your online store, do bookkeeping and banking, answer business emails, pay bills, write blog posts, take classes, read technical books, etc. etc. You will spend a minimum of one day a week on such activities, and more likely it will be considerably more than that. So count on at least 20-40% of your time being spent on indirect labor. That’s 1-2 days per week.
EXAMPLE – Studio Hours:
Days in year 365
Weekends (2 x 52) -104
Sick days (2 wks = 10 work days) – 10
Vacation (4 wks = 20 work days) – 20
Total work days in year 231
Indirect labor, 40% of 231 days – 92
Studio days in year 139
Hours work per day x 8
Studio Hours/Year 1,112 hours
To calculate your hourly rate for studio work, divide your desired income by your studio hours.
EXAMPLE – Studio Hourly Rate:
Desired NET Income/Studio Hours = $65,000/1,112 hours = $58.45/hour
Make your life easier and round up to: $60/studio hour
Now you know what to charge for the time you spend on a piece. But this is useless information unless you keep track of your time WHILE you are working. Use a timer. Use several timers if you are working on multiple jobs simultaneously. But most importantly, WRITE IT DOWN. Don’t guess. Keep a log. Use index cards. Use a phone app. Did I say don’t guess? Bears repeating. DO NOT GUESS! You will undercharge if you guess. I guarantee.
No piece is made of only time, though, so there are a number of other investments you make in your work. These fall into two groups: direct costs and indirect costs.
Part Two: Direct Costs
Direct costs happen only when a piece happens. These are variable expenses that fluctuate depending on what you make. Mostly this means materials, but a case can be made for shipping, and sometimes there are other situations like advertising for a particular project, or commission paid to a sales representative who places your work with galleries and retailers. If you have such expenses, be sure to include them when you calculate your prices.
Materials are the most obvious part of your work, but frequently not nearly the most costly part. If you base your prices only on the materials, you will lose money (unless you sell high karat golds and very fine gem stones, in which case you most probably don’t need my advice!).
Make notes as you work and weigh your materials before you make a piece, so that you can include the scrap in your cost. If you pierce a design out of silver sheet, the value of the scrap you cut away needs to be paid for by the sale of the piece that generated the scrap. Get a scale that weighs in grams or troy ounces. Surprisingly inexpensive, yet accurate, digital scales are available through jewelry suppliers and online retailers like Amazon.com. Be sure to buy an appropriate calibration weight, if the scale doesn’t already come with one. You must have a calibration weight, or your poor scale will suffer needlessly from creeping “sensor drift”.
Once you have a total for the cost of the materials in the piece, double that number. You buy in bulk, but a customer would pay considerably more for materials than you do, and this needs to be reflected in the price. An exception to this would be very expensive gemstones, which are still marked up, but not doubled.
Particularly if you are selling work directly to your customers through an online retail establishment, you may want to include the cost of shipping in your pricing calculations. If you do this, then you can offer “free” shipping and insurance to your clients, meaning that you will not charge them any additional amount to ship to them. Add up the costs of postage, insurance, and packaging materials (always double box!) to get a total for the cost of shipping.
Part Three: Overhead
Overhead costs happen whether you create work or not. These costs are also called indirect costs, fixed costs, operating expenses, or non-variable expenses. You will need to add up all business related expenses for a year like studio rent or mortgage, utilities, phone, internet, office supplies, business insurance, legal and accounting fees, business licenses, dues, subscriptions, course fees, books, photography, etc. You’ll need at least 6 months of data to get a decent idea, but if you are just starting out, simply estimate all of these costs and adjust as more data comes in. I include small tools in this number. The cost of big expensive tools really should be spread out over several years, which is what depreciation does. If you have just bought some expensive tools that you expect to use for at least a decade, mimic depreciation by adding only a tenth of the cost to your list. Once you have an amount for a year’s worth of overhead, divide it by your Studio Hours/Year, and that will give you a rate to charge for “overhead/hour”.
EXAMPLE – Overhead per Hour Cost:
Annual business expenses/studio hours = $11,000/1112 hours = $9.89/hour
Make your life easier and round up to: $10/studio hour
Part Four: Wholesale vs. Retail
For a simple pair of earrings, your wholesale pricing worksheet would look something like this:
EXAMPLE – Gorgeous Girly Earrings – WHOLESALE Price
These sterling silver and green onyx earrings took you half an hour to make, and involved $11.36 worth of metal and stones. No shipping cost is included in this example.
Time = .5hrs x $60/hr = $30.00
Materials = $11.36 x 2 = $22.72
Overhead = .5hrs x $10/hr = $5.00
Total = $53.72
Round up for WHOLESALE PRICE: $54
The wholesale price is what it costs to MAKE the work. When that work is sold to a delighted customer, the customer will pay the retail price, which is usually twice the wholesale cost.
Think of it this way: half the money goes to whoever makes the piece, and half goes to whoever sells it.
If a retail shop buys a pair of Gorgeous Girly Earrings from you outright (pays you when you deliver the work), you receive $54 and the shop marks the earrings with a retail price of $108. A gallery that takes your earrings on consignment would also offer them to the public at $108 and pay you $54, but you wouldn’t get a check until after they actually sell the work.
Both types of shops have lots of the same kinds of overhead you do: rent, utilities, insurance, business licenses, etc., and they have to pay salaries for sales staff, too. The $54 they make on your earrings goes towards all of that.
By the same token, if you sell your own work at a craft fair, trunk show, house party, or other venue, then you should sell it for the retail price. Half that price goes to you for making the work, and the other half goes to you for selling it. That second half covers your booth fee, booth electricity, display costs, food and lodging for out-of-town shows, advertising, theft/damage, and most importantly your TIME to work the show. A three day show can easily require 40 hours of your time, starting with setting up the day before, running through long days working the show, and ending with tearing down and unpacking once you get home.
I did not come up with this basic formula all on my own. I sell in galleries, read books, and talk to artists – both savvy and starry-eyed. This is the system that works for me. Feel free to alter it to fit the unique specifics of your own situation.
The best part of doing all this work? Knowing your prices are based on real data will make stating them matter-of-factly SOOOO much easier.
P.S. Did a friend forward this post to you? Did you stumble on it by accident? Want to eliminate the element of chance? Click here to get on my direct list.
Reblogged this on Lora Lee's Centsations and commented:
Pricing is one of the hardest things to do when you create handmade items of any kind. This is a great article that helps figure out your total price.
Thank you just read through your blog and it’s well written and quite informative, which makes it a easy read. 🙂
One small point, you don’t you seem to make any profit on your wholesale price when you sell or consign/sell to a gallery or a retail store? Your wholesale cost would therefore be purely cost recovery with no profit. Long term wouldn’t these sales forums become in reality unsustainable as there wouldn’t be any profit to pour back into the business for R&D or to grow your business?
You are quite right that profit should be part of the picture. To make things easy, in this post I suggest sort of backing into profit by picking a desired annual income that is higher than your living expenses. Your desired annual income should be a number high enough to provide you with food and shelter AND money to save for both emergencies and retirement. An amount of money to put back into your business can be included here as well. This number is what is used to calculate your hourly studio rate, so the profit is built in there, rather than being a separate part of the equation. This is only one way to approach pricing, and there are numerous other ways that work just as well, so all that matters is that you find a way that works for you!
I cannot imagine selling any of my work using your formula. My pieces would be completely unaffordable!! Also, you assume that people reading the article are all professionals and can charge the $60/hr. I found your article b/c a newbie read your article and now thinks he can charge $150 for a sterling ring it took HIM 2 hrs to make – but would take an experienced jeweler about 15 min to make. You have to consider the market as well. I use the “5x materials” formula and my prices are great – things sell – and no one complains about the price!
You are right that in my post I assume the reader has a reasonable level of technical proficiency at making jewelry. This formula works best for production pieces, ones you know how to make, have made before, and have spent some time working the kinks out of, so that your production process is as stream-lined as possible. The R&D that goes into developing a production line could certainly be considered part of the Direct Cost, BUT would need to be spread out over multiple pieces, rather than all lumped onto only one piece.
This is only one of many ways to price work, and it sounds like you’ve found one that works for you. Your friend is trying to find something that works for him. I commend him for not under-selling his work, as many newly-minted artists do.
If he over prices his work for the market he’s in, the market will let him know that, and he’ll lower his prices until he finds common ground with his market. If he under-prices his work, the market will happily gobble him up and walk all over him, and he’ll end up giving up selling his jewelry because he can’t afford to continue.
Unfortunately, he won’t be the only one who suffers, since he will have done his bit to train his market to expect unsustainably low prices for work of his caliber. The next artist who tries to ask for more reasonable compensation will be told that her work is completely unaffordable.
If we artists hold hands, we can all stand up together :)!
I think your site is absolutely fabulous and have worked my way right through it. Thanks for all the tips. You have made things easier for me and one day when i am good enough, I shall be able to implement your pricing structure.