What are seven easy steps to calculate how much your product will cost?

7 STEPS TO CALCULATE YOUR CRAFT PRODUCT COST PRICE

Written By Patricia 41 Comments

Do you know the cost price of your product?

Do you know how much it will cost you to create one product?

Do you know how to calculate how much your product will cost?

Many designer makers don’t really know how to calculate their cost price, and undercharge for their products. You can then be really busy, but still earn less than the minimum wage and barely make a living.  That’s not what we want you to do!

It’s crucial that you know how much it costs you to produce your products. These calculations are the foundation of pricing your products.

7 EASY STEPS TO CALCULATE HOW MUCH YOUR PRODUCT WILL COST:

In this popular post we will go step-by-step how to calculate how much your product will cost in 7 steps. We will use as an example a milliner making one hat.  It is based on a one-person business, but can be adapted for a partnership too.

STEP 1: CALCULATE YOUR HOURLY OVERHEAD COSTS

Start with identifying your annual business overheads.

Overhead costs are costs that need to be paid regardless of sales, so for example include your studio rent, phone and mobile, insurance, utilities, marketing, storage, business rates.  These are the invoices that you pay often on a regular basis.  Don’t include your drawings/salary or raw materials.

You can find your business overheads by checking your monthly or quarterly invoices, identify the various overhead costs, and list them all in a spread sheet or on a piece of paper.

For our example we use £12K p.a. as your total annual overheads. (PS your figure will not be as perfectly round as this!)

Now we need to work out how many hours per year she actually spends on average making hats. This is the time spend on making products that can be sold (and therefore generate income), so don’t include your time here that you spent on marketing, admin, meetings and the like.

Be aware that in your first years you do well if you spend 40% of your time physically making products that can be sold. I would expect a more established maker to be able to spend between 50 – 60% of their time on making for sale.

Let’s say that the milliner has 4 weeks off (for holidays, illness and slack time), and that she works 40hours per week, so the total hours/year making work would be: 48 weeks x 40hours x 40% = 768h/year.

The hourly overhead costs will then be £12,000/768h = £15.62

It’s very likely that your overheads, in particular your studio costs, is one of the biggest costs for your business. It’s often higher than the salary you want or need! Therefore it is really important to keep your overheads as low as possible, especially when you are just starting out. See if you can share a studio or work from home to minimise your costs and to get your business off the ground.

STEP 2: CALCULATE YOUR HOURLY WAGE

How much do you want to earn?

Let’s say the milliner wants to earn gross £22K p.a.

This is her ‘salary’ to cover her personal outgoings such as rent, food, clothes, holidays etc. This is a gross figure that includes national insurance and tax etc. The salary that she would get in her purse would be less as she would pay tax over £10K of profit in her business. For exact details see the HMRC website in the UK.

How much salary you need or want depends on many personal circumstances, such as your expectations, additional income, where you live and with whom you live, and what you want or need to have the lifestyle you want.

We use the same hourly figures as previously: 48 weeks x 40h x 40% = 768 hours, so that makes an hourly wage requirement of £22K/768 = £28.65

STEP 3: CALCULATE YOUR TOTAL HOURLY RATE

This is your hourly overhead costs + hourly wage = £ 15.62 + £28.65 = £ 44.27

STEP4: HOW LONG WILL IT TAKE YOU TO PRODUCE ONE PRODUCT?

This next step in how to calculate how much your product will cost can be a bit tricky!

If you don’t know the answer to this question, don’t guess! 

Check out with a time sheet and keep a time log. You might be surprised how different your guess is from the reality!

Hopefully you have made your production more efficient and effective by combining various jobs together and produce products in small batches.

Remember to include all production processes, including cutting fabrics, sewing,  finishing and packaging.

Use averages e.g. you cut 6 hats in 2 hours, resulting in 20 min per hat on average.

Let’s say total time spend to get 1 hat ready is  2.25 hours x hourly rate of £ 44.27 = £99.60

It is always good to calculate backwards too:

If you indeed make 16 hours per week, then this calculation means that you should be producing 7 hats per week: 16h/2.25h per hat = 7 hats.

Is this true? Do you want to create more or less hats?  Use this calculation to improve your own management and start checking out if you need to look at outsourcing too.

STEP 5: CALCULATE THE TOTAL MATERIAL COSTS

Add all the costs of the materials to produce one hat.

Don’t skimp, it really is important to have a bit of contingency, and don’t use the cheapest materials.

For our example we will use £22.

Don’t use the cheapest materials: Think about the value that you add with your materials and make sure that the costs are lower than the perceived value. Is it worth it?

If you use a very cheap zip for example your overall product will look cheap, but the chances are that it will break sooner too, and the cost of replacing a broken zip are far higher than using a good zip in the first place.

STEP 6: ADD CONTINGENCY

Contingency is ‘just in case’ and we suggest a contingency percentage of around 10%. If your product is very expensive you might go for a lower percentage, or if you have a lot of experience with similar products you can lower this figure too.

Contingency will allow for mistakes, hidden extra etc, and will allow you to offer discounts or special offers.

We will use 10% in our example.

STEP 7: CALCULATE YOUR TOTAL COST PRICE

And then finally the last step in how to calculate how much your product will cost!

Add step 4: £ 99.60 + step 5 (material costs): £22 x 110% (contingency) = £133.76

This is the amount that it cost to produce one hat.

That’s it! You have just calculated your cost price!

SOME IMPORTANT NOTES:

So what do you think about your cost price?

Be very aware of the cost terminology and markups.  If you would sell to retailers then you normally would double your cost price to get to your wholesale or trade price, and they would add 200-300% commission to get to their retail price.  So your cost price of £133.76 would lead to a RRP of around £535 – £800.

Is it too expensive?

In this case I used an example of a milliner in London, who would have been going for a while, and who would have her own studio space. Therefore her overheads and salary expectations are higher. If you have just started out and work in a different part of the UK then your studio costs and overheads might be far lower.

She also might decide that she wants to create unique, commissioned hats and not work with retailers, so she would not have to deal with the potential markup of a retailer. She might sell directly at consumer shows, open studios or by appointment to clients in her own studio. She could sell her unique hats for £600 – £950 (therefore having a profit margin of £450 to £800 per piece). This price level is not expensive, it’s what I would expect to pay for a unique commissioned hat in London!

If she wanted to sell at a lower rate then she would have to make more hats that are similar, to bring her production costs down and the quantities go up.  She would have the same income, but her business model would be very different!

You might find it useful to read this blog post of a jewellery asking about pricing her handmade jewellery too, or a ceramicist who is struggling with her pricing and wonders if she can earn more than the minimum wage.

Use your calculation as a starting point to calculate backwards. 

How many products would you need to sell per year to cover your annual overheads, salary/drawings and direct costs/raw materials? Is that do able and do you feel comfortable with that, or is it far too many or far too few?  What kind of business do you want to run: very bespoke and at the high end, or sell a lot more products but then at a lower price point? Do you want to sell directly to your clients or through retailers? How would you produce your products if there are lots of them, and how would you market and sell them too?