Tuesday, April 28, 2015

How should you price your goods or services?

I've been thinking a lot about pricing lately. Kyla Roma wrote a post with FREE WORKSHEETS that got me thinking about some old pricing formulas I had seen somewhere before and how awful they are. So I decided to go ahead and write about pricing, how to do it, and maybe what you're missing. (Warning : This is a long and technical post. If you're serious about pricing your goods or services, get out a pad and paper and work along side me!)

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Now, before I go into how awful the formulas I linked above are and why they are NOT right, I wanna talk about what you need to know before you even begin to think about pricing. The two things you need to know are your cost of living and your cost of business.

Here is what goes into your cost of living:
1. Rent
2. Utilities
3. Car payment or transportation cost (bus passes, whatever)
4. Insurance stuffs (car, medical, renters, whatever)
5. Groceries cost
6. All other incidentals including entertainment
7. Any other bills (medical, credit, loans, whatever)
8. Add anything else that is consistent and necessary for you

Here are mine:
1. $425 (mine's actually way lower, but that's half of the rent for our house, so we'll call it that)
2. $240 (this is half of what they were in January, when everything is highest)
3. $180 (bus pass, plus car insurance and half of renter's...I don't have, nor do I want, medical)
4. $50 (this is a low number because I like to live cheaply and because Adam often pays for our fun stuff)
5. $200 (this includes cat food and litter)
6. $145 (half of cable, credit cards, and student loans...I don't pay for phone service)
My total cost of living per month: $1240.00

The next step is to divide that by four as a weekly amount : $310 and then divide that by 40 hours, because I am assuming that whatever I'm doing is my full-time job : $7.75.

So basically, even with adding in a rent that I don't currently pay, I don't have to make much money at all for a 40 hour work week. If you want to work part-time, that's your prerogative, but that is not really how the world works. So let's just say you're a crafter, this should include whatever time you spend on social media or at shows or going to shops and doing your inventory and updating consignment. All those hours, including driving from place to place, add into your 40-hour work week. Which might mean that you work more than 40 hours in a week. If that's the case, you can choose to calculate the rest at overtime, as your state allows. What you're trying to get at here is the amount of money you need to be paid per hour in order to live. This is how America works and how your business should work.

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The next step is figuring out your business costs:
1. Cost of office space (if you work from home, you don't include this in your up front costs...it's done later during taxes)
2. 20% for taxes (you can do 30% if you wanna be extra secure, but 20% is the standard)
3. Insurance (which you may not have depending on your state and business)
4. Cost of materials (this is for those who make something)
5. Cost of supplies (business cards, other marketing material, internet hosting and subscriptions)
6. Cost of equipment and maintenance (for those who need it to do their job)
7. Cost of shipping or postage (if you do that for your business)
8. Anything else that is consistent and necessary for your business

Here's mine for Larry and Boo's Emporium

1. $150 (average cost of shows and applications per month)
2. $94 (average profit is $470 and 20% of that is saved for taxes)
3. $0 (we are not required to carry insurance in Ohio)
4. $50 (average cost of materials per month)
5. $30 (average cost of equipment and maintenance per month)
6. $0 (we have not yet sold anything online)

Total cost of business per month : $324

Now we have to take that total number and divide it by 4 weeks : $81 and then divide that by a 40/hr work week : $2 per hour is the cost of business we need to make per hour that we work.

OK, some of those numbers will seem shockingly low on both the cost of living and cost of doing business. For starters, we are a work from home business which means we don't have office space (and the amount of our home that we claim on taxes is not included in the cost of our items, because taxes are done later in the year and we took out our 20%). We work with vintage and recycled fabrics and have a very large group of resources that enable us to get free fabric. What fabric we get for free is bought from thrift shops and we are very savvy at going on fifty cent day. We have a very special business with very low costs, so this is obviously not going to be average for everyone. But it will still play into my formula.

If you live in L.A., manufacture your goods from new materials, or need a lot of expensive equipment, your number will be higher. That's ok. Every business is different! If you can think of something you definitely have to pay for each month that I have not listed, then simply add it to your costs. What's important is that you KNOW what your business and your life cost before you begin to think about pricing!

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Ok, so we know that for me, it costs $9 an hour to live and to run my business. Now let's look at the formulas I listed above:

Formula 1. Materials + Labor + Expenses + Profit = Wholesale x 2 = Retail
Formula 2. Cost of Supplies + Labor + 10-15% Overhead = Total Costs
Total Costs x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price

There are problems with both of these "simple" formulas. What is 10%-15% overhead and what does it mean? That's part of your business costs, which is an easy to calculate number that I showed you how to figure out above. What is the profit? I mean, I don't know. Because if you're paying yourself for the labor, then what the hell is the profit? Your labor is your profit.

Here is what I think these formulas miss : Your labor is your profit. And also Your cost of business isn't included in their formulas. You need to know exactly what the cost of your business is, and it isn't hard. As long as you get organized, you can figure it out. Maybe you go and buy your thread at the same time as you buy the fabric for a skirt you're making that's not for your business. Maybe you buy canvasses for your art students at the same time that you buy frames for your living room. (Maybe you can tell that I do a lot of stuff in craft stores!) It's ok if the film you bought for a wedding is on the same receipt as a new camera you bought for your niece. You're just going to have to sit down and figure out your costs. It's not as simple as a formula if you haven't already done the work of figuring out all the costs of living and doing business.

Here is what those formulas should look like:
Cost of living + Cost of business = Wholesale + 60% = Retail
(60% retail markup is standard in consignment shops in our area and determines how we charge retail. Sales tax in your area as well as what is common in your area might make this number higher or lower. Selling online should go based on research and not random ideas.)

Your cost of living and your cost of business determine your wage. Your wage determines your prices.

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Now, have you ever thought of running your business in terms of what your wage should be? Maybe not. Maybe you've just given yourself esoteric numbers based on what you think the value of your product or service is. If this is the case YOU'RE DOING IT WRONG. The thing is, just because you become a business owner, doesn't put you outside the bounds of the economy. People make wages, and that's how it works. Some people make salary, and you don't want to run your business based on a salary. A salary doesn't include a solid dollar amount per hour because salaried workers are often forced to work a certain amount of overtime hours without making overtime. Trust me, if you're running a business and working overtime, you wanna include that in the cost of your business.

Now, we run a seasonal business, so during the summer is when we do most of our shows and then at Christmas. January-April is when we make. So let's just say that you tend to work 45 hours/week in your busy period, by all means tag time and a half to your wage. Just make your overtime part of what you charge people always. In that regard, you're always making what you should. Most wedding photographers put in a 14-hour day and up to an 80-hour week during the season, which is why they tend to charge a LOT (plus they're skilled). People who run a seasonal business still have to live during the rest of the year. If that's you, include what you need year-round in what you charge.

Sound complicated? Well, it kinda is. Your business is not just a simple formula where you throw numbers together at random. And if you start to making a living at it and make more that $12000.00 per year in the U.S., then you are above poverty, and you are liable for all the taxes involved. (Less than that is complicated, and I can go into that if you want.) Think of everything your managers at previous jobs have ever had to do or think of the fact that accounting is a legit and necessary business because taxes are complicated and then realize that running a business takes work so get organized and do the work.

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Now that image popped up on my Instagram the other day and it really pissed me off because, like the formulas above, it's not true. You are NEVER paid for the value and not the time. You are always paid for your time. When you're figuring out what you should be making as your wage and therefore what you charge by the hour or the item, then you should consider what is the value of your time.

If you have worked for a decade to learn the skills necessary to do your job, you're worth more. If you are a degreed and licensed professional, then you are worth more. If you are brand new and don't have a lot of experience and are still learning, then you are worth less. I know, it sounds hurtful, but it isn't.

Here's me:
Cost of living $7/hr
Cost of business $2/hr
Actual wage I pay myself: $15/hr

Why? Well, because $15/hr gives me a take home of just over $12/hr (I figure my 20% for taxes separate from the business, because it's run by two people), which is $4/hr above the minimum wage in the state of Ohio and just about where skilled laborers start. A skilled laborer means that experience or a tech degree earns them more than someone else. I don't have a bachelor's degree, just years of sewing experience. I have experience running a business, but I haven't been responsible for every aspect of Larry and Boo. Since mom and I split it, I don't currently make as much as if I were running it. There are tasks I don't do, and therefore, I'm not paid for those tasks. If all goes as planned and we start to double our business, then I will fully expect to make more.

At $15/hr, I am able to more than pay for my cost of living and my cost of doing business and can now save money or go on vacation or roll it back into the business to expand on my ideas. I pay myself a wage, because this is how America works. I do not exist outside of the bounds of the American economy, and my business isn't a platform for me to pretend I do. My wage is a very fair wage for what I do. (But if you want to know, as a photographer or web designer, I pay myself much more. This is just what I make as a crafter.)

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Now that you have a wage, how do you know what to charge for one item (or service)? Sometimes, you fuck up and don't charge enough because you don't know how long it takes. Sometimes, in the beginning, you're too slow to charge for your labor. You certainly can't charge yourself out of the market. It took me several years to streamline my photo editing process to ensure I was charging the right amount for my market and making enough for the work I put in. It might take time for you to check out your competitors and understand where you're going (yes, we charge more in higher markets or in high end boutiques, but not exorbitantly more). We make our animals in different steps, spending a day cutting out stuff and then a day sewing and then a day stuffing. One animal might wholesale at $20 because it takes a little over an hour to make it. $20 is right around a medium price for a stuffed animal in our area and with a 60% mark up, doesn't become cost prohibitive for the customer. Since I have already figured out my wage, I can simply charge an animal by the time it takes to make it. It's no more complicated than that.

If you own your own business, you are obviously worth more than minimum wage. You are the manager and administrator as well as the laborer and whatever else. So you need to know your cost of living and your cost of business and use that as a base to determine your overall worth. These items are your foundation. From there, you need to determine your worth. Are you new at what you do? Then you are not worth the highest amount available in your market. Is your cost of living more? Then you simply must charge more in order to live. Are you currently working 45 hours a week in order to make ends meet? Then charge more for what you're selling so you can work fewer hours. Are you degreed and or licensed? Charge more. Are you highly experienced and skilled? Charge more. Are you part of a team? Divide your business costs and determine your worth from there. Do you purposely keep your own life and business costs low so you can provide for those in a lower socio-economic status? Then charge less, but be aware that your services may not be sought after by the wealthy. You can choose to charge lower for your items but then you must know your market. You should never overprice your goods or services without research into why you are charging more.

If you want to charge more just because you want to make more and there is no value in the cost of your goods or services, then call yourself an unethical liar and call it a day.

Do you have more questions? E-mail me! fennarama at gmail dot com.

2 comments:

  1. I'm going to be graduating soon and need to start budgeting so I can work out how much I have to live on. Although I'm not quite at the business stage, this is a very useful post I'll be bookmarking.

    ReplyDelete