To figure a price:
1. Figure out exactly what expenses you want your business to pay for. This includes things like rent, electricity and other utilities, insurance, licenses and fees, whatever else. This is your shop expenses, the stuff you would have to pay for even if you didn't make an item in a month. Include a reasonable income for yourself. For me, I just added all the expenses I need to cover in a month here. (If you have employees, you need to add their salary here) If you have a plan, you should have an idea what you can earn in a year. Use that figure, figure what you need to pay in taxes on the income, and include the taxes here so they get properly divided into your prices. Otherwise you'll get a rather rude surprise when they come due!!! You will also need to pay taxes and insurance for your employees, if you have any, so add that in as well. Talk to an accountant if you have any questions!
2. Figure out your production time. This is exactly how many hours you want to PRODUCE your widgets in a month. This does NOT including the marketing, sweeping up, packing, etc. because that's NOT production time. I use 25 hours a week for my production time. (if you have employees, add their PRODUCTIVE time here- not including things like bathroom breaks or coffee breaks)
3. Divide your shop expenses by your production time to get an hourly shop rate. A simple math step.
4. Figure out exactly how much time each widget you make takes to make. KEEP ACCURATE TRACK so you can price things accurately.
5. NOW.... multiply the time each widget takes by your hourly shop rate. Another simple math step!
6. Take THAT figure and add in your materials costs. The clay, paper, saran wrap, thread, whatever is required to make your widget. THIS is how much the item has to cost AT ZERO PROFIT. Your rock bottom, giving it away price, because if you sell it at this price you might as well give it away. You sell at this price and you'd probably be better off not making the item! If you have to, divide the cost for one item by how ever many widgets can be made from it, and use that as your material cost per widget. (Alternatively, you can bundle all your material costs for a year up and include them in expenses, but putting them HERE is much more accurate)
7. Multiply your rock bottom price by a profit margin. This figure will vary, and this is the easiest place to adjust your prices. It can be adjusted up for items that sell well or are a pain in the anatomy to make, or down to increase the number of sales. THIS IS YOUR WHOLESALE PRICE.
8. This next step, for most people, is the hardest part: Multiply your wholesale price by two, to get your RETAIL PRICE. This allows you to market your item, sweep your shop, occasionally take a day off. THIS IS THE PRICE YOU SELL AT (unless you're selling wholesale.) For most people, you will need to add sales tax to this figure, and pay the money collected to your state or other local tax board. The requirements vary based on your selling location, so make sure you know what you have to do to satisfy your local requirements. If you sell at different locations, the actual tax percent you charge can change!
NOW, if your price is out of line with what your market will bear, there are several choices...
A. Change your market. Start selling to people who have the money to pay for your item. For most of us, we are NOT our target market.
B. Reduce your materials cost. Buy in bulk, change the quality of your materials, use less, whatever makes your supplies less.
C. Change your process time. Make it quicker, eliminate steps that don't really increase what the customer is willing to pay but add too much time.
D. Decrease your profit margin. Or increase it, if you can't keep up with your market!
E. Change your product. Some products just are not profitable, and as a last resort, should just be dropped.
F. Cut your shop expenses. You can do this by finding cheaper rent, cheaper insurance, things like that. Not always easy!
If you really are running a business, these are all things you need to take into account. A simple cost+ pricing (charging three times what your materials cost, for example), IF IT TAKES THESE INTO ACCOUNT, is ok, but its not generally a realistic pricing method for a business.
Ok, this is something I posted over on the Etsy forums about pricing... It pretty well describes HOW to set prices for a business. I'll have to edit a bit to clarify some things, but I think the info is good. This is for figuring the price for an item produced by a sole proprietorship with NO EMPLOYEES. Employees mean you have to add more expenses, but get more production time. THIS time its edited to at least mention taxes! (yeck, but needed)
Clay has always fascinated me, its many colors and textures, the shapes you can create using it, even the feel of it squishing in my hand. Even after years of playing in the mud I find myself exploring new ideas and I hope my work shows this.