How to price your work - my 2c

[Spyros]

Hi all.  Before you start reading keep in mind: this is only my opinion, please feel free to reject it if sounds wrong. Chances are if you've been in business a while that I'm not telling you anything new anyway 

I came across a couple of articles on pricing written by excellent leather workers, and then I kept digging and found more from more crafts people and small business owners, and they all seemed to have a very similar logic.  I want to offer my opinion because I've been a finance manager for a couple of decades now and I've had that same discussion with sales and product managers a thousand times (feels like).  And it was the exact same discussion over and over again whether we were talking mobile phones or potato chips.  Because when it comes to selling they're all the same.  And although not everyone agreed with me most of them eventually did.   

So, every article I read says roughly the same thing: to price your item, calculate the cost to make it and then price it based on that cost.  Well here's the thing: don't do that.  First of all you don't know your cost, nobody really does because even for professionals it's so damn hard to calculate.  I can guarantee you from personal experience that even massive companies with armies of accountants don't really understand their cost.  They can estimate it based on some assumptions, and overtime they're getting more and more accurate with experience, and then something changes and they start over again.  Give you a simple example: say you bought an expensive sewing machine to make bags.  The cost of that machine is now part of the cost of making a bag, right?  Correct, but the machine cost $3k so how much for each bag?  To calculate this you need to know how many bags you'll make on that machine every year and how many years the machine will last.  Well, there's no way you know this right now.  See what I mean?  There are many problems like that in cost calculations, and if you try too hard to price your product based on your cost you run the risk of getting it wrong and losing money with every sale.  Happens a lot.

Secondly: in most countries 2 out of 3 new businesses fail.  That's a statistical fact, not my opinion.  When the odds are stacked against you like that you should absolutely not reduce your price just because your cost went down for whatever reason.  And there's nothing unethical about that, it's the way the world works.  Nobody will give you free money if things don't go your way, therefore you should not give your profits away when you catch a break that allows you to keep the lights on for longer.  And conversely, don't try to put your prices up just because your cost went up, you're only gonna lose sales.  Nobody cares about your cost, it's not their problem.  Your cost and profit is nobody's business but yours.  A customer has a budget and a price on his mind that he's willing to pay even if he doesn't know it.  When you're pricing your product you must figure out what that price is, and that's absolutely all you have to do to price your product.  At that point in time your cost is irrelevant.  Cost and and price will often move in opposite directions, and that's fine, you should let them do that.  I'll discuss further down when you should think about cost and for what purpose, but it's not for setting a price.

So how do you figure out the right price for your product?  You should look outside your business, not inside, look to the market.  Find businesses that have been around a while and sell products similar to yours and take note of their price.   Use their experience, they have made those decisions long before you.  Etsy is great for this type of research because it tells you for every shop how many years it's been on Etsy, how many sales it has made, and you can also see the customer feedback.  Very easy to spot the businesses that are successful, and those are the ones you should look to.  If you see someone with 10 sales in 2 years move on, his prices are most likely irrelevant because he's not actually selling much at those prices.  Do the same with ebay, then go to websites of people you know who seem successful, and also show your product to pretty much everybody you know and ask them what they'd pay for something like this.  And when I say show your product I don't mean the actual bag or wallet.  Most of you sell online these days, so show them on your phone what they would see when they're making up their mind if they will buy or not:  photos and description, hide the price.  Do all those things long enough and you will soon start getting a range of market prices in your mind.    Say for example you want to start selling your belts, and you see that similar beltss to yours sell between $50-$70.  Because you are new to this market start with a price towards the bottom of that range, around $50-$55.    If you make for example 10 belts a week and they all sell at this price, bump the price to $55-60.  Wait a couple of months and if you're still getting recurring business and all your 10 belts sell off at that price bump it again, until you see that you're now only selling 7-8 belts, then take it back a notch.  That's your ideal price: you're selling all your production and getting the most you can out of the market.

Here's an important detail when doing your price research: I said look for businesses that sell a product similar to yours.  To do that first you must understand what a product is.  Sometimes people think they know but they really don't.  Say for example there is a guy who makes and sells a wallet exactly identical to yours, but that guy also has a youtube channel with a million views and you don't.  In that case his wallet is not the same product as yours, his product is vastly superior and you can't compare.  Along with the actual wallet people are paying for this guy's persona, his lifestyle, and of course the fact that they can see how the actual wallet was made.  This guy has done the hard yards to attach those things to his product and therefore can price it accordingly.    Another simpler example:  identical wallet as yours but with a better description on the website, materials, process, where it's made etc.  People will pay a little more for the fact that they understand better what it is they are actually buying.  You have to put in your product more than just stitches if you want to compare with the best sellers.  Look to Mascon Leather, Mr Lentz, Ian Atkinson, these are all outstanding product managers (whether they view themselves like that or not) because they embody in their products many different things that customers value, whether it's lifestyle, knowledge, a persona, or simply an honest or even just familiar face.  It's not easy to achieve that, or quick.  If you meet a guy and you think he's an awesome guy, you are then more likely to buy his product. That's just the way the human brain works.  Same if you meet a guy that looks successful, there's a reason sales people (try to) show up in expensive cars and suits.  Another example: a wallet on ebay is not the same as the exact same wallet on a beautiful website, ebay is great in many ways but it is also associated in peoples' minds with cheap imported stuff.   Last example: a locally made wallet is not the same product as the exact same imported one, people value locally made things a little higher.  And so on.  Understand your product so you can compare the price correctly.

So what about the cost then, should you just ignore it?  No, you must make an honest effort to at least estimate your actual cost as best as you can.  But not for setting a price, that's too late.  You should have an honest cost estimate in the back of your mind when you're deciding IF you should even make something or not.  If you do that, and you understand what is the actual product that you're selling, it's really not that hard to see how much it sells for and if there's money in it or not.  And if there isn't, you simply shouldn't make it regardless how good you know that it is.  Make that thing for yourself or the people you love instead.  Sometimes you might find that products that seem boring to you are actually more profitable than your favourite pieces.  That's the nature of the beast and the eternal battle between the artisan and the businessman, at some point you might have to decide which one you want to be.  You're not making this for yourself, you're making it for somebody else and you must give them not what you want but what they want, and for the price that they're willing to pay.    So, estimate your cost to decide if you want to get in the market with this product or not.  But if you decide to get in, you should forget about the cost and just try to get the best out of the market that you can.  Along the way if you feel that the prices or the costs have moved too much, periodically do a review of your products and make sure you're still making money on all of them.  Drop the ones that don't and boost the ones that do.  And remember, when you're getting into business the goal is exactly the same for you as it is for a billion dollar corporation:  survival.  The longer you stay in business the easier things will become and the more options you'll have, but you have to start from somewhere.

Hope I haven't confused you and this helps a little.   Just my opinion 

 

 

[chuck123wapati]

Very interesting, great advice and logic and i agree with it completely. I think most folks fight that cost per piece problem because of a couple of reasons. Either they went to college and majored in business as i  did and were taught that this is one of the first thing you need to find out if your business plan will work or they got online and tried to build a business plan  from one the get rich sites or they read some of those articles you mentioned. Also when going to a bank for a loan that's about the first thing they want to know and your loan may depend on it accurate or not.  It does scare a lot of folks simply because as you said there are plenty of variables and hidden costs associated with a product as well some don't understand depreciation of tools for example or how it is figured into cost per piece or how you are eating that cost at the beginning but making it back up in the end that is if your still in business lol.

[Retswerb]

Pin this post, admins! 100% right on, @Spyros.

[Spyros]

Whichever methodology someone follows, mine or someone else's, if they do stay in business for a while eventually they will arrive to the same result:  the market will force them to price their products realistically, or they just won't sell, and if their cost calculations were off and they're losing money they will know just by looking at their back account at the end of the month. Or they'll go bust.

I guess the point I am trying to make is how to avoid typical mistakes that I see everyday, which can add up and make all the difference in the end.  Don't waste your time and money on loss making products, don't try to compete on price with people who have been building their brand for years and are charging a premium for it (but do observe and learn from them, see if you can easily incorporate something that they do), learn to read the market prices, understand how the customer sees and values a product and why they're paying what they're paying, do some basic calcs and keep an eye on your cost but don't get too bogged down on spreadsheets (soon you will know from experience anyway what is profitable, it's not that hard, it's mostly just leather and time), and don't make the mistake of selling your products short compared to the market.    When you say those things like that I know they sound like hollow advice and cheap marketing catch phrases, which is why I started this topic, to explain bit more with specific and relevant examples.

 

Edited July 19, 2020 by Spyros

[dikman]

It's interesting to have that perspective from someone with an insight into marketing. If I had to try and start a small business I'd probably end up as one of the failed ones. A couple of reasons why - I'm a technical hands-on type of person, with little interest in the business side of things and I wouldn't be "hard" enough to run a profitable business because I would most likely be too willing to help people rather than make the tough decisions.

Thanks for your thoughts, Spyros.

[Gulrok]

I agree with a lot of what you said, but I also disagree.

I agree that you need to price your products comparable to other products. For example.

Leather belts are my bread and butter. We charge $40 and $45 for buffalo, $60 and $65 for English Bridle from the US, and $80 and $85 for the English Bridle from the UK. However, I'm priced competitively around belts that are sold at 'higher' end department stores in the $40-$65 range. SOLID.

However. Here is the difference to your strategy. You talk about a slow price hike. It depends on how much you sell, but if you're selling regularly you should be A/B testing your product pricing.

If a belt takes 15 minutes to make, costs $10, and sell $60 and you make 5 a week. Does it make sense to raise your prices to $80, and sell 3 a week, or lower your prices to $40, and sell 10 a week. Does the price of your product actually have any indication on how many will sell?

The answer is... we have no idea until we test.

Pricing should be tested if you have the ability to do so. (High enough volume).

For example. I'm reading this book right now  https://www.amazon.com/Making-Websites-Win-Customer-Centric-Methodology-ebook/dp/B076XSCTB2/ref=sr_1_3?dchild=1&keywords=making+websites+win&qid=1595139169&sr=8-3

and in the book they talk about an experience they have selling travel phones during a declining market. ( I'm using arbitrary numbers for this example because I don't remember the exact specifics ).

They A/B test the price of a phone by say selling it for $0, selling it for $40 and selling it for $75. Well $40 and $75 sold the same amount of phones. Showing that the price is not indicative on the value of the phone. However, $0 sold less phones. They inferred it may be because people saw a product at $0 as less valuable, or that there is some kind of catch with it. Literally all 3 phones were the exact same. They were able to increase profits by raising the phone to $75 in the end and it didn't even cost them sales.

My point is you need to test your product out for pricing if you can get the volume. Obviously selling 1 or 2 belts a week, you'd never be able to get the data needed.

--

My last point is that you need to have a prospective buyer. Are you making concealed carry holsters for NYC businessmen in suits (please don't awful idea.. check NYC gun laws...)? Or fine leather gentlemen top hats for Southern Hillbillies? You have to have a niche that isn't super super defined, but has a general population to it. Maybe, concealed carry holsters, or fine leather gentlemen top hats. That may be niche enough for you.
 

[Spyros]

Sorry Gulrok, I didn't quite understand what you disagree with.  Everything you said makes sense to me.  My main point is to avoid becoming a cost accountant as much as possible (you still have to do it a little bit) and focus on becoming a market expert instead.   I mentioned a simple way of testing your market and your price as an example, but there are many more.  It looks like you already doing it and know a lot about this.  If you have the ability to A/B test your product and your size justifies it, then absolutely go ahead.  Great stuff.      

[Spyros]

1 hour ago, dikman said:

It's interesting to have that perspective from someone with an insight into marketing. If I had to try and start a small business I'd probably end up as one of the failed ones. A couple of reasons why - I'm a technical hands-on type of person, with little interest in the business side of things and I wouldn't be "hard" enough to run a profitable business because I would most likely be too willing to help people rather than make the tough decisions.

Thanks for your thoughts, Spyros.

Yeah it's boring, I get it.  I do it all day for work and even the thought of doing it in my free time to turn my hobby into a business is just exhausting.  I can barely deal with one job, the last thing I need is another one.

I am envious of people who have a smart partner/wife/husband who looks after the business side of things while they focus on the creative and technical stuff, that's the perfect combo

Edited July 19, 2020 by Spyros

[LumpenDoodle2]

Spyros, I agree with you, it’s very easy to get bogged down worrying about pricing, and pushing items that there isn’t really either a good market for, or is too expensive to make.

 I have a couple of ‘bread and butter’ items which sell very well.   My customers tell me they are priced at the low end of the scale, but I am under no illusion as to the fact that I feel I am a ‘jobbing’ leatherworker, selling to a niche which suits my style.    I have slowly crept the prices up to where I am now happy that everything is covered,  and have gained a number of regular return customers over the years.

I have very low overheads, and have been lucky enough to source materials at very low prices (including sewing machines), and buy stock in bulk when I can.    My two standard items cover all my bills, and gives me a wage, and where I push the boat out is with customers who asks for a personalised item.   These are where my heart lies, and although I have been told I still do not charge enough compared with others, I charge what I feel my ‘niche’ will support, and still have cash in the bank.   

I have in the past, been contacted by 2 leatherworkers who have complained that my prices are too low, and I should raise them to be compatible with theirs.    My answer to them is that if their product is of a higher quality, then they deserve a higher price.   My niche is the ‘utility’, cowboy of the 1800’s, with no frills.   Sort of the Black & Decker drill, compared to the Makita, both drill holes, but everyone has a Black and Decker hidden in their shed somewhere.

At the end of it all, as important as making and selling an item for a profit is, I have found that finding your niche market helps the pricing side fall into place way easier.

[toxo]

At last, a well thought out, sensible discussion on prices. Well done. Be gone materials x 9 / 6 minus tea breaks.

[Gulrok]

9 hours ago, Spyros said:

Sorry Gulrok, I didn't quite understand what you disagree with.  Everything you said makes sense to me.  My main point is to avoid becoming a cost accountant as much as possible (you still have to do it a little bit) and focus on becoming a market expert instead.   I mentioned a simple way of testing your market and your price as an example, but there are many more.  It looks like you already doing it and know a lot about this.  If you have the ability to A/B test your product and your size justifies it, then absolutely go ahead.  Great stuff.      

Sorry. I didn't specify. I just disagree with the slow price hike. I use to do something similar, but I actually found that I slowly lost a bit of business with it. Actual with belts as that's my main product. We raised our prices a few dollars, and lowered our conversion rates, resulting in more hand/thumb twiddling and less making. A few dollars affected us that much. Things like that is why we've now built shipping cost into every product and offer "freeeeee shipping"!!! Because we were finding that people didn't care about a lower product price as long as they free shipping. We'd have a $100-$200 abandoned cart over $7 shipping. 

That's why I was recommending the A/B product testing IF possible. Because most of what we think is all anecdotal until scientifically proven. 

 

Edited July 19, 2020 by Gulrok

[Lfrog]

I dont agree with the slow price hike in the scenario you gave, although in certain instances it may be ok ( If you have reached your current production capacity for example). I am a great believer in manufacturing efficiency. In the grand scheme of things the leather/hardware cost is a small percentage of the overall product's retail price. In the example you gave with leather belts, say the material cost was $15, with a selling price of $50 and a sell through of 10 units/week, if you can produce 5 extra belts per week that will make a meaningful difference to your weekly nett profit margin. More importantly it will increase the rate you generate free cash (money  left over after everything has been paid out, including taxes etc.)

[chrisash]

Marketing is not looking at competition and copy their price

You can control your price by good marketing, which is giving a person a good reason to buy the item at your price

It may be just explaining your story where your leather came from and how it was made, what your QC is like, or you can spend millions telling the same story with variations just like Hermes, Rolls Royce or LV or any other premium company does

A website, Etsy or Facebook are all marketing area's that most people just display there goods just like a store front window, little or no effort made to give a reason to the buyer to buy, Information is king, a Photo may sell a item at $50 where the whole story may get you double that with more customers. Look at the advertising and marketing Apple does to sell its over priced items

If you are any size business you know your costs down to the last penny its in your monthly accounts under Profit and Loss and Balance sheet, but i guess many small businesses just don't bother with accounts apart from year end when they find out that profit they thought they had has disappeared