In an earlier post on Pricing Strategies I mentioned using the method of making a cost sheet for your products then adding a percentage to find the window in which you should be pricing your products.  Here’s a breakdown of the process I go through to make this cost sheet for handmade items and for vintage clothes. The final cost I get is the lowest price I can sell my product at and still be sustainable as a business. Because a lot of my expenses are things I’d have to pay for anyway (computer, home office) or things I dont necessarily have to pay for (my own time laboring), I can afford to sell at a loss from this cost sheet. I try not to do this unless there is some sort of perceived benefit to my long term business efforts: building sales numbers, positive reviews, generating a loyal pool of potential repeat customers. Selling at a loss can also be bad for other sellers in your market so even if you can afford to take a hit consider the effect that might have on the whole community.

Whatever this cost sheet price is I try and frame as the absolute lowest cost and add a percentage on top of that as my business profit margin. My mantra: I’m successfully self-employed when I break even on my cost sheet, I’m a successful small business owner when I start seeing a good percentage off the top. This is a pretty simplistic way to consider but as you are getting started and operating on a product to product basis it can serve as a good basic way of formulating prices. The percentage over an above the cost does not have to be consistent from product to product and could also be informed by competitors pricing. (eg If you have a product that costs $7 to make and the average competitor prices theirs at $10 you might consider pricing anywhere from $8-$12. If your product costs $7 and your average competition is $6, price yours at or just above your cost $7-$8 in order to stay competitive. Remember Etsy shoppers are not necessarily bargain hunters they are often looking for quality handmade items that they love. If you offer such products they will not hesistate over a few dollars and your business is more likely to suceed if you are able to profit over and above your basic costs.) NOTE: If I plan to run a 20% off sale or offer a 20% off discount coupon to return customers I generally shoot for over 20% so that I’m not loosing money by offering discounts.

Check out my free 2 page PDF worksheet which accompanies this how to on my Free Tools page. 

How to make a Product Cost Sheet for your Etsy Products

Section 1: Waged Work Time (to nearest ¼  hour)

Whatever your selling it takes time to make or find it. If you were to scale up and incorporated more people into your process you would have to pay them so if you have a hard time imagining that your time is worth anything, think about how much you would pay someone else to do the work for you as a good small business owner. Think sustainably and be a responsible business owner even when you are the sole employee.

Making/Finding

Hourly Rate:_____ x ____ Hours=______

Photographing/Listing

Hourly Rate:_____ x ____ Hours=______

Packing/ Shipping:

Hourly Rate:_____ x ____ Hours= ______

Flat Rate for Marketing: ______

If you spend over an hour a week just on shop enrichment (building treasuries, linking to external sites, blogging, generating social network traffic) you should include this time as work by taking the total hours at preferred wage and divide by number of products listed in that week. (You can use averages here and set a flat rate but its important to accommodate for this time because this is necessary work for a successful business. For example if you spend about 5 hours a week on site enrichment at a rate of $14 an hour and you post or relist an average of 20 items a week you can consider an averaged flat rate of $3.50 for each item to accommodate for the time you spend driving traffic to the listing.)

Here’s the formula:

Hours per week on site enrichment: A ;  times Hourly Rate for copy-writing and online marketing work $B/hr ; divided by the average number of re/listings per week: C

A: _____x B: _____/C: ______= _______: flat rate for marketing

STEP 1: Total all your waged work: ________

Section 2: Determining a flat rate operations cost per item.

This can be averaged weekly, monthly or annually depending on the type of work you do and the scale at which you are operating. Basically you want to total all the operations costs and divide by the number of sales over that same time period. This includes all your tools and space for operating and is broken down here in these 2 parts. This will give you a flat rate to add to each item to cover basic operations.  If you’re working out of your home with devices you already own for personal use here’s a quick and dirty way to get some estimated costs of operation. The important thing if you are thinking about scaling up to a full time business is to include some operations costs.  The more you are selling, the less these initial operation costs will end up being, this is where you will find the room for expansion.

Operations, Tools:

For larger items (like computer, camera etc) you can an estimate percentage use for business if you use the items for other things like personal use. For example I have a $1,500 computer, which I expect to last for 3-4 years and use ½ time for my business and ½ time for personal use. I project sales of 500 items in 1 calendar year and come up with a flat rate of 0.42. Do this for all the tools you use for your business including: computer, printer, camera, specialty appliances, etc. This is a quick and dirty estimate that does not account for things like depreciation or maintenance but it is important to have some number to accommodate for these expenses if you ever want to scale up from a hobbyist.

You’ll want to divide the total cost of the tool by the number of years of use and by the percentage (eg multiply by .5 for 50%) and again divide by total project number of sales.

Total Cost of Tool A: ___________

Number of expected years in use B: ___________

% of business use/ 100 C: ___________

Average/Projected number of annual sales D:__________

A:____/B:_____ x C:_____/D:______= ______ (cost of operation with tool x)

Flat rate operation for each tool:

Cost of operation with: computer

A:____/B:_____ x C:_____/D:______= ______

Cost of operation with: ________

A:____/B:_____ x C:_____/D:______= ______

Cost of operation with: ________

A:____/B:_____ x C:_____/D:______= ______

Cost of operation with: ________

A:____/B:_____ x C:_____/D:______= ______

If you are a vintage reseller, reclaimed wood carpenter or if you make frequent trips to gather or search for your supplies you should consider tracking and adding mileage into your operations cost here. A good rule of thumb is $0.50-0.55 per mile (or what you are eligible to claim on your taxes as mileage expenses).  If your travel is consistent keep careful track of your travel for one month then use your figures to estimate by diving the total miles x $0.50 by the total number of sales. (NOTE: You will likely need to track all your travel to claim on your taxes so averaging is just a tool for the cost sheet.)

Operations, Space

You also want to include some number for the site of your work location. This is easy if you rent a studio space or office but can be a bit trickier when you are working out of your home. There are a few ways to go about this the easiest is to estimate the cost of subletting the space to a third party for a similar use. For example if you use a spare bedroom in your home check local listings for room for rent (local papers or craiglist) and see what the sublet on a room in a comparable area would be. Take this monthly sublet figure and divide it by your average/projected number of monthly sales. For example, if you’d sublet the rooms for $100/month and have 100 sales a month accommodate an extra $1 for operations space.

If you use your kitchen or a room part time this can be a bit trickier. You can estimate cost by dividing the square footage of the space you use by your total square footage then again by the percentage of time you use if for business purposes then take that number and.

Say you use a 500 square foot space in your 2,500 square foot home for 20 hours a week (or 90 hours a month- its easier to deal with this one on a monthly scale) and you pay total $2000/month for your space (rent/mortgage, electricity, water, internet access, fees etc) and plan to sell on average 25 items a month. Your total monthly ‘rent’ on the part time use of your space totals: $50 divide this by 25 sales and you should accommodate for operations space an additional $0.50 per sale.

Square Footage of Workspace A:___________

Total Square Footage of your home B:__________

Hours per month used for business purposes C:__________* (this figure should be 720 if you have dedicated space which cannot be used for other purposes such as a craft room or storage)

Total Monthly Expenses for your home D:_________

The formula on this one is a little tricky (You’ll get a figure for the percent of space and then a figure for thepercent of time you want to multiply but the total cost of household operations. )

(A/B) (C/720) x D= $_______ (total cost of operations space per month)

Divide this total by average/proposed number of monthly sales = __________ (flat rate for operations space per item)

Step 2: Total your operations cost per item by adding the flat rate for each tool and for your space: _______

NOTE: This can be used on future cost sheets for other items. If you have a lot of very varied prices for your items you may want to consider fixing your operations costs to each $1 of sales and multiplying out for each item rather than fixing it per sale and having a flat rate for all items.  The important thing is that you are accommodating for the space and tools you are using for your business when you consider how to price your products.

Section 3: Materials Costs

Finally the part that you probably already thought of (maybe the only part you thought of)  you need to add us the cost of all the materials that went into your product. If your selling vintage this is simply the initial cost of your product from the thrift store, antique shop, yard sale etc. If you are making products be sure to include here the cost of any kind of membership to wholesale clubs (including Costco, Amazon Prime) and divide annual fees by total number of projected sales (then half that number if you share these services with personal use). Don’t forget to include small items: glue, tape, q-tips etc (total cost of 1 year supply divided by number of estimated products this supply could generate), all the pennies add up to reach your final cost and its important to consider all the things that go into making. If you worked for a company that made t-shirts you wouldn’t be expected to bring your own thread would you? That’s part of the cost of the business.

Total Annual Buying Fees:______ divided by projected # of Sales: ___________=_______

Total Annual Cost of Incidental Supplies _____: divided by Total Projected Production: ______=________

Total Cost of all materials in final product: ____________

Add all totals TOTAL MATERIAL COST: ____________

To find your Final Total Product Cost grab the final numbers from each of these 3 sections and total them together:

  1. Total Wages for this item: _____________
  2. Total Operations (flat rate per item): _____________
  3. Total Materials for this item: ______________

GRAND TOTAL COST OF PRODUCTION FOR THIS ITEM: _________________

Remember this is your baseline. Your next step is to review your competition and come up with a reasonable price that will allow for some percentage of profit over an above this cost. If you are having a hard time pricing above this total cost of production just keep in mind that you (and your partners and dependents) are essentially subsidizing the cost of this product to your potential customer.

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