Ask Biz Miss: Pricing Your Work February 23, 2010

Do you have any advice for how to calculate prices for creative products or services?

There are two main approaches to pricing your work: a bottom-up approach and a top-down approach.

The Bottom-Up Approach

The bottom up approach creates a pricing formula based on the time, skill, and materials you put into a piece.  It is usually the best approach for freelancers or other creative service providers.  It looks like this:

Price  = Freelance rate x Hours + Materials

Step 1: Calculate your freelance rate

Visit Freelance Switch to calculate what you need to charge in order to live comfortably based on your business and living expenses.  This is your break-even rate.  Use this rate to charge for the hours you spend on non-skilled work like hole-punching or putting prints into plastic sleeves.

Next, add some profit to that rate to cover your “intangible assets”—that is, your creative ideas and skilled artisanship.  One good estimate is to add $3,000 of annual profit for each year of experience or education you have in your field.  This new rate is your ideal rate.  Use this to charge for the hours you spend on skilled work like sketching designs, brainstorming with clients or intricate beadwork.

Step 2: Calculate your materials cost

Add up the cost of all the materials you need for your project.  This includes transportation/shipping or the time it took you to get those materials (at your break-even hourly rate).  Many Biz Ladies find it easier just to add a mark-up of around 10% to cover these costs.  If a material is particularly difficult or expensive to obtain, you may want to mark it up higher.

You don’t need to include the cost of overhead (i.e. utilities, rent, office supplies) since this has already been figured in to your hourly rate.

The Top-Down Approach

The top-down approach creates a pricing formula based on the current market value of products or services similar to the ones you offer.  You start with a competitive retail price and then work backwards to try to bring your material and labor costs in line.  The bottom-up approach is usually the best approach for people selling products.  It looks like this:

(Price – Expenses) / Hours = Hourly Wage

Step 1: Do some market research

In order to figure out a competitive retail price, you need to know what other people are charging for their goods.  Do your research by visiting stores, fairs and web sites that sell products similar to yours. Make sure you extend your search beyond huge online marketplaces like Etsy and eBay, where items are often bargain-priced.

Pay special attention to products that share materials, style, process, or target customers with yours.  For example, earrings made from a single plastic bead will not cost the same as earrings made from 24K gold cast in the shape of a spiderweb.

If you’re having trouble finding pricing information on your own, do a bit of crowdsourcing.  You can ask participants in certain forums on Etsy or Craftster what they would pay for your products.   Limit your crowdsourcing to forums that specifically encourage this type of feedback.  Good etiquette recommends that you avoid asking for advice from competing sellers or from posting links to your products in blog comments.  Don’t forget to continue the karma cycle by offering your feedback to others in turn.

Step 2: Do the math

Now that you have a good idea of what your retail price should be you need to decide whether or not you can afford to wholesale.  Usually, a product’s wholesale price is about half of its retail price, so if intricately cast gold earrings are selling for $300 these days, their wholesale price would be $150.

Now, let’s say it costs $25 in gold (including shipping) to make your spiderweb earrings, and each pair takes you three hours to make.  Using the formula above, you can make $41.67 an hour for each pair of earrings you sell wholesale.

($150 – $25) /3 = $41.67

Pretty good, right?  But wait a minute, earrings don’t just sell themselves (no matter how talented you are).  You spend your time on all kinds of things in order to run your business, so let’s take a monthly view instead.

For simplicity’s sake, let’s say you only make 24K gold spiderweb earrings.  You work full-time on your business (about 180 hours a month) and you are able to spend half of that time actually making your products.  The rest of the time you are doing things like bookkeeping, shipping orders, and answering correspondence.  Let’s also say that the overhead for your business costs around $1,000 a month.

In 90 hours, you can make 30 pairs of earrings.  Assuming you sell all of them wholesale, you make $4,500 a month.  Let’s take that number and figure out your actual pay:

($4,500 – $25 x 30 – $1,000) / 180 = $15.28/hour

If you can live comfortably on that wage, you’re all set.  Otherwise, you’ll need to make some adjustments.  For example, you can buy larger quantities of materials to get better deals, or you can try to make your jewelry-making process more efficient.

If none of these adjustments gets you to a comfortable hourly wage, you might want to sell that particular product only at retail.  Many designers who make high-priced items but still want to reach a wider audience will create a second product line that is specifically designed for wholesaling–for example, a line of less expensive earrings where the spiderweb design is stamped into a square of gold-plated metal.

Pricing is part of the marketing plan in my business plan template.  This doesn’t make any sense to me.  Why is it in this section?

Marketing encompasses more than just advertising.  It’s comprised of everything that influences the way people see your business, and that includes your prices.  For example, while it may seem counter-intuitive, raising your prices can sometimes boost sales by making your work seem more desirable.

At a Biz Lady meet-up in San Francisco years ago, I participated in a group session led by Meg Mateo Ilasco, author of the excellent business book for crafters, Craft, Inc. She described how she had decided to ramp down her wedding invitation business by doubling her prices. Instead of causing fewer people to hire her, however, it more than doubled her number of clients.  The higher prices made her look like a more sought-after designer, which became a self-fulfilling prophecy.

Of course, raising your prices doesn’t always cause a stampede.  The trick to maximizing your sales is to bring your prices in line with the rest of your marketing, including the taste and craftsmanship of the work itself.  Whether you make stylish home furnishings or adorable character art, your prices should not surprise your target audience, and should look right at home on your packaging, on your web site, and in the stores and galleries that sell your work.

I cut my prices pretty drastically for a craft fair this past weekend to try to get rid of some inventory.  I have a day job, so I just need to cover my costs.   Another vendor selling similar stuff got angry at me and accused me of “threatening her livelihood.”  I think she was totally out of line, but my friend disagreed.  I don’t get it.  Every business is free to set their own prices, right?

True, there’s no minimum wage law when you work for yourself, but there is a polite way to price.  Here are a couple of common pricing faux pas to avoid:

1. Changing your prices too often: yes, you should absolutely market-test your prices, but don’t just throw numbers out randomly to see what sticks.  Focus on testing one or two products at a time, and try to do it at a live event like a craft show, where you can gauge customers’ reactions directly.  Changing your published prices too often (like the ones on your web site) will make repeat retail customers think they are overpaying, and will make your wholesale customers struggle to keep their prices current.
2. Pricing just to maintain your hobby: I think it’s lovely that you make so many beautiful things that you’ve run out of people to give them to.  I also think it’s great that you sell your extras in order to support your hobby.  It’s selfish, however, to sell a fair-isle sweater you knitted for just the price of the yarn.  Your customers might be thrilled, but underpricing devalues creative work and makes it harder for creative professionals to make a living.

Sadly, there is no magic formula for pricing, but with some research, careful thought, and a little finesse, you can find the sweet spot that makes your business the most successful it can be.  If you have any other pricing tips or questions, please feel free to share them in the comments below.

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Epic How-To: Setting Up Your Business to Accept Credit Cards February 20, 2010

I’ve written a few posts before about my own experience with accepting credit cards, but I’ve finally put all of info together in one place.  Enjoy!

When I first decided to start taking credit cards, it took me weeks to sort out the fees, the terminology and the parties involved, and even longer to feel secure that I was buying what I needed at a reasonable price.  To save you some of that hassle I’ve laid out the process below.

Step 1: Estimate whether your business can afford to accept credit cards.

For a small business, accepting Visa and Mastercard for in-person or phone/fax/mail sales will cost you around $25 a month, plus 3.5% of each transaction, often with a $20 monthly transaction fee minimum.  If you want to accept credit cards through your web site, add another $20 a month for a gateway, shopping cart, and/or SSL encryption (more on this later).

But how can you tell how much accepting credit cards will increase your sales?  Here are two commonly used rough estimates:

• you can estimate an increase of about 25% (I found this to be true for my own business).
• for in-person sales like those at craft fairs or brick-and mortar stores, you can estimate an increase rate about equal to your average sale.  In other words, if your average sale is $20, you can estimate about a 20% increase in sales from credit cards.

Here’s a quick example: if your monthly sales average $500 and your typical sale is $10, you can expect $50 more each month in sales (a 10% increase), but your processing fees will eat up nearly all of it, so it might make sense to wait a little longer before signing up to take credit cards.

Step 2: Know what you need.

Depending on your business, you may need some merchant services and not others.  It’s important to figure this out before you start searching for a “merchant service provider” so that you don’t end up paying for products you don’t use.

No matter what, you will need a merchant account.  A merchant account is basically an intermediate account between your bank and the customer’s card-issuing bank.  A merchant account is presided over by a merchant acquirer (usually another bank), who is responsible for finding out whether transactions have been accepted or declined. Here’s how it works:

The day of the sale…

1. Susie buys a handmade scarf from you for $50.  She hands you her Washington Mutual Visa card.  You swipe or imprint the card and she signs the receipt.
2. You send the information about the card and the transaction to your merchant acquirer.  You might type this in yourself on a phone or through a website, or it might get sent automatically if you swipe the card using a terminal.
3. The acquirer sends the info to Visa, and then Visa sends the info to Washington Mutual for verification.  If everything is cool (i.e. the card number is valid, Susie hasn’t exceeded her credit limit, etc.), Washington Mutual authorizes the transaction to Visa.
4. Visa tells your acquirer that everything is approved.  Your acquirer keeps a record of the authorization for later (called “batching”).

The next day…

1. Your acquirer takes the batch of all the approved credit card transactions you made that day and sends them back through Visa for payment.
2. Visa sends all of the transactions to the appropriate card-issuing banks, including Susie’s for $50 to Washington Mutual.  Washington Mutual pays Visa the $50, and Visa pays the acquirer.  The batch is now “settled.”
3. Once the acquirer gets paid, they put $50 minus their transaction fee into your merchant account.  Usually, the money is then transferred to your business’s checking or savings account the following day.

Now that you know how it works, it’s time to decide what you need.  You’ll need most basically to decide on your merchant account, equipment, and in some cases, your processing method.

The Merchant Account:

Lots of places offer merchant accounts, including banks, trade associations, and third-party companies.  Unfortunately, fee structures are not consistent from company to company, so it can be tough to comparison shop. Here are the most common charges to check on:

• One-time set-up fees
• Annual or monthly fees (often called “statement” or “reporting” fees)
• Per transaction fees
• Transfer fees (for transferring the money from your merchant account to your bank account)
• Monthly minimums
• Equipment fees (terminal lease, imprinter and name plate, etc.)
• Any other fees they haven’t told you about yet

You might have to do a bit of math to figure out the best combination of fees for your business.  If you have low monthly sales, for example (like if your business is part-time), your best bet is a merchant account with low monthly fees even if it means higher transaction fees.  If, on the other hand, you make a lot of small sales ($10 or less), you’ll want to look for a merchant account with percentage-only transaction fees (3.5%), rather than fees that take a percentage plus a fixed charge (3.0 % + $0.50).  Propay is a popular merchant account with small-volume businesses.

Equipment/processing method:

This is the device you use to collect your customer’s credit card info.  There are three common options:

“Knucklebuster” credit card imprinter:  This is the old-school sliding machine that physically rubs the credit card info onto a receipt.  You need to get the name plates for these directly from your merchant services provider.

Pros: portable, don’t require electricity or a network connection, inexpensive ($25 for machine and name plate and $20 for 100 receipts).

Cons: inconvenient, require manual entry of transaction info, offer no instant authorization.

Best for: craft fair vendors or people who need a cheap, portable device to use occasionally.

Processing method: manual entry of all data via “MOTO” processing (telephone) or “virtual terminal” (online form).  For an extra fee you can sometimes add cell phone processing to get instant authorizations while on the road.

Credit card terminal: this is the machine that you swipe your card into. Some print receipts directly, and others connect to a computer or cash register running “Point-of-Sale” (POS) software, which might cost extra.  They need to be hooked up to a phone or data line, but this can be done wirelessly.

Pros: convenient, offer instant authorization (and therefore cheaper transaction fees), can be integrated directly accounting software like Quickbooks.

Cons: expensive ($300-$1000 per system), require electricity and phone/data line, non-portable

Best for: people with brick-and-mortar stores, offices or studios who process a fair number of credit cards each month.

Shopping cart and payment gateway: these are web tools you need to process credit cards through an eCommerce site.  The shopping cart collects your customers’ information, and the payment gateway transmits it securely to your merchant acquirer.  If the checkout page of your shopping cart isn’t secure, you might also need to add SSL (Secure Socket Layer) encryption to your site. Your web host can usually provide this for about $20/year.

I won’t go into detail about the various e-commerce products now, but here are some examples:

• Shopping cart: Shopify, Zen Cart or Mal’s eCommerce.
• Payment gateways: Authorize, LinkPoint, and Paypal’s PayFlow.
• Combo merchant accounts/shopping carts: Paypal Merchant Services or 2Checkout.

Pros: convenient, offer instant authorization, allow you to take credit cards over the internet.

Cons: requires separate monthly fees, can be complicated to set up, not all shopping carts work with all gateways.

Best for: people who want to set up web stores that move beyond Paypal.

Phew!  That’s a lot of options.  Now that you know what you want to buy and how much you can afford to spend, it’s time to take the plunge.

Step 3: Compare and negotiate

Do some research to find a short list of companies that offer what you need.  You can get suggestions from your bank, your credit card issuer, or your local chamber of commerce.  You can also let your mouse do the walking, but make sure any companies you find through the web are reputable by checking references or the Better Business Bureau.

Call the sales department of each company.  Salesmen will often waive or lower fees, especially if you present them with a competing offer.  You can also negotiate combo deals this way, such as a discount for adding a payment gateway for your web site.  When I did this step I kept the most current rates for each company in a spreadsheet for easy access and comparison.

Be aware that most merchant service providers will run a credit check on you and/or your business before giving you a merchant account.  Your credit can affect the fees that they charge you.

If you don’t have a separate bank account for your business, now is the time to open one.  Even if you’re a sole proprietor, it’s always a good idea to keep business and personal finances separate, and some merchant acquirers will not give you a merchant account without a business bank account.

Get your best offer in writing.  Read it carefully.  If everything looks good go ahead and sign up.

Step 4: Test

Ask a friend or family member to “buy” something from you so that you can run a test transaction.  Make sure everything goes smoothly on both ends before accepting cards from customers.

If you’re accepting credit cards through your web site, make sure every step in the process (shopping cart, gateway and merchant account) is functioning correctly before going “live.”

I hope this helps to remove some of the mystery and confusion from opening a merchant account.  It can be a long process but it’s worth it to do things carefully and correctly the first time.  I’ve had my merchant account and gateway for three years now and I’ve never had a problem or a chargeback.

For more resources, check out some of the links below.

Resources:

Visa’s rules for merchants (pdf): http://usa.visa.com/download/merchants/rules_for_visa_merchants.pdf

Mastercard’s rules for merchants (pdf): http://www.mastercard.com/za/wce/PDF/10071_MasterCard_Merchant_Rules.pdf

Craftster shopping cart poll: http://www.craftster.org/forum/index.php?topic=231406.0

How to Configure SSL With a Merchant Account: http://www.ehow.com/how_5704137_configure-ssl-merchant-account.html

How to Evaluate Credit Card Processing Companies: http://www.businessknowhow.com/money/tips5.htm

Craftland Application is Up August 5, 2009

The annual Providence, RI holiday season craftavaganza (yeah, I said it) is back and the application is now up. The show takes place 12/4-12/31. Craftland works a little differently than most other shows you’re used to in that they don’t charge a booth fee (it’s in a retail store), they take a commission–30% if you volunteer 12 hours, 40% if not.  This makes it a really good first show or one to try out new products–you only pay money if you make money.  It’s also good if you can’t be in town but your products are easy and inexpensive to ship.  Early bird deadline is 8/14, final deadline is 8/31.  Apply here!

Oh, and if you’re psyched for Craftland but already booked up for the holidays, get psyched because Craftland is going year-round!  That’s right, folks, seven days a week at 235 Westminster Street in downtown Providence, RI (oh, the nostalgia!).

Renegade L.A. July 15, 2009

This past weekend I participated in the Renegade Craft Fair’s first ever Los Angeles show.  I’ve never done a Renegade show but I kept hearing form other vendors that the L.A. show was nowhere near as good as last year’s San Francisco show, which is coming up again next week.

Renegade L.A. was held in the California Market Center, the same venue where Unique L.A. is held.  It’s not my favorite space.  Firstly, it’s downtown, which is dead on the weekends, so there is no casual foot traffic, but I’m not sure there’s any place in L.A. that gets much random foot traffic full of eager craft buyers.  Secondly, it’s located on the 13th floor of the CMC, which can make loading in and out a nightmare.  This wasn’t as much of an issue with the Renegade Fair as with the Unique L.A. show because Renegade had fewer vendors.  Thirdly, the 13th floor is a labrynthine mess.  People can’t figure out where they are or what they’ve already seen.  This makes your success extremely dependent on your booth location.  If you’re near the elevators and bathrooms, you’re fine, but once you get into the deeper recesses of “the penthouse” traffic dwindles significantly.

I made a little more money at the Renegade fair than at Unique L.A., even though there were fewer shoppers, because Renegade skews more toward my usual demographic, which is less fashionable/trendy and more indie/crafty.  I don’t think I’ll be able to do any more L.A. fairs, though, because my sister is moving back to NYC.  That means no more helper and no more free room and board.

The best part of fairs like Renegade is the awesome people you get to hang out with.  I got to chat with Jenny Hart and Rob Mahar (each just shopping for a change), both of whom I never get to see because we all live in different cities.  I also exchanged hand signals with my L.A. “booth brother,” Adam from the Poster List.  We’ve been placed across from each other at every L.A. fair we’ve ever done, but he speaks quietly and I’m hard of hearing, so we communicate via sign language.  Adam is a real hardcore craft vendor.  He never leaves his booth during show hours (eight hours a day at Renegade!) and never starts packing up early.  I know he hides Starbucks lemon loaves under the table, but how does he pee?!

I also met a ton of fantastic new people this weekend, most of whom will be at Rengade SF this weekend, including my awesome neighbor, illustrator Caitlin Kuhwald.  How gorgeous is this painting?

I also got to know Robert Goodin, who traded me this jah-mazing refillable sketchbook (which I have been sorely needing) for a giant ham…

…and all the ladies at Krank Press, where I bought the perfect little birthday calendar (which I have also been needing).  Each page is letterpressed in three colors and contains California planting and harvesting information for each month in addition to spaces for each date.  The whole calendar was only $15!  What are they, crazy?  I know underpricing is a craft-world epidemic, but how can you even survive on that?  Geez, when I think of the cost of paper, inks, binding, printing plates, AND the very skilled labor is takes to print 14 pages three times each, I’m a little astounded that Nor can eat three meals a day.

I also got to chat a while with the gals at dust and co. and Porterness, where I scored this tote for a cycling friend who hates Prius drivers even more than he hates tomatoes.

Elijah at Figs and Ginger gave me a deal on these totally sweet earrings in exchange for some fashion advice…

…and Erin Dollar at I Made You a Beard (also an underpricer in my opinion) wowed me with her varied crafty talents.

Ask Biz Miss: Self-Shipping Questions June 23, 2009

Is it worth all the trouble to give my customers multiple shipping options?

Well, that all depends on what you mean by “options.”  I wouldn’t necessarily recommend offering multiple carriers but it’s okay to offer multiple speeds.  In other words, choose just one company to ship with, such as UPS, FedEx or the US Postal Service.  If your web site’s shopping cart automatically calculates shipping costs, you can offer multiple delivery options such as First Class or Overnight, but if you have to enter those prices manually it may not be worth it to have to stay current with rate changes.  Some sites, like Etsy, never let you choose more than one service or delivery option to a given destination.  That’s fine.  Just add a line to your FAQs, policies, or product pages that asks customers to contact you if they need expedited shipping or prefer a different carrier.

Can I charge for “handling” if I ship products myself?

Absolutely.  I think it’s crazy that people believe their customers won’t buy from them if they charge more than the cost of postage to ship something.  Packing materials aren’t free and neither is your time.  Charge your normal hourly rate plus the cost of your shipping materials and postage.  For example, if it takes you five minutes to ship something (i.e. look up the order, pack it, address it and print out shipping labels) and you pay yourself $25/hr., you should charge $2.08 in addition to the cost of the box and the stamps.  This is not unreasonable.  If you still feel funny about it, though, feel free to lay out the charges in your FAQs or Policies page.  Don’t sweat it if a customer refuses to buy from you because of this.  You don’t want a relationship with someone who thinks your time is worthless anyway.

How can I keep the time and cost of shipping as low as possible?

Whoa.  Big question.  Let’s tackle time-saving first.  The most important thing is having the right supplies around.  I keep all of my shipping materials in one place, including a postal scale, address stamp, padded envelopes in sizes that fit my most common items, and the most common denominations of stamps I use.  I order most of these in bulk from places like Quill and Uline.  The shipping is usually free and my order often arrives in 1-2 days.

My postal scale is a regular spring-loaded Dymo scale with the postage prices printed right on the dial.  I place my package on top, and the needle points to the correct First Class postage price so I don’t have to look it up.  The Priority Mail and Express Mail prices are also printed on the front in a grid.  My only complaint is that the replacement dials they send when the price goes up are slow in coming and expensive ($15).  I looked into postage meters, too, when I was first starting up, and I determined that they are not worth the monthly rental fee unless you send hundreds of First Class envelopes each month.

I keep tons of $0.44, $1, $0.17, and $0.20 stamps around because any First Class package can be mailed using just those four denominations.  It’s often much quicker to address an envelope by hand and use stamps than it is to go online and print out the shipping label.  On the other hand, if you’re mailing something that has tracking info or doesn’t fit in your corner mailbox, it’s usually better to create the label online.  The shipper will send the tracking info to the customer for you and you can drop off your shipments at the post office or hand them to your driver/mail carrier.

Now for cost-saving.  Firstly, the more you can store, the better.  Having space to save shipping materials allows you buy in bulk and and to reuse the boxes, bubble wrap, etc. that you receive from other senders.  Secondly, become familiar with shipping classes and delivery times.  For example, what the USPS defines as a “letter” can be surprisingly large, thick and heavy.  Just beware of uneven or weirdly-proportioned envelopes.  USPS machines can’t handle them so they require a $0.20 “non-machinable” surcharge (hence my stash of $0.20 stamps).  In another example, UPS always delivers Ground shipments within the Bay Area in 1-2 days.  There is therefore never any reason to pay the overnight rate on a local shipment.  It arrives just as quickly at the lowest price.

Thirdly, I’ll reiterate that you should use online shipping labels for any package that uses tracking info.  Most carriers will give you a discount on postage bought online.  You can also schedule a free pickup for most online shipments, which allows you to save on gas money.

Lastly, make friends with your delivery people.  Learn the names of your UPS driver and your mail carrier.  Ask them how they’re doing.  Leave them tips or gifts at the holidays.  Not only are they competent human beings who deserve to be treated as such, they are often happy to do you favors and help you solve problems with your shipments.

Most of the complaints I receive from customers have to do with shipping.  How can I avoid this?

Shipping issues are by far the most common complaints I receive from customers as well, but I’ve been able to reduce them significantly by posting clear and specific shipping policies to my website and Etsy shop.  If an issue ever comes up that isn’t covered by those policies or falls within a grey area, I solve the problem to the customer’s satisfaction and then update the policy page so it never happens again. In addition, I sometimes put the answers to the most common shipping questions on the product page itself.

You can also reduce the number of complaints by offering fewer shipping options.  This may sound counter-intuitive (customers prefer choices, right?), but it ultimately makes for less confusion and frustration.  You can always let the customer contact you if they’d like special shipping arrangements.  If you’re able to provide them, great!  Your customer will love you for being so accommodating.  If not, you can always return a polite explanation that references your shipping policies and leaves no room for argument.

Finally, always pack your items well. Like, to withstand being run over.  It doesn’t matter whether or not your customer opts for insurance, you’re an A-hole if the product breaks in transit and you refuse to replace it.

What are some common shipping issues you’ve faced and how have you dealt with them?  Please share your experiences in the comments section.

No More Outdoor Fairs June 21, 2009

Just got back from the Indie Mart.  I’m exhausted.  The sun was directly in my face all day and I spent a lot of time chasing down things that the wind blew over.  The poor guy next to me had to decide whether to leave his awesome woven collages in their condensation-filled plastic sleeves or to let the vintage paper sit out in the UV unprotected.

I don’t normally do outdoor fairs because they’re so uncomfortable. I think I’m going to have to forgo them completely, though, from now on.  Sweet Meats just don’t sell very well outdoors.  I don’t know what it is.  Cupcakes, on the other hand, seem to sell much better outdoors than in.  I’ll probably still do the Indie Mart (the booth fees are reasonable and the organizers are super nice), but only the indoor shows.  Anyone else find a huge difference in sales (one way or the other) between outdoors and in?  I’d like to explore this phenomenon further.