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

NorCal SBDC Offers Small Business Classes Online January 25, 2010

I’ve written before about how awesome the San Francisco SBDC’s accounting workshop series is, but it’s really no help to those of you who live outside the Bay Area.  Well today I discovered that the Santa Rosa SBDC is running a ton of classes online, so now you can take them from anywhere!  Unlike the workshop series, which was just four full days of instruction, the online offerings appear to be full six-week courses, but the pacing is considerably more manageable than the intensive workshops.  They put the full syllabi online beforehand, so you can decide which class (if any) is right for you.   Most classes seem to be really specific (i.e. Quickbooks 2007, 2008 and 2009 are all separate classes) and they cost under $100.  Sweet!

Freelancers: Calculate Your Hourly Rate January 18, 2010

As I transition (hopefully) from managing toy lines to doing more freelance design, I thought it would be good to calculate what my base hourly rate should be.  Once I’ve finished prepping all of my financials for tax time I should have a much more accurate idea of this, but in the meantime I was able to get a decent estimate from the FreelanceSwitch hourly rate calculator.

It only takes three minutes or so fill out, but it’s good to have a calculator handy, because most of the numbers they ask for are annual.  I’ve discovered that to cover my business and living expenses, I will break even at around $35 an hour (hey, San Francisco is expensive, y’all).  You can also enter in ideal annual profits to see how that affects things.  When you’re finished, check out some of their articles on freelancing to get some good tips and advice.

Tip for crafters: when deciding how to price an item, be sure to include the cost of your labor at the aforementioned hourly rate.  Even if I only spend five minutes making a product, at my break-even hourly rate that translates into almost $3 that needs to be built into the wholesale price.

Ask Biz Miss: Sustainable Fabrics September 29, 2009

**Note: though this is a very respectfully worded request (note how she doesn’t ask specifically for my sources), it is considered good etiquette to ask advice like this from someone with a related but non-competing business, like someone who’s in fashion, or who makes baby products.  That said, when I had this exact question starting out, I asked the plush toy makers down the block from me.  They were more than gracious and generous in their help, so I’m paying it forward to all of you.  For more on the subject of crafty business etiquette, please see this article I wrote for the Bazaar Bizarre San Francisco blog.

I am currently designing my own line of stuffed animals (not meat products) and would really appreciate your advice.  I would like to make a product that takes the environment into consideration.  I am finding it extremely difficult to find recycled fabrics.  I did find recycled polyfill.  Any advice you can give on finding an environmentally aware manufacturer and materials would be greatly appreciated.

As far as sustainable fabrics go, it is difficult to find them outside of the hemp/wool/cotton/natural fibers area, but there are some polyesters that can be made from recycled plastic, such as fleece and fake furs.  I have never found a place to purchase these in small quantities, so I source my fleece in China, where the minimum for each color is 300 yards.  (I was lucky enough to have a friend whose toy company runs a reputable factory in China.  They were able to point me towards fabric mills there.)  There is a fleece called EcoFleece and a short fur called EcoPile, both available in the U.S., but these lines also require large wholesale orders.  You’ll have to do some calling around and searches through wholesale directories like ThomasNet to find them.  Some manufacturers only make/carry a set of common colors, and others can dye your fabric in any color you choose.

There is also an organization here in San Francisco called People Wear SF that held a small sustainable fabric trade show twice last year. If they do it again, it would likely be in the next month or two.  If not, someone there might have a list of past exhibitors you can contact.

Since you are starting out small, you may have to make some compromises about your fabrics.  For example, you might consider buying fabrics from a creative re-use center or something similar.  I don’t know where you are located, but here in the Bay Area we have S.C.R.A.P. in San Francisco and the East Bay Depot for Creative Re-use in Oakland.  At these places you can buy fabrics otherwise destined for the landfill and you will have lots of choices when it comes to fabric type (but maybe not color/print as much). You can also pilfer clothing and pillows from thrift stores.  Felted sweaters make excellent no-fray fabric for toys and some stores sell by the pound.

You can also just buy off-the-shelf fabrics in the beginning, and try to maintain your commitment to the environment in other ways (which is what I did).  You’ve already found some recycled fiberfill (Carlee sells this in bulk in New Jersey or you can buy corn-based fiberfill from your local fabric store), which is a good start.  You can also ship your toys using only recycled and/or re-used packaging, and you can plant trees or buy credits to make your business carbon neutral.

I hope this helps. There’s unfortunately not a lot of information out there regarding material sourcing, because it’s one way small businesses discourage competition.  If any readers have info they can share, please add it to the comments.  Thanks!

Happy New Year September 20, 2009

Fall is the beginning of my year.  It always has been.  In the first place, I’m Jewish, so I celebrate the new year in the fall rather than in January.  I take stock and make my resolutions in the fall.  Fall is also when school starts, and when people come back after having a long break.  Fall is when I naturally feel compelled to start in new directions and when the economy begins to ramp up again.

This year my main goal is to take those new directions and make them more, um…directed.  I’m trying to set clear, achievable goals for each of my current projects, which I am trying to cull and focus in service of a greater professional goal: an independent and sustainable career as a creative professional.

I’ve decided I need help with this, so I’ve been in contact with Lisa at the Renaissance Business Center here in San Francisco.  Renaissance is a non-profit dedicated to helping people start and/or grow small businesses.  What makes them different from SCORE, SBA and the SBDC is that they are much more focused on providing intensive, long-term assistance.  Two programs I’m currently looking at are their 14-week business planning course (which has been described as a mini-MBA program), and their 1-3 year business incubation program (probably the virtual incarnation).  I’ve got a tour and orientation on Wednesday.  Hopefully they can help me focus and kick my ass a little.

In the meantime, I’ve been applying for some holiday shows, and trying to create new wares for them.  The one I’m currently most excited about is DesignerCon in L.A. (formerly Vinyl Toy Network).  It’s sort of a combo trade fair/cash-and-carry for folks who make the kinds of things you see in designer toy and comic shops–plush and vinyl collectibles, limited-edition prints, and character-driven art of all kinds.  At $125 for a one-day booth, the cost is comparable to your standard craft fair.  I’m planning on showcasing/selling Sweet Meats on one side of the booth, and presenting samples of my plush design work on the other.  DesignerCon is on November 21st, which gives me a concrete deadline by which to have my new web site and business cards done, as well samples of next year’s toy line.

A little bit further down the list is a book proposal.  I’ve heard from fellow crafters that writing an instructional book is extremely difficult and takes about a year of full-time work to complete.  According to Crafty Chica Kathy Cano-Murillo, just writing the proposal takes a week.  Things being what they are in publishing, writing a book is often not very lucrative, assuming that your proposal even gets picked up a by a publisher in the first place, which is unlikely.  On the other hand, authoring a successful book significantly increases your profile as an expert in your field, leading (hopefully) to press, more clients and higher rates.  What doesn’t get picked up you can always publish on your own, so I’m keeping it as an option for now.

As for making a Thing-A-Day, I’m still doing it, though I’ve fallen back on the “work on an existing project for 30 minutes” net a couple of times this week.  Yesterday I made and decorated a cake for my friends’ 26th/30th birthdays, but I didn’t like it enough to photograph it.  Otherwise I’ve mostly been working on re-making my pieces for the Plush You show next month.

It’s going to be a busy fall.  I’ll keep you posted about what I learn along the way.  Happy New Year, everyone!