Know Your Worth...

What is Value?

How do you value something?

Should you raise your prices?

Just a selection of very common questions I get all the time, both on Instagram and in my day job. By day, mild mannered accountant, by night...

Yeh...who am i kidding, I am just as abrasive, cursive and difficult in my day job as I am on the gram...but that's just me, that's who I am, raw, unfiltered...consistent!

The problem is that we live in a world where cost is prioritised over "value"; and by that I mean that people would rather focus on reducing the price they have to pay, than looking at the quality of the item they may be receiving.

Now you can't necessarily blame people for being like this, it's endemic in society. Over the last 20 years we have had terrorism, war, global recessions, national recessions, pandemics, stupid fucking referendums...and a myriad of other things that have directly hit consumers (you lot) in the pocket. So yeh...it's very easy to sit here and say people don't focus on the value of the thing that they are buying...but ultimately we now live in a world where people simply cannot afford to be that selective about how they spend their hard earned...

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This is a picture of a puppy. It bears no relevance to this article

other than to soften you up for the mental abuse you are about to receive!!

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Now, let's get something clear from the very very beginning...

THERE IS NO RIGHT OR WRONG WAY TO PRICE YOUR PRODUCTS!!!

What is important however is that you are consistent and you have some kind of logic behind your pricing structure and not just having a stab in the dark every time someone makes an enquiry.

What can the market bear?

Probably the easiest and simplest way to value something...what can you get for it?

Let's take an example:

I want to sell my house

I list my house for $1,000,000

(From this point forward all examples will be in GBP...but i couldn't resist!!)

I get offers ranging from $800,000 to $950,000

How much is my house worth?

Easy - it's worth $950,000 - the maximum the market will bear. I can either sell at that price, or I can be stubborn and tell them to fuck off...but either way, there is clearly a discrepancy between my price and my value!

The only down side of this method is it can take time. Go in too low to begin with, you could be working at a loss, go in too high and you could turn away sales and again, end up running at a loss.

You will never find a price point that satisfies everyone Some people will always think you are too expensive Whilst others will always perceive you as being too cheap

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Pricing Products

To clarify, i'll be focussing on the production and pricing of handmade products as opposed to the buying and reselling of stock items (mainly to avoid the deep dive into the world of stock valuation 😅)

So let's get straight into it, because this is ultimately what brought you guys here...

Let's start with an incredibly simplified example...a chopping board

(Image shamelessly stolen from google...sue me 🖕😅🖕)

So, let's work out a price for the above using costs plus time:

Material cost - £20

Time to make - 3 hours at £8.21 an hour (starting with UK National Minimum Wage)

Selling price - £44.63

WRONG 🤦🏻‍♂️

Firstly...those chopping boards above are selling online for £20 each because the manufacturer is going to have access to automated processes and bulk buy discounts (and they're also probably using lower quality materials than we'd ideally like to use) meaning competing with them is ultimately fucking pointless

If you are entering an existing market you have two options

Compete on price

Compete on quality

Secondly...there are many more costs involved that we have not taken into consideration in the above example

Let's go into a bit more detail...

We have two main cost types, INDIRECT COSTS and DIRECT COSTS:

INDIRECT COSTS are your general overheads, costs we will incur regardless of whether we take on that specific project or not, examples being:

• Light/heat/power

• Telephone

• Rent

• Motor

• Professional fees

• Insurance

• Advertising

• Depreciation (we'll come on to this in more detail later)

• And many many more

DIRECT COSTS are costs directly attributable to a specific project, such as:

• Materials

• Labour

• Consumables

• Tools

So when calculating the cost of the chopping board in the above example, we have taken into account the DIRECT COSTS but have made no attribution for the INDIRECT COSTS we are also incurring. Failing to take these costs into consideration would mean that those costs are being covered out of the labour aspect in the above example, meaning that you'll ultimately be earning less than minimum wage, making the entire process a fucking waste of time.

So lets detail it out a bit more

Material cost - £20

Time to make - 3 hours at £8.21 an hour (starting with UK National Minimum Wage)

General overheads - £10

Selling price - £54.63

Note that there is no hard and fast rule as to how to allocate general overhead expenses when it comes to handmade items...generally speaking, you would work out how many items you expect to make in a year and work on the knowledge of your business from previous years accounts and allocate a figure from that. But it's all very business/product dependent and it has to be a fluid and evolving process.

Which brings us back to our first topic of conversation - "What can the market bear"

As i've said, these are selling online for £20, so for the same product, can the market bear £54.63?

Quite simply...NO

So we evidently cannot compete on price...therefore we have to decide if we are able to compete on quality (more than likely) in a way where we can justify the increased selling price. If we can...great...increase the COST but also increase the VALUE! If we can't...dont bother making the product!

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Depreciation

I'm sure a few of you are saying...what the motherfucking fuck is 'depreciation'?!?! Well let me clarify

Depreciation is the allocation of expense to account for the replacement of a piece of equipment with a finite life cycle.

For example:

You buy a planer/thicknesser for £2000

It has an expected life of 10 years

We therefore need to allocate indirect costs of £200 a year to account for its ultimate replacement

I won't go into too much detail about how these costs are allocated/claimed for tax purposes as it does get a bit complex, but the general takeaway is that you need to be accounting for these costs over time!!

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Pricing a Mallet

Let's give a more comprehensive example of how I will price one of my mallets to put a lot of the above into context...

I have several different mallet styles and each will have a base price made up of an allocation of indirect costs and direct costs (as I have a very good awareness now of how long each one will take me to make)

Let's look at a square detailing mallet as these are by far my most popular

Base price - £275

These on average take me around 5.5 hours to make, and I charge my time out at £40 an hour which gives me a DIRECT COST of £220

The INDIRECT COST of running my workshop last year came to around £4675 (note that this does not include the purchase of equipment or materials but does include depreciation as mentioned above)

Last year I made 85 mallets and as this was the main source of my workshop income, I use that for my indirect cost allocation.

£4675 divided by 85 is 55

Therefore we get a base cost for the Square Detailing Mallet of £220 + £55 = £275

The final price is then determined by DIRECT COSTS associated with material choices for the handle, the head and the metal accents.

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Markup vs Margin

Credit - www.double-entry-bookkeeping.com

One thing I know a lot of you will have heard of, or have tried, is margin/markup pricing, whereby your profit margin is the difference between your selling price and your cost.

It can be a very useful way for pricing products, especially if you want to attain the same margin across a range of products.

However it still relies on having a reliable cost or sale price to work from

MARKUPS generally work best if you are working from your cost price to find your sale price

eg - cost price is £20 and we want to apply a 100% markup, giving a sale price of £40

This gives us a profit of £20

MARGINS generally work best the other way, when you have a sale price and are trying to establish your cost base

eg - sale price is £40 and we want to achieve a 50% profit margin, giving a cost base of £20

This gives us a profit of £20

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Market Research - Know Your Niche

So we have established a means of pricing a product...

This then bring us back to the very first point we made about the chopping board...

CAN THE MARKET BEAR IT?!

We can work out our indirect costs reasonably easily, we can work out our direct costs reasonably easily, and we can therefore establish a selling price that is absolutely fair and justifiable for the product(s) we have made.

We now need to find out if our product will actually sell at that price.

This is where it is incredibly important to understand your market. The more niche your market is, the less important competition becomes. The more congested your market is, the more competitive you have to get on either price or quality.

Too many people produce good quality products, priced extremely reasonably yet still sit and wonder why they cannot sell a single item. This is because they are creating products that are NOT price competitive and never can be. I know there are people out there that have made more money by buying IKEA chopping boards, and rebranding/customising them than by making the items themselves...because there is no way to compete with their price point.

If you are the only person in the world creating a certain product...you can effectively price it however the fuck you want to...because although people may tell you its expensive, you could also argue that it's the cheapest that they'll be able to get it. Inevitably though, every niche product invites competition, and as it's always "easier" to compete on price, this means you will encounter people selling similar products, at reduced prices, in an attempt to undercut you.

Myself and Matt Estlea have both been victims of this and we are thinking about writing a much more detailed article on how to counteract/deal with it if people are interested...

The important thing however is to stay true to yourself, focus on your product, and focus on the value you provide, rather than the price you can offer.

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If you've got this far...you deserve one more puppy pic as a reward

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In Conclusion

You can price an item fairly and it won't sell

You can price an item unfairly and it will

Pricing a product is both a science and an art, and it ultimately comes down to the individual.

Two people can be making the same product, but have them priced differently, depending on their direct/indirect costs.

You have to be flexible on pricing and allow yourself the freedom to go both up AND down, but never to the point where you are intentionally making a loss in order to chase sales.

Remember, it is always better to go in high and bring your price down. Once you make a sale, you can't go back and ask for more.

I hope this has been useful and if you have any questions, please drop them in the comments and i'll be sure to reply!!

Hashtag

N.B Research and Development

Something I haven't touched on because it is a mine field of its own is R&D. This is something that should 100% be incorporated into the cost of a product if you have had to spend a large amount of time and money on developing an idea.

I will follow up on this in another article if enough people show interest...