Creative entrepreneurs often need help to calculate prices for their products and services. This is especially the case for early stage businesses and for self-employed sole traders. In arts, crafts, photography, graphic design, illustration and many other creative endeavours, pricing is a crucial matter.
Here’s an example I use in one of my creative business training workshops called ‘Creative Pricing’. The workshop helps creative entrepreneurs to calculate prices for their goods and services, by understanding their business from three different perspectives:
– the full costs involved including overheads and labour
– what the right customers are really buying, what they value and consequently what you can charge them
– whether or not you are selling your intellectual property
The first of these is to fully understand all the costs involved in their creative enterprise, including the cost of their time and labour and their business overheads as well as the more obvious direct costs such as materials.
This example shows how to calculate prices in order to cover all the costs of the items made by a designer-maker called Anna. Please note that this about calculating the minimum or ‘break even’ price for each item. Depending on the market and the value to the customer, the price could be much higher. Of course this method to calculate prices also applies to services and projects as well as goods.
Here is an exercise I designed for workshop participants use to calculate prices, working individually or in groups.
Anna’s Pricing Question
[This can also be downloaded as a PDF document.]
Anna is a designer-maker.
She makes and sells 100 items per year.
The raw materials for each item cost £50
She works 40 weeks a year, allowing for holidays and other time off for family commitments etc.
She works 50 hours per week, on average.
Over the year, half her working time is in designing and making; the other half is doing all the other necessary business tasks, such as marketing, book-keeping and accounts, networking, administration etc etc.
Anna needs to earn at least £15 per hour
Anna’s business has fixed costs (overheads), which she needs to pay each year, irrespective of the amount of business she does. These items include rent, phones, internet, website maintenance, insurance, professional fees, subscriptions for magazines, transport and other costs.
She also includes depreciation on her equipment each year, even though this is not an obvious business expense (because she doesn’t ever write a cheque for ‘depreciation’).
All these overheads, including depreciation, total £5,000 per year.
Anna needs your help to calculate the minimum price she can sell her items for, if she is to ensure she does earn at least £15 per hour.
Let’s analyse her business, step by step:
[This can also be downloaded as a PDF document to print and use as a work sheet.]
Total number of hours worked per year =
Number of hours worked on designing and making =
‘Designing-making hours’ worked per item =
Labour cost in each item =
Direct costs of each item (raw materials plus labour) =
We also need to take into account the overheads of the business and each item sold needs to make a ‘contribution to overheads’ to support the indirect costs of the business.
Indirect costs (or fixed costs) of the business (excluding labour) =
Indirect labour costs (time Anna needs to be paid for, even when she is not designing and making) =
Total indirect costs, including labour =
The ‘contribution to fixed costs’ which must be paid by each item sold, to cover these business expenses =
The total cost of each item, including all overheads =
(This is the price Anna needs to sell each item for in order to break even and pay all her costs, including her own labour)
Anna’s twin sister, Ella, who runs an identical business, likes to be ‘nice’ to people and sells her annual production of 100 items to friends, family and local shops for £175 per item.
How much does Ella earn each year?
Before tax and other deductions, Ella’s earnings =
In contrast, Anna’s earnings =
I suggest you download this PDF document and work through this example using the methodology suggested. This will help you to get your head around the process of calculating prices. Once you are familiar with the method, you can then apply it to your own business.
Of course there are other methods you can use to calculate prices. Other valid techniques will come to the same conclusion about the minimum price Anna needs to charge her customers if she is to cover all her costs, pay herself the money she deserves, and develop a commercially sustainable creative business.
After going through the calculations yourself, using the downloadable worksheet, you can compare them to my calculations here.
Other relevant artlcles:
There is a section on Pricing in the marketing book ‘Chase One Rabbit: Strategic Marketing for Business Success’.