Do you know what to include in your cost price calculation? What about your hard work and time, your studio space and material costs? What about your marketing or equipment? You are not the only one struggling with the question of how to calculate the cost price of your creative product! In this practical blog post, I will explain step-by-step the 7 stages to calculating the cost price of your creative product. It is based on my own experience of working with designers and makers for over 20 years as a business adviser and trainer.
In this example, we will be using a milliner making a hat. It is based on a one-person business but can be easily adapted for creative partnerships too.
Have you been looking for a formula to calculate your prices for your design or craft products? You have found it here:
Step 1: Calculate your hourly overhead costs
Start with identifying your annual business overheads.
Overhead costs are costs that need to be paid regardless of sales. Think about it like this: the costs that you have to pay even if you are on holiday or ill. For example include your studio rent, phone, mobile, insurance, utilities, marketing, storage, business rates, and equipment (spread the cost of the latter over a couple of years if it is expensive!).
These are the invoices that you pay on a regular basis. Don’t include your drawings/salary or raw materials in this first step, we’ll get to those later.
The best way to find your business overheads is by checking your monthly or quarterly invoices, identify the various overhead costs throughout the year, and list them all in a spreadsheet or on a piece of paper. If you are a very new business and you haven’t paid these costs out yet then do make sure that you research what the actual overhead costs would be. Don’t guess!
For example, our milliner has been working in London for a couple of years, has a studio in town, does three trade shows a year, plus two high-end events. She checked all her receipts from the last few years and will use £12K p.a. for her total annual overheads. (PS your figure will not be as perfectly round as this! If you don’t have any studio costs then your figure will be much lower. Result!)
Now we need to work out how many hours per year she actually spends on average making hats that she can sell. This is the time spent on making products that can be sold (and therefore hours that generate income), so don’t include your time here that you spent on marketing, admin, meetings and the like.
Be aware that in your first years you need to aim to spend around 40% of your time physically making products that can be sold.
That might not sound like a lot, but that is the reality! If you are spending close to 80% of your time making then I would be worried because it’s unlikely you will have a sustainable business, more of a hobby … most sustainable creative businesses spend on average 40% of their time on making to sell because they need to spend an equivalent amount of time (40%) on marketing their business to get the sales they need! The other hours they spend are 10% on professional development and research and 10% on administration – in an ideal world.
One of the big challenges for new creative businesses is to become more aware of how they spend their time.
I would expect a more established maker to be able to spend a little more time on making for sale (around 50%) because they have a reputation already and therefore have to invest slightly less time in marketing themselves.
Let’s say that our milliner has 4 weeks off (for holidays, illness and slack time) and that she works 40hours per week, so the total hours/year making work would be: 48 weeks x 40hours x 40% = 768h/year.
The hourly overhead costs in our example will then be £12,000/768h = £15.62
It’s very likely that your overheads, in particular your studio costs, is one of the biggest costs for your business (besides your own labour costs!). Therefore it is really important to keep your overheads as low as possible, especially when you are just starting out. See if you can share a studio or work from home to minimise your costs and to get your business off the ground.
Step 2: Calculate your hourly wage
How much do you want to earn? This is a very personal question!
Do you know how much money you need to live, to cover personal outgoings such as rent or mortgage, food, clothes, holidays etc? If you don’t know the answer then you will need to do your research and find out how much money you need to live on.
Let’s say the milliner wants to earn gross £22K p.a.
This is a gross figure that includes national insurance and tax etc. The salary that she would actually get is less as she needs to pay tax over £10K of profit in her business. For exact details of your personal tax allowance see the HMRC website in the UK.
How much salary you need or want depends on many personal circumstances, such as your expectations, additional income, where you live and with whom you live, and what you want or need to have the lifestyle you want.
For example, when I started The Design Trust in the first three years I didn’t pay myself any wages at all! This is actually fairly common for new businesses as they want to put all their income back into their business to grow it. I was very fortunate that my husband’s income covered our mortgage and other regular personal outgoings.
For our milliner, we use the same hourly figures as in step 1 (48 weeks x 40h x 40% = 768 hours) so that makes an hourly wage requirement of £22K/768 = £28.65
Step 3: Calculate your total hourly rate
This is very straightforward as you need to add step 1 (your hourly overhead costs) with step 2 (hourly wage).
So in the example of our milliner, this would be: £ 15.62 + £28.65 = £ 44.27
Step4: How long will it take you to produce one creative product?
This next step in how to calculate how much your product will cost can be a bit tricky!
If you don’t know the answer to this question, don’t guess!
Check out with a time sheet and keep a time log. You might be surprised how different your guess is from reality!
Hopefully, you have made your production more efficient and effective by combining various jobs together and produce products in small batches.
Remember to include all production processes, including cutting fabrics, sewing, finishing, and packaging.
Use averages e.g. you cut 6 hats in 2 hours, resulting in 20 min per hat on average.
Let’s say that our milliner took 2hours and a quarter to make one hat, then: 2.25 hours x hourly rate of £ 44.27 = £99.60
It is always good to calculate backwards too:
If you make for 16 hours per week (40% of 40hours), then this calculation means that she should be producing 7 hats per week: 16h/2.25h per hat = 7 hats.
Check if this is indeed what you manage on average in a week. Do you need to look at producing more or getting more effective with your time?
Step 5: Calculate the total material costs
The next step in how to calculate the cost price of your creative product is to add all the material costs to produce one hat.
For our example, our milliner will use £22 worth of materials, including fabrics, feathers, and threads.
It’s really important that you keep a record of all the material costs and the receipts too.
Don’t use the cheapest materials: Think about the value that you add with your materials and make sure that the costs are lower than the perceived value. Is it worth it?
If you use a very cheap zip, for example, your overall product will look cheap, but the chances are that it will break sooner too, and the cost of replacing a broken zip is far higher than using a good zip in the first place.
Step 6: Add contingency
Contingency is ‘just in case’ and we suggest a contingency percentage of around 10%. If your product is very expensive you might go for a lower percentage, or if you have a lot of experience with similar products you can lower this figure too.
Contingency will allow for mistakes, hidden extras etc, and will allow you to offer discounts or special offers.
We will use 10% in our example.
Step 7: Calculate your total cost price
Finally, the last step in how to calculate how much your product will cost!
Add step 4: £ 99.60 + step 5 (material costs): £22 x 110% (contingency) = £133.76
This is the amount that it costs to produce one hat.
That’s it! This is how you calculate the cost price of your creative product.
Some important notes:
So what do you think about your cost price?
Firstly, be aware that your cost price is NOT the price that you will be selling your creative product for! The cost price only tells you how much it cost you to create one of your creative products. It’s only the first step in costing and pricing your creative products.
If you are new and sell it to consumers, then you would add some additional profit margin to your cost price to calculate your retail price.
However, if you sell to retailers then you normally would double your cost price to get to your wholesale or trade price, and they would add 200-300% commission to get to their retail price. So your cost price of £133.76 would lead to a RRP of around £535 – £800. You can find out more about the various pricing terms and their calculations in this blog post.
Is it too expensive?
In this case, I used an example of a milliner in London, who would have been going for a while, and who would have her own studio space. Therefore her overheads and salary expectations are higher. If you have just started out and work in a different part of the UK then your studio costs and overheads might be far lower.
The milliner might decide that she wants to create unique, commissioned hats and not work with retailers, so she would not have to deal with the potential markup of a retailer. She might sell directly at consumer shows, open studios or by appointment to clients in her own studio. She could sell her unique hats for £600 – £750 (therefore having a profit margin of £450 to £600 per piece). This might sound very expensive yo you, but actually, this price level is pretty standard and what one would expect to pay for a unique commissioned hat in London!
If the milliner wanted to sell at a lower rate then she would have to make more hats that are similar to bring her production costs down and the quantities up. She would have the same income, but her business model would be very different!
Use your calculation as a starting point to calculate backwards.
How many products would you need to sell per year to cover your annual overheads, salary/drawings and direct costs/raw materials? Is that doable and do you feel comfortable with that, or is it far too many or far too few? What kind of business do you want to run: very bespoke and at the high end, or sell a lot more products but at a lower price point? Do you want to sell directly to your clients or through retailers? How would you produce your products if there are lots of them, and how would you market and sell them too?
Are you still worried about being too expensive? Read this blog posts to get some alternative responses to clients who say that you are too expensive.
If you want to avoid being a starving creative then read this blog post.
Also, costing is just the first part.
The second part is pricing your products!
If you are looking at how to cost your services and in particular your hourly or daily design rate, then click here.
Originally published on The Design Trust.