Determining Actual Cost - A Challenge For You

Thursday, June 16, 2011

{Earlier this week I wrote a bit about the concept worth in small creative businesses. Specifically, recognizing that worth goes beyond price but includes many intangible variables.  It's important for us to really grasp that notion and avoid selling ourselves short. A part of that process however, does include number crunching, determining the actual cost of your items. It's a task that feels more like a challenge probably....I've talked to some folks who flat out refuse. But honestly, I think it's a critical first step in establishing your worth and developing pricing.  Here's an updated and simplified article I wrote last year showing all the components of actual costs. Happy number crunching! }

First, let's start off by noting that pricing might just be one of the most difficult + personal aspects of starting & running your creative business. It's tempting to compare yourself to others. Don't. It's easy to second guess yourself. Don't. It's quick to be cheap. Don't.
So then, what should we do?

Well, start off by writing down the actual cost to make your item. I mean actual. Every last cent that goes into creating your pretty little gizmo. Here's where it's easy to short change yourself. But again- don't.  For nearly a year my husband urged me to do this. I avoided it. Finally, I acknowledged his MBA and gave in.  I sat down and crunched some numbers.The results were so astonishing-  at first I wanted to cry....but then seeing the numbers in black in white inspired me to make some serious adjustments and improvements....and led to a more successful business. 

So....let's go through an example and pretend you make pretty patchwork aprons. Here's what your breakdown of actual costs might look like:

Supplies Cost:
1 yard fabric = $8 
fabric scraps = $2
1 yard of ribbon = $2
 Thread = .02  (200 aprons per $4 thread spool)
Garment Labels = .10 ($500 for box of 5,000 labels)

Production Cost:
Use of sewing machine = .10 (approx. 1000 aprons for every $100 maintenance fee)

Packaging Cost:
Tissue Paper= .02 ($2 box of 100)
Hang Tag = .04  ($40 box of 1000 tags)
Business Card= .05 ($25 for 500 cards)
Mailer = .03 ($30 for 1000 mailers)

Labor Cost: {for this example we'll use $10 per hour}
Cut & prepare materials = $2.50 (1/4 of a $10 hour)

Sew 1 patchwork apron = $10 (one $10 hour)
Package 1 patchwork apron = $1 (1/10 of a $10 hour)

Total =$25.86

This means that the actual cost of making each apron is $25.86Note, this does not include Etsy & PayPal fees or time spent listing and marketing. 

Wow! See what I mean?  The actual cost sure seems high, but there is power in just knowing the true cost of your item. It makes decisions about pricing, offering discounts, giveaways, or establishing wholesale accounts a lot easier.  Plus, it is absolutely critical in determining the long-term sustainability of your business. 

So, what now? Well, more than likely you'll need to make some adjustments- raising your prices, establishing your worth, improve your sourcing of materials to lower your actual costs. But seriously, dust off the calculator, grab a cup of coffee and hunker down to crunch some can thank me later ;) 


Anonymous said...

holy-smack-to-the-face, Batman! After seeing these numbers, I need to make myself an ice cream sundae. Excuse me for a moment.

Linda said...

What a great reminder to us all! People who do not "create" have no idea what it costs to make things. They see mass produced items that are sold for a song and expect everything to be that cheap. I once had a lady ask for one of those $10" quilts on my website! (It was actually a pattern). I tried to explain to her that it costs well over $100 to even make a quilt, not to mention the hours and hours to work on it. Crafters and artisans who sell their work cheaply make it extremely difficult for those of us who value our work and time to get a fair price.

abi said...

I've been looking for someone like you! I run a small creative business out of my home and all the blogs I've found are either Donald Trump businessy or Super Duper Mommy. So glad to finally see a balance of creativity, family, and business. I'll be stalking you now ;) Btw, found you through 20best20.

abi zimmerman