Article on pricing as instruction for jewelry makers. Written for Ganoksin, reprinted here.
Pricing for wholesale
First – I apologize to the real accountants out there. This is a pricing plan that works for my artistic brain. I have used terms that have real meaning in accounting because I don’t know any better ones to use. This is a way to get it mostly right when I price my work.
I use three segments to determine wholesale pricing. I call them: Direct costs, Overhead and Profit. This is an overview on how I go about figuring a wholesale price. I’m using a fabricated brooch set with a single cabochon as an example.
DIRECT costs are those that you can directly attribute to this piece. In this segment is your labor (you do get paid for doing this, don’t you?) and the cost or current value of the materials in the piece. When you figure labor cost, be realistic about what you are worth in the marketplace doing this work – not the great salary you previously got as a computer executive. So in this example, direct costs for this brooch are 45 minutes labor at $20 per hour - $15, silver sheet and bezel at $4.65, pin catch, hinge and stem for $0.35 and a cabochon purchased for $10, for a total of $30.
OVERHEAD costs are computed annually and should have these components:
1. Space - costs for a year of having a space to work in – rent or mortgage, utilities, insurance, janitorial services, repairs.
2. Marketing – costs for a year – wholesale trade show booth rental, travel, mailing, photography, website, printing, ads. I have not included juried art fair booth rental and jury fees because those are marketing expenses associated with retail sales.
3. Amortization – this is the number that accounts for your bigger equipment – Add up the value of your shop equipment – flex shaft, buffer, tumblers, hydraulic press, sand blasting cabinet etc – and divide by 5. This is a simplistic estimation of the cost of owning your tools. For this example, all my big tools add up to a value of $12000. When divided by 5, we get $2400.
4. Supplies – the annual costs of stuff you use up but are not directly attributable to this particular brooch – solder, compressed gas, saw blades, burrs, polishing compound, sand paper, etc.
Now this is the tricky part – add together the four components of overhead. This is your annual overhead. To get it to a number you can use for this piece, estimate the number of hours you work in your studio for a year. If you work 8 hour days, 5 days a week, 50 weeks a year, that number is 2000 hours. I know that only part of the available hours are spent working directly on product so I use 1000 hours as my number. The other time is distributed to all the other stuff an independent artist has to do – selling, ordering supplies, thinking, designing, running to the post office, etc.
In this example – Space is $8000, Marketing is $5000, Amortization is $2400, Supplies are $3000. So overhead is $18400 annually and when divided by the number of hours in the studio (1000) is $18.40 per hour.
PROFIT is the reward for having your own business, and to allow you to take classes, send your kids to school, buy new equipment, retire, etc. I figure profit as one third of the cost of wholesale. So I compute profit as half of Direct cost plus Overhead. This number is not your salary – that’s in the DIRECT cost computed above.
In this example – the wholesale cost of this brooch is calculated this way:
DIRECT: $30,
OVERHEAD: 0.75 hours x $18.40 = $13.80,
PROFIT = ($30 + 13.80)/2 = $21.90
WHOLESALE = $30 + $13.80 + $21.90 = $65.70
Retail prices are usually double or more, so a retailer would price this brooch for sale at about $135. You can make a living with this kind of pricing. If you are pricing your work at material costs plus some kind of mark up – and omitting your own labor– this brooch would be priced at $45. Unless you are independently wealthy, you can’t afford that simplistic pricing.
These are some things that I do to make these calculations relatively easy. I have made a spread sheet that shows manufacturing costs for commonly used metal products – sheet and wire by size in silver and gold. It computes my cost of a foot of wire or square inch of a particular gauge based on current market prices. When I do my taxes, it is easy to extract the dollar amounts for overhead, and I only need to do it once a year.
Here is a fun calculation to make – If you want to show a profit of $10,000 this year, what would your sales number be? You need to book $30,000 in sales.
For even more fun – you can work the equations above backwards. The proof is left to the reader.
Judy Hoch
In this section you will find esoteric and peripheral information. Some of it is relative to my art.
The Golden Ratio
The golden ratio is a special number approximately equal to 1.6180339887498948482. We use the Greek letter Phi to refer to this ratio. Like Pi, the digits of the Golden Ratio go on forever without repeating. It is often better to use its exact value:
( 1 + sqrt{5} ) / 2
The Golden Rectangle
A Golden Rectangle is a rectangle in which the ratio of the length to the width is the Golden Ratio. In other words, if one side of a Golden Rectangle is 2 ft. long, the other side will be approximately equal to 2 * (1.62) = 3.24.
Now that you know a little about the Golden Ratio and the Golden Rectangle, let's look a little deeper. Take a line segment and label its two endpoints A and C. Now put a point B between A and C so that the ratio of the short part of the segment (AB) to the long part (BC) equals the ratio of the long part (BC) to the entire segment (AC):
A----------------B-----------------------------C
The ratio of the lengths of the two parts of this segment is the Golden Ratio. In an equation, we have
AB/BC = BC/AC
Now we're ready for the definition of the Golden Ratio. The Golden Ratio is the ratio of BC to AB. If we set the value of AB to be 1, and use x to represent the length of BC, then
1/x = x/(1 + x )
If we solve this equation for x, we'll find that it is the value given above, (1+sqrt{5})/2, which is about 1.62.
If you have a Golden Rectangle and you cut a square off it so that what remains is a rectangle, that remaining rectangle will also be a Golden Rectangle. You can keep cutting these squares off and getting smaller and smaller Golden Rectangles.
This piece of jewelry is based on the golden rectangle.
The above definition is thanks to Dr Math on the math forum.
