An Introduction To Pricing

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28 August 2012 By Sarah Thelwall

An Introduction to Pricing

You’re selling online and perhaps you also sell via a few shops or galleries and directly to a set of private customers. Here are some things you should keep in mind.

You now have a collection of prices for wholesale purchases, retail prices and in all likelihood a degree of ‘mates rates’ prices for people who’ve been long term loyal clients or friends who’ve supported you through the early days. This is no doubt starting to get confusing and it’s probably time to make your life a bit simpler. As an emerging designer you are also faced with the challenge of how to price your work versus global designer brands and high street retailers.

You can’t afford to be too expensive if you have a European or American client base who can compare you to the top end of the high street but if you come down to their level not only could it be bad for your brand but it could be financially disastrous as you won’t have the volume of sales to gain the efficiencies of scale that allow these retailers to push their costs down. 

The good news is that there are several things you can do quite quickly to see not only where you stand now in terms of pricing and profitability but also things you can put in place to help you keep track of your finances better going forward.

Action 1: Look at where you stand in comparison to your peers.

The NOT JUST A LABEL website is a great place for conducting a bit of market research! It’s worth browsing the site just to see what else a customer might spend their hard earned cash on instead of your pieces. For example if you are a jeweller it would be worth seeing how your prices compare to the work of other jewellers. Start by looking at designers who work in similar materials (i.e. gold and gems is very different to non-precious metals) but after that have a look by style i.e. how cutting edge or classic the work is. Ask questions such as ‘what is the maximum and minimum price for comparable work and where do I stand in this range?’

Of course not everything that has a price actually sells so here’s a piece of inside knowledge gleaned from the back end of the NJAL site. So whilst the minimum price on the whole site is £10 and the maximum is £1,600 in reality 55% of items sold in 2011 were priced between £50 and £250 and within that range there are some ‘sweet spots’ i.e. prices that lead to the greatest volume of sales – roughly these are at the £50, £100, £140 and £250 price points.

It’s also worth noting that the designers who sell the most are not necessarily the cheapest. It is about how a piece matches up design quality, materials used and price. So it’s worth asking yourself the question as to whether you’d rather sell a smaller volume of pieces at higher prices than a large volume at lower prices because the total turnover might be the same from both routes or indeed we’ve seen cases where the lower volume but higher prices is actually worth more to the business.

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Action 2: Know your cost base.

Whilst you need to know what the market will accommodate in terms of prices this does of course need to be balanced against what you can produce the work for. It’s worth considering whether you would make good use of specialist fashion product costing software which will enable you to cost individual garments very accurately. If your business doesn’t justify this yet then look at what costs are involved when producing your work. The ‘Cost-plus’ approach to pricing involves setting price by starting with the cost of creating a product, and then adding a mark-up. The mark-up provides you with your profit margin and so the cost-plus approach almost guarantees that you will not sell at a loss.

Mark-ups can be based on industry standards, individual expert opinions, or widely accepted rules of thumb. I usually advise designers to try and double their cost price to arrive at their wholesale price. In other words, add a mark up between of 100%-150% or x 2-2.5. And then add a mark up of around 2.5 on the wholesale price to arrive at the retail price. This is equal to multiplying your cost price by 5 to arrive at your retail price, or adding a mark up of 400%. This should ensure that there’s enough profit to cover some of the other costs associated with running your business. The disadvantage of this approach is that if costs increase, the price of the product must also increase. The price of each product is therefore dependent on how many costs it creates. The key to using this approach effectively is to be as accurate as possible about actual costs.

So what should you include?

Firstly there are the costs that directly relate to the production of the work such as materials, the cost of outworkers and labelling or packaging. These costs will tend to vary as the volume of work you produce and sell changes and can be referred to as variable direct costs.

Then there is the cost of your time (if you produce the work yourself) which will be based on your hourly rate.Finally you also need to think about making a contribution to the day to day running costs of your business, or overheads (also referred to as fixed costs). This will include things like studio rent, day to day administration costs, PAYE staff costs and marketing. Some designers build this into their hourly rate. A cost-plus figure generally provides a basis for the lowest price acceptable, but should not be the only consideration. It takes into account the cost and profit side of buying and selling, but it neglects demand for your work and what is going on in your market. Another way of using costs to determined price is ‘target pricing’ where a target price is made, and then costs are adjusted so that that price can be achieved. However, this is often very difficult to achieve for designers who produce in small batches because costs are less flexible.

Action 3: Look at what has sold and what you’d like to sell going forward.

Now if you’re using a piece of online accounting software, then this is just a case of looking up the ‘sales by product’ report. If not then you need to look at your sales by product type for lets say the last 12 months and just tot up how much of each product type you have sold (you can ignore the price you sold it for the time being). Now have a think about whether this is the mix of products you’d like to be selling.

If you have one or two key products that sell well are these ones you make great profit on or only reasonable? Are you selling some things at lower prices because the market won’t allow higher ones and how does this compare to the cost of these items? You need to start to understand not just whether you are making a profit overall in your business but how your profitability might change if the patterns of products sold changed.

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If we look at the data on what sells on NJAL within jewellery we see that rings are the leading item both in the UK and across Europe, the Middle East and Africa. For these regions of the world, rings sell almost twice as well as necklaces and over five times as well as earrings.

Sarah Thelwall is founder of MyCake, an online finance and benchmarking toolkit for creative businesses and the arts & culture sector.

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