Lesson #6 – Lumen By the Numbers, Pricing Part Two.
Before I get to our pricing structure, there is one more concept I need to explain.
Wholesale vs Retail Pricing
Most consumers know that the price they see in a store (retail) is not what the retailer paid for it (wholesale).
At the end of last post I quoted a retail markup that may be shocking.
10X, or more.
I was not exhagerating. Many large retail chains have huge markups, especially on the most commonly sold items.
But before you get hot under the collar, markup does not equal profit.
I repeat, markup does not equal profit.
In fact only a small part of it is profit.
Retailers have huge costs. Leasing a store is not cheap, tens of thousands of dolars a month. And then there is salary for the employees, electricity, marketing, advertising, etc etc etc. Its all funneled into overhead.
This is why wholesale and retail pricing exist. Everyone in the food chain can have their costs paid, from the manufacturer to the retail store.
I actually learned about this concept as an engineer, not as an artist. In a previous life I worked for *company-that-shall-not-be-named.* We had the largest markup on the middle of the line bikes, the best sellers, not the high end bikes. We pinched every penny for the former, but the latter could cost whatever it took to make them drool-worthy and bring people into stores.
For commodities such as gas or food, the markup is small. For luxury items such as jewelry, it varies widely.
A LOT of factors go into determining those costs. Perceived value of an item can factor as much into the retail price as the skill it took to make it. The Birkin Bag is a classic example on the high end of the price spectrum.
We are not anywhere near Birkin Bag level. I wish!
Lumen By the Numbers – So what goes into our pricing?
Material prices can vary widely for hand made items. Yarn or paints are relatively inexpensive whereas precious metals or stones can cost thousands of dollars.
And the labor involved can also change a lot. A knitted sweater or painting may take literal weeks or months to create. Whereas a solid platnum ring may only take hours to mold, polish, and set a stone.
The hours of labor are different, as are the skills and talent to craft something beautiful and unique. How an artist decides to pay themselves, whether its 20-100 an hour, is an art in and of itself.
Our wholesale price has 5 major areas that factor in.
- Modest Profit
The least understood item on the list is probably overhead. For us it includes monthly costs to run a website, Etsy store, accounting, insurance, credit card fees, etc. It does NOT include a salary for either of us. Yet.
If we were a brick and mortar store the overhead would be substantially more. But because we work out of my apartment and sell online, our overhead is much lower.
The profit is to re-invest in the company. Eventually. lol.
Retail prices are higher than wholesale. What this covers is different for every business model, but for us it pays for:
- Show Costs
- Consignment or Gallery Fees
As discussed previously, going to art shows and conventions can costs thousands of dollars. We keep track of this and have a number in mind for every show that is our “break even” number.
We also have jewelry in galleries and consignment stores. Their fees can be 30%-50% of the retail price. True story.
So you may be thinking “Since we are also an online business, why don’t we simply charge the wholesale price online and retail price at shows or galleries?”
Answer? Cell Phones and the internet.
How happy would people be if they saw one price at a show, bought it, checked out our online store afterwards and saw it for sale at 30%-50% less? They would rightfully be pissed. And so would galleries, no one would buy from them. Best buy anyone?
And frankly, online sales make up only a tiny part of our overall sales.
That 30-50% markeup to retail pricing also repays us for all the time, money, and talent we put into designing every item we make. The dragonfly alone took 9 generations to perfect. None of the initial investment of time and money to create Lumen has been paid back, yet.
So now that I’ve explained how pricing works, lets get to the numbers.
Blinky LED Square Necklace Cost
- Electronics $6.39
- Necklace chain and Findings $3.41
- Total: $9.80
By the way, if we did not buy the electronics in large(ish) amounts but instead bought them individually the cost would almost double from $6.39 to $11.92. That is economy of scale. If we built them in even larger volume than the handful a time at a time, material costs would reduce even further.
- Labor – $17.00
It takes just under an hour to make one square, start to finish. $20/hour is a steal for skilled labor.
- Packaging – $1.50
This includes the mounting card and box.
Material Total: $28.30.
If we sold them for this amount online or at shows, or even $30, there would be no money for overhead of running a business or profit to re-invest. And worse, consignment stores or gift shops would want a cut of that and then we would be losing money.
To get our wholesale price I multiply this number by 1.75. This is a modest markup by jewelry industry standards. Here is a link explaining jewelry pricing. Or here. What we loose in profit at wholesale we make up in volume from minimum orders.
To reach retail price I multilply this by 2. Again, this is pretty standard and modest number for jewelry. Like I said previously, retailers expect to make 40% minimum on items, 50% (2X) is more attractive. So the the retail price is
For the non-blinky version the costs are a bit different.
- Circuit board: $0.99 ($1.98 individually)
- Findings: $3.41
- Labor: $2.50
- Packaging: $1.50
- TOTAL: $8.40
Yes, thats right, the centerpiece of a non-blinky necklace is the least expensive component, if you don’t count the labor to seal it in epoxy.
Using the same multipliers as above
- Wholesale: $12.00
- Retail: $25.00
$25 for non blinky and $85 for blinky is the basis for our entire jewelry line.
Every other piece falls into place around these two retail numbers.
Is the piece more complicated? More components? Larger? Then it costs more.
About the same size and simplicity? Then the same.
This system makes pricing new items such as the polygon much easier. I price where it fits visually, then double check the costs add up to a modest profit.
Phew! Thanks for making it this far. If you felt this was interesting or helpful, please share.
Quite interesting, Robin. I knew that the products of creative endeavors are woefully underpaid, but I had never seen all the costs broken down before.
And this is part of why most would-be artists and crafters fail. And why many small businesses fail. They don’t realize that the seemingly high number you get from the considerations discussed here, are actually what you need, to just break even. To make a lot of money, you have to charge even more! And think about what happens if you have to give a refund for defective merchandise, or if already-made merchandise won’t sell – you’ve lost all that money, and have to cover it from other sales.
This is a good reason NOT to go into a business, that can be done by someone else easily. Other people will try to make a go of the same business, charging un-sustainably low prices, and then there is not enough customer base for you. It doesn’t matter that they fail after a year or two. Some other fool will come in and try to do the same thing, making the same mistake of charging too little for their product or service. You don’t want to compete in that market.
Art has some advantages there, because it’s a little harder for others to offer what you do. On the other hand, art is rarely a necessity, so your success is strongly-linked to how much money people have to spend on non-necessities. When the average American is hurting, the average artist probably is too…
Best of luck, and thank you for the honesty! If everyone were honest (I’m talking to you, CEO’s and bankers and politicians and really, everybody), most of us would be better off. The only people that lose from honesty, are the ones ripping us off with their lies. Sorry, went on a bit of a tangent there. But thanks again for the honesty!