Establishing the Cost
The first step is to calculate the amount it costs to run your business. Prepare a summary of annual outgoings including:
- Studio/workspace (or as a proportion of the house that you use for a home studio)
- Administration costs
- Equipment & loans
- Marketing materials
- Incidental expenses
- Income tax & social security payments
- Insurance for public liability, materials, equipment, and employment
- Depreciation (cost to replace things you are reliant on). The amount or proportion varies according to jurisdiction.
2. Step two is to calculate the time available to make your work over a year. If you are full time, start with 365 days and then subtract the weekends (104), holidays (say 10), administration time, and allow a contingency for sickness, etc.(say 10). That leaves you 241 days, less the administration time. When you first start in business you are likely to spend 40% of your time on administration, but you should get more efficient and this time will reduce to around 30%. So, even when fully up and running you will have about 169 days out of the 365 to spend on producing work - at best. This means that you will have about 46% of the available time spent on production.
If you are working part time you need to do the calculations on the basis of the number of days you have available and do the subtractions and calculations as for a full time basis. You may find your overheads are proportionally higher than fulll time, as these costs continue accrue whether you are in the studio or not.
Then do the calculation:
Overheads & personal salary (you do want to pay yourself - I insist!) divided by days available to work.
This enables you to fix a price for your time and gives you a daily rate from which you can calculate an hourly rate.
3. Step three is to estimate how long it takes you to do anything - preparation time, research, selling, marketing, packaging etc.
Add together the cost of materials and charge for the time it takes to make the item at the hourly rate you have calculated. This enables you to calculate a price for the item. Then look at how much the market will pay for your type of work.
Even if you know the market will not stand the full price, you should still do the calculations to find out the price that you should be trying to achieve. If the price is unrealistic, you need to look at simplifying the item, or to consider different items.
All these calculations need regular reviewing.
More information is available
Establishing the costs
Creating a pricing structure
Terms and conditions of sales