Setting Prices on the Creations of Your Craft, Hobby

Dear New Frugal You,

I'm a crafter and have been selling a few of my creations for fun, and I've gotten pretty darn good at it if I do say so myself. I'm thinking that I could turn it into a side business selling at craft shows. My problem is that I really don't know anything about business. For instance, I have no idea how to price my stuff. I'm embarrassed to ask too much, but I don't want to shortchange myself either. How do I know how much to charge?

- Samantha

Dear Samantha,

Congrats on turning your hobby into a sideline business! It's always nice to be able to make money doing something that you love. And you're right that decisions about pricing your creations will be key to your success.

There are two basic strategies that you can take in pricing. One starts with cost and works toward price. The other starts with price and works backward to determine how much you can spend to create the item. Let's look at both.

Some crafters take a very simple approach. They price things at three or four times the cost of the materials that went into the finished product. If you're only selling a few items each month, that might be the best way to go. Keeping track of costs is as simple as tagging each purchase with the receipt or pasting a sticker on it with the price. Total them up when you use them, and you'll know how much you've invested in materials.

The practice of charging three or four times cost probably goes back to older mom-and-pop stores. They'd price that way figuring that one times cost covered purchasing the item, the second covered the cost of having a store (i.e., overhead) and the third time covered profit. The fourth allowed them to discount the price if necessary.

The obvious problem is that costs can vary quite a bit even for essentially the same end product. One crafter might buy all supplies from retail craft stores. Another uses bits and pieces found in yard sales. When you multiply the costs times four, the difference can grow fairly large.

You'll also need to determine what your time is worth. If you're just trying to earn enough to pay for your hobby, then your time isn't that valuable. But if your goal is to make some money, you'll need to factor in what you could be making at a "real" job. It's easy to find yourself working for pennies per hour.

Another problem with pricing based on your cost is that you may find that no one is willing to buy at the price you want to charge. If that's the case, you can either find a way to reduce your costs or decide to make something else.

One way to maximize what you can charge is to create items that are unusual, hard to duplicate or both. Almost anyone can assemble gift baskets. It's much harder to copy intricate handcrafted work.

A different strategy for determining price is to work backward. First, determine an appropriate price for an item. A professional will try to factor many things into that decision. In fact, they'll say pricing is itself an art form.

But for an at-home business you don't need anything fancy. Just an idea of what similar items are selling for. There are a number of ways to get that info. Check out craft shows and online sales for similar products. Ask fellow crafters what they think your creation is worth.

Don't hesitate to experiment a bit. Try one price at one show and a different price at a second show. You'll learn from the experience.

Pricing won't be the only challenge. You'll also need to learn a few basic business rules. For instance, you'll want to learn about legitimate business expenses. If you're successful, there will be income to report to the Internal Revenue Service at the end of the year. Fortunately, you'll be able to deduct certain costs to reduce the income you'll pay taxes on.

You'll also need a basic accounting system. There are inexpensive software packages that make accounting simple and easy for nonbusiness types to use.

Ultimately, the key decision is whether you really want to make money or are you looking for just enough income to offset your hobby expenses.

If you want to make real money, treat it like a business. Price your work accordingly and pay attention to how much time and money you have in each project.

On the other hand, if it's just a hobby, don't take the fun out of it by worrying about what to charge. Anything you receive puts you that much closer to paying for your next project. And if you're having fun there's nothing wrong with that!