Pricing Strategy Review

18 02 2013

I just read another jeweler’s recommendation about pricing strategies, and it doesn’t work for me.

He recommends multiplying materials and shipping costs by 4 and then adding hours times an hourly rate. This is the formula:

(4 x Materials & Shipping) + (hours x rate) = price

This strategy doesn’t work for me. Using this formula will give you either costs that are higher than most people will spend, or costs that are too low to be worth the effort.

For example, I make a sterling silver byzantine bracelet, with the following approximate values:

  • Materials cost: $35
  • Shipping: $3
  • Time to make: 2.5 hours (from making rings to tossing it in the tumbler)
  • Hourly rate possibilities: $15, $20, $25, $30
  • Typical price range of similar pieces from other jewelers: $120 – $150

Let’s work the first part of the formula first, and then use various hourly rates.

4 x (35 materials + 3 shipping) = 4 x 38 = $152

This cost is already higher than most people price similar bracelets, but let’s go ahead and apply the hourly cost and see what happens.

  • 2.5 hours x $15 = $37.50
  • 2.5 hours x $20 = $50.00
  • 2.5 hours x $25 = $62.50
  • 2.5 hours x $30 = $75.00

Now, with these costs for time, here are the resulting prices

  • $152 + $37.50 = $189.50
  • $152 + $50 = $202.00
  • $152 + $62.50 = $214.50
  • $152 x $75 = $227.00

Ok, I “might” get away with pricing the bracelet at $189.50, even though this is quite a bit more than comparable pieces by other jewelry makers, but I doubt I could sell the piece at the higher prices.

Using this strategy, I’d have to lower my hourly rate a lot, and, frankly, it would not be worth my time. Even $15 per hour is really low for me, given the quality of the pieces. Higher quality pieces are worth a higher hourly rate.

If you’re going to use a strategy similar to this one, forget multiplying the materials cost. I mean, really, what the point of multiplying the materials costs? If you add the materials costs as they are, you neither lose nor make money on them. Materials costs become straight expenses that you pass on to the buyer. You already pass on the shipping costs, don’t you? Do the same for your materials costs. Instead, adjust your hourly rate; your time is the variable.

In short, do this instead:

Materials & Shipping + (hours x rate)

Using the bracelet values above, you would get the following prices. (Materials & Shipping = $38)

  • $38 + $37.50 = $75.50
  • $38 + $50 = $88.00
  • $38 + $62.50 = $95.00
  • $38 + $75 = $107.50

Now we’re getting into a more reasonable price range. If you use the $30 / hour rate, you will slightly undercut your competition, which may result in more sales, and you will make a decent profit from each piece.

You could use a combination strategy of multiplying materials AND charging per hour, such as in your original formula. If you do, consider multiplying materials costs by 2, not by 4. Here’s the formula:

(2 x materials & shipping) + (hours x rate)

Just using one example hourly rate, I would get the following price:

(2 x $38) + (2.5 x $30) = $76 + $75 = $151

Just make sure your final price is within the typical range. Also, whatever hourly rate you use, make sure your work is worth that rate.

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