Product Costing

There are some financial disadvantages of being a maker and selling products (and not a designer), which are:

• You will have higher start up costs when you begin to get your craft business off the ground
• You have higher overheads than a designer, as you are more likely to need a studio
• You have higher direct and ongoing costs as you will need raw materials to produce your work from and you will need to keep stock (often there is a lot of money ‘locked into’ stock especially if you work in gold for example)
• And calculating your costs are slightly more complex than for a designer!

 So it might be a good idea to work both as a crafts person making products AND a designer working on commissions or consultancy, to counter some of these issues.

Here we will go step-by-step through the calculation for the costs of a milliner making one hat:

Step 1: calculate your hourly overhead costs

Start with identifying your annual business overheads by checking your recent monthly or quarterly invoices, identify the various overhead costs, and list them all in a spread sheet or on a piece of paper.

Overhead costs are costs that need to be paid regardless of sales, so for example include your studio rent, phone and mobile, insurance, utilities, marketing, storage, business rates.  These are the invoices that you pay often on a regular basis.  Don’t include your drawings/salary or raw materials.

For our example we use £12K p.a. (PS your figure will not be as perfectly round as this!)

Let’s assume the milliner has 4 weeks holiday, this makes £12K/48 weeks = £250 per week.

Now work out how many hours per week she actually spends on average makinghats, so don’t include marketing, admin, meetings and the like.  In your first years you do well if you spend 40 – 50% of your time physically making.

So let’s say 40 hours per week working x 40% = 16 hours per week physically making.

The hourly overhead costs will then be £250/16h = £15.62

To keep her millinery studio running with these overheads she needs to generate at least £250 every week plus a salary to cover personal living expenses.  Even if she doesn’t sell anything she will need to cover both these costs.  Therefore it is really important to keep your overheads as low as possible, especially when you are just starting out. See if you can share a studio or work from home to minimise your costs and to get your crafts business off the ground.

Step 2: calculate your hourly wage

Let’s say the milliner wants to earn gross £22K p.a. (to cover her personal budget, rent, food, clothes, national insurance and tax etc).

How much salary you need or want depends on many personal circumstances, such as where you live and with whom you live, and what you want or need to have the lifestyle you want.

We use the same figures as previously: 48 weeks x 40h x 40% = 768 hours, so that makes an hourly wage requirement of £22K/768 = £28.65

Step 3: calculate your total hourly rate

This is your hourly overhead costs + hourly wage = £ 15.62 + £28.65 = £ 44.27

Step4: Calculate how long it will take you to produce one product 

How long does it take you to produce one product?  You hopefully have made your production a bit more efficient and effective and combine various jobs together and produce products in small batches.

If you don’t know the answer to this question, don’t guess!  Check out with a time sheet and keep a time log. You might be surprised how different your guess is from the reality …

Remember to include all production processes, including cutting fabrics, sewing,  finishing and packaging.  Use averages e.g. you cut 6 hats in 2 hours, resulting in 20 min per hat on average.

Let’s say total time spend to get 1 hat ready is  2.25 hours x hourly rate = £99.60

(It is always good to calculate backwards too: if you are actually making 16 hours per week, does this calculation mean that you indeed produce 7 hats per week? – is this enough, too many or too little?  Use this calculation to improve your own management.)

Step 5: Calculate the total material costs

Add all the costs of the materials to produce one hat. Don’t skimp, it really is important to have a bit of contingency, and don’t use the cheapest materials. We will use £22 in our example.

Tip: Don’t use the cheapest materials: if you use a very cheap zip for example your overall product will look cheap, but the chances are that it will break sooner too, and the cost of replacing a broken zip are far higher than using a good zip in the first place.

Step 6: Add contingency

Contingency is ‘just in case’ and we suggest a contingency percentage of around 10%. If your product is very expensive you might go for a lower percentage, or if you have a lot of experience with similar products you can lower this figure too.

Contingency will allow for mistakes, hidden extra etc, and will allow you to offer discounts or special offers.

Step 7: Calculate your total cost price

Add £ 99.60 + £22 x 110% = £133.76

This is the amount that it cost to produce one hat. That’s it! You have done it!

Some important notes:

So what do you think about that cost figure?  Is it too expensive? This cost price would mean that this hat would sell in a shop for 4 x which would make it £535.04.

In this case I used an example of a milliner in London, who would have been going for a while, and who would have her own studio space.  If she wanted or needed to earn less, and wouldn’t have her own studio space, then the cost price would come dramatically down.

Also, the answer of ‘being too expensive?’ often depends where you want to position yourself in the market. This milliner works very much with more or less bespoke pieces.  I would see if she could cut her costs a little, so that the retail price would be below £500.

Would she be able to sell wholesale with this cost price?  The wholesale price would normally be double the cost price, and then double again for recommended retail price.  This is a very expensive hat, and it might be better for this milliner (who wants to provides a bespoke service) to actually sell directly to her customers, instead of through a retail shop.  She might sell directly at consumer shows, open studios or by appointment to clients in her own studio.  This would mean that she could probably sell these hats for around £350 herself directly.

Do not attempt to sell far below the retail price if you sell through shops.  If you would undercut the retailer then they very quickly will drop you if they find out that you sell directly for a lot less.

She could create a cheaper range that is less bespoke and therefore less costly, and sell these through trade outlets.

Also, use this calculation as a starting point to again calculate backwards.  How many hats would this milliner need to sell per year to cover her annual overheads, salary/drawings and direct costs/raw materials? Is that do able and do you feel comfortable with that, or is it far too many or far too few? What kind of business does she want to run: very bespoke and at the high end, or sell a lot more products but then at a lower price point?

Also, from calculating the cost you can start pricing your product, and there are lots of different ways to price your product.