Pricing Your Handmade Product: How to Stop Underselling Your Work

Most pricing advice tells you to add up what a bar costs and mark it up. I do it the other way round.

Here's why. If you build your price up from materials, you'll almost always land too low. The small number in front of you — oils, lye, packaging — feels like the whole story, and it isn't. Start from the market and your position instead. Then check whether your costs fit underneath.

Let me walk you through how I actually price a soap bar.

Start with where your product should be priced, not what it costs

Before any maths, do your research. Look at what your competitors charge and how they position themselves. Are they cheap and made for the masses, or premium and made for people who care? That's the first decision: where do you position your product?

Handmade almost always has to sit towards the premium end. Better ingredients, better materials, time from a real person, no automation, no cheap labor — that costs money, and the only way the math works is with a higher price. Try to compete with cheap products and you lose.

For my soaps, the sweet spot is around 11 to 15 CHF. Obviously there is soap for 2 CHF in any Migros if someone just wants a soap. But my soaps are something else entirely. 
I’ve found that around 12 CHF is the sweet spot for people willing to pay in Switzerland for a premium soap. There is e.g. Soeder which is higher but there you pay a premium for the brand & their concept. I don’t have that so I am not going to charge that premium.

Put the price on paper first

Based on your research, write your price down before you calculate a single cost. 

Now let’s set your margin rules:

1. You want at least 50% margin when you sell directly to end customers. That 50% will cover the growth of your business or at least the sustainable existence of your business. Don’t think it is enough to cover just your costs and your salary. That model will fail as soon as you want to change something or something unexpected happens. Not to mention if you get a big order from a retailer, you usually need to come up with the material costs in advance, prepayment is not really something bigger retailers do in Switzerland. So 50% profit is very much needed!
2. Selling through a retailer you need closer to 70% margin, because the retailer will usually want to buy at half your retail price. 

That gives me two ceilings if I calculate with my 11.90 CHF soap price. Direct, my total cost per soap can't go above 5.95 CHF (50%). For wholesale it has to come down to around 3.57 CHF (30%). Those are the numbers everything else has to fit inside.

Now let’s focus on the costs.

The three costs you can work out on day one

I usually write up five cost types for my handmade products: material, labour, variable costs, fixed cost & I treat marketing separately. Three of them you can calculate before you've sold a single product: material, labour, and fixed costs.

Material and labour are the easy ones — you can get them down to the per-product level straight away. Add up material & packaging; divide by the number of products in your typical batch if you have any. Then track how long a batch really takes and pay yourself a proper wage. For me that's roughly 8% of the price in materials and 15% in labour.

Fixed costs are trickier, because they don't attach to one product — accounting, internet, domain, your shop subscription, studio rent if you have one. To get a per-product number you have to estimate how many products you'll sell in a year. I aim for fixed costs to sit around 5% of the price, which works out to about 0.60 CHF a soap bar.
And here's the honest part: until you sell enough, that 5% is a fantasy. Fixed costs run at a loss until you hit break-even. If my fixed costs are 7,000 CHF a year (which is super low) and I want them to be 5% of revenue, I'd need to sell over 140,000 CHF — that's 11,764 soaps in a year. (Yes, I did the maths. Yes, it's a lot of soap. :D)

The two costs that depend on how you sell

The last two — marketing and variable costs — change completely depending on your sales channel.

Marketing first, because without it there's no sale. Most handmade businesses run 10 to 15% of the product price on marketing. I cap mine at 15% and currently sit around 12%. Two things to note. One: at the start your marketing costs will blow past that while you figure out what works — that's the hardest part of any business. Two: if you want to keep marketing to 15% of your price, every CHF you spend has to bring back 6 to 7 CHF in sales (100%/15%=6.6667). You can only scale your marketing activities if they make you profitable, otherwise they eat up your margin. That's a real return to hit, and most people underestimate it.

If you sell through retailers, your marketing cost in this calculation is basically zero. That's the whole reason they take such a big margin — the marketing happens on their side, not on yours.

Variable costs move with each sale: packaging, shipping, payment fees. Online these are high — for me, postage and online payment fees come to about 13%, or 1.57 CHF per soap. Through wholesale they're much lower, because you're shipping one box, not 80 little parcels. Expect variable costs somewhere between 5 and 15%, and don't let it climb past that.

Put your pricing structure together for one channel first

This is for my online shop, which is my main sales channel: 

• 8% material costs
  
• 15% labour costs
  
• 5% fixed costs
  
• 12% marketing costs
  
• 13% variable costs
  
• 47% margin

My costs come up to 53% of the sale price, which leaves a hair under half as margin — right at the edge of my 50% rule. I should be able to reduce the material costs & variable costs once I scale up again (the transaction fees get cheaper above a certain number of transactions and if I start to buy material in bigger bulks, they get also cheaper per soap bar)

Wholesale is the same bones with two pieces removed. Take out the online fix & variable costs and take out marketing, because either irrelevant or the retailer covers it. That's how the same soap can support a shop buying at half price and still leave you something:

• 8% material
  
• 15% labor
  
• 5 % fixed
  
• 2% variable (you still have some costs per order)

This adds up nicely to the 30% costs and leaves me 70% margin in the wholesale channel.

Do this calculation for your main channel first. Don't try to model every channel on day one like markets or Etsy or whatever else might work for your business — you don't know your numbers yet. Once you launch on local markets or into retail shops, and you can see how people actually order and what an average order is worth, you redo the maths with real figures.

Once you have your calculation done, it is pretty easy to adapt to other sales channels and also update with more accurate numbers! 

Because pricing should be revised at least once a year. If for nothing else, than at least for the adjustment of the annual inflation rate at the end of each year.