[Jewelry making - Article 00036] - Re: [Orchid] Pricing strategy for a newbie

[JoAnna Kelleher]

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Hi Dolphin,

    I have been doing jewelry for 3 years and am contantly learning,
    evolving, etc. Recently, I have revised my pricing strategy based on
    suggestions from a business coach rather than someone in the jewelry
    business. To some, it's appears completely backwards (it did at
    first to me). But from a business strategy perspective, it makes a
    lot of sense. 

    My initial approach was to take the cost of materials and double it
    to create the wholesale price. And then double or triple THAT (often
    referred to as keystone or triple keystone in the jewelry business)
    to get my retail price. But a piece that was made of inexpensive
    materials (such as sterling silver and semi-precious stones), but
    required a lot of time to design and create wasn't really covering
    the costs of my time; whereas a piece made with expensive materials
    (Tahitian pearls, faceted gems, 18K gold, etc.), but didn't require
    as much labor was a real boon in terms of profit. Additionally, this
    method of pricing didn't take into account fixed expenses (aka
    overhead) such as the cost of tools/equipment, rent, insurance, etc.
    So I realized that this formula was clearly flawed from a business
    standpoint. 

    My new approach is to start with how much myself and my partner want
    to net from the business (we are an LLC/partnership); let's say
    $7,000/mo. Next, I take into account my fixed expenses, that is the
    costs that I incur regardless of how much jewelry I make or sell.
    Let's say fixed expenses are $2,500/mo. And let's not forget
    self-employment taxes, which would be roughly $1,070 ($7,000 X 15.3%
    3D $1,070). So we are looking for a gross profit (which is in fact
    gross revenues minus the cost of goods sold) of $10,570. 

    Now, we have to know (or guess at) the average ratio between our
    costs of goods sold (the costs of the materials that are a part of
    the finished jewelry such as metal and stones; does not include
    labor or materials such as buffing compounds that are not a part of
    the finished product). I use a ratio (also known as profit margin)
    of 50%. That is, a piece that has $100 worth of materials might
    wholesale at $200.  Now, keep in mind that this is just an average
    that we are using on our way to determine our actual labor costs. 

    With an average or estimated profit margin of 50%, we take the gross
    profit ($10,570) and DIVIDE by 50%. This is the same as multiplying
    by 2. The result is gross revenues of $21,140.  What this means is
    that I have to sell $21,140 worth of jewelry in order to earn (after
    costs of good sold, expenses and self-employment taxes) $7,000. 

    Now let's assume that my partner and I are each working in the
    business 40 hours each week for a total of 80 work hours or between
    the two of us (344 hours/mo). Now we're going to create an algebraic
    equation (don't worry, just follow along; there won't be a test) to
    determine a base hourly rate. 

    With "N" being the hourly wage we want to figure out, we can create
    the following equation: 

		344 hours/month X "N" dollars/hour =3D $21,140/mo =20
		344*N=3D21,140
		N=3D(21,140)/344
		N=3D61.45

    But here's the kicker -- we only spend 60% of the time actually
    making jewelry. The rest of the time is spent making sales calls and
    doing office work. So we need to adjust our hourly rate to
    compensate for time not spent making jewelry. We need to divide our
    base rate by 60%. The result is an adjusted rate of $102.42/hour
    ($61.45/60%3D102.42). 

    Now we can determine our actual price for a piece of jewelry. A
    piece of jewelry with $200 worth of materials and takes 30 minutes
    to make (for example a cast gold ring) would wholesale for $261.
    Under my previous pricing strategy, I would have made $400. But keep
    in mind that it only took me 30 minutes to make it. 

		(200+(102*.5)=3D261)  vs. (200*2=3D400)

    An elaborate piece that was comprised of $100 worth of materials and
    took me 4 hours to make including soldering, stone setting, and
    finishing (for example a fabricated silver bracelet with set stones)
    would wholesale for $508. Under the old method, I would have sold it
    for $200...for 4 hours work!!! 

		(100+(102*4)=3D508) vs. (100*2=3D200)

    Now would someone be willing to pay $508 for a silver bracelet? If
    it's well-made, yes. Think about David Yurman. Yes, he is a renowned
    designer, but what makes his pieces popular are not so much the
    materials used but the attention to detail in the design...oh and
    the extensive marketing campaign. 


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