[Jewelry making - Article 00154] - Re: [Orchid] Dealing with the increase in metal prices...

[David L. Huffman]

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Pricing for a changing metals market
By David L. Huffman

    As you may have noticed (I'd be astonished if you hadn't), prices
    for gold and silver, platinum too, are on the rise. 

    First, a word of advice: Don't panic, it doesn't mean we are going
    to have to price ourselves out of our markets. Now if only we can
    convince the customers, who are also privey to the knowledge of
    rising gold and silver prices, that jewelry is still a good buy. 

    Relative to the effective purchasing power of U.S. currency,
    precious metals are actually a fairly stable commodity, historically
    speaking. But the value of the dollar, typically relative to the
    price of oil since the U.S. left the gold standard, is in flux, as
    oil is increasingly traded in other currencies. What that means is
    that we can expect the price of gold and silver to continue to rise
    and stay high. What that also means is that, as a jewelry producer
    using these metals, your pricing structure must take into account
    the fact that you will be replacing inventory at increasing cost. Is
    there a formula you can use for this? Yes, but market forces will
    affect your decision. You may need to accept smaller margins to stay
    within price points that are competitive. However, your competition
    will undoubtedly be raising their prices too, so, whereas it is
    generally safe, in fact advisable, that you raise your prices with
    the increasing cost of materials, there may, in fact, exist an
    opportunity to increase your market share. It's all in the game of
    pricing and marketing. 

    First, with every article of jewelry you produce, it's useful to
    keep records of the costs of production, separated into cost of
    materials and value added costs. Materials, furthermore, might be
    broken down into metals and gemstones, as metals are the more
    volatile component of material costs. Value added costs should
    include all your overhead plus any profit. You need to know how much
    it costs to operate your business, including such things as wages,
    taxes, rent, utilities, insurance, and everything else you pay for
    to operate. The idea that you can find a specific number to multiply
    material costs by to arrive at price is not a wise idea, although
    retailers typically price in this fashion. It is much more useful to
    know what it costs to run your business, and you should track this
    year by year and compare for changing costs. It is not unusual for
    it to take a couple years in business to acquire an accurate profile
    of your business costs. 

    But back to the issue of adjusting prices to protect your ability to
    produce replacement inventory and stay profitable. You may decide to
    adjust upwards your overall costs of operation as well as your
    material costs, since you will inevitably find that costs such as
    shipping and utilities tend to be rising nearly as fast as metal
    prices. Remember, the rising costs of metals is due to a number of
    factors, and some of those factors affect other areas of the
    economy. But you need to at least cover what you'll have to spend to
    acquire precious metals to continue to produce your work. 

    Gold used in casting, at 14 karat purity (remember, karat is a
    fraction of 24 karat purity as in 14 karat is 14 twenty-fourths
    gold, the other ten twenty-fourths other alloys). What's more, the
    market price of gold doesn't reflect what you pay for karat gold
    casting grain. There is a premium, relative to purity, going to the
    supplier who manufactures it. Typically, 14 karat gold's actual gold
    content (14 twenty-fourths), will cost you around 15% more for the
    gold content than the market price that gold is trading at, and
    should you contract out casting, it will cost you between 18-20%
    more for gold. Even if you acquired 24 karat and alloy your own
    karat gold, expect to pay in the neighborhood of 8-10% premium over
    the market price gold is trading at. 

    What about silver? 

    Most suppliers of silver stock provide charts to calculate their
    charges and accommodate rising silver prices. Likewise with gold,
    but most gold suppliers make this calculation a bit more difficult.
    In the case of findings, some suppliers provide prices based on a
    gold or silver market price at the time of the printing of their
    catalog, so it's a simple matter of dividing their price by that
    gold or silver price and then multiplying that number again by the
    current gold or silver market price. 

    Here's a typical breakdown of a hypothetical jewelry article, in
    this case, a ring with 7 grams of 14 karat gold, 0.18 carats of fair
    to good grade small diamonds, and a good grade amethyst in a
    calibrated size, let's say, 5 millimeters square princess cut. It is
    a production item, so it's cast using a rubber mold. But the initial
    costs of developing the prototype and the mold to enable production
    have to be defrayed of a number of units. Suppose you expect to
    produce 100 of these before you discontinue production and the cost
    of model and mold come to $500. That's 5 dollars added to each unit.
    Here's a cost analysis using a price of $400 per ounce of 24 karat
    gold, which has not become $630 dollars per ounce since you last
    produced this item. Diamonds are stable at this time, in your
    quality at $480 per carat, but you initially priced the item when
    they were $380 per carat. 

    Back to our hypothetical jewelry article. Here's the breakdown. 

          Gold (at $400 per ounce market price) 

          5 grams at a cost of $8.97 per gram = $44.85 

          Diamonds (at $380 per carat), 0.18 carats = $68.40 

          Casting charges, $13.50 casting, $15 sprueing, and $8.00
          shipping = $36.50 

          Labor and overhead at $45 hour, 2 hours in finishing, assembly
          and setting (including cleaning and packaging) = $90.00 

          amethyst (shipping incidental if you ordered a significant
          quantity) = $18.50 

          prototyping and molding costs per unit = $5.00 

    That brings us a total wholesale cost per unit of $263.25 

    Suppose we add a profit of 20%, that brings our wholesale price to
    $315.90 

    If a typical retailer sold this, it wouldn't be uncommon to mark it
    up 150%, so multiply by 2.5 for $789.75 or $790.00 

    That's a hefty price for such an item, and we haven't even adjusted
    that price to reflect the current metal and diamond costs. If we can
    get a price break for the casting service by having 25 units cast,
    we can bring that cost of casting down by $8.10 per unit, which
    means that the final wholesale price comes down to $306.18 and that
    gets reflected in a retail price, now, of $765.45. That $25 drop in
    price might just make the difference in the appeal of that price
    point to your market. Certainly, you'd want to look for price breaks
    for diamonds, if you have the capital to lay out. The temptation is
    to try and reduce your own labor costs, but that is only 34% of your
    cost. Cut materials down and at some point you compromise the
    integrity of the piece. Cut profits and you'll hurt your ability to
    grow your business. If you are the retailer, it's logical to
    decrease your margins, but be careful, a retailer has higher
    operating costs and there is, somewhere, a point at which your
    business will suffer. Look for more efficient production methods,
    price breaks for quantities on materials, and keep an eye on if and
    how much sales change after you adjust your prices. 

    Back to our example: 

    In the above product, we have a spit in costs between three things,
    some changing, some not. 

    At the old gold and diamond prices, it comes to $44.85 in gold,
    68.40 in diamonds, and $150 in labor, overhead, profits, and stable
    material costs. 

    You can divide the gold cost by the old market price of $400, then
    multiply that by the new price of $630, and now your cost of gold is
    $70.64. 

    You can divide your diamond costs by the old price of $380 per carat
    and multiply by the new price of $480 and now your cost of stones is
    $86.40. This reflects a total increase in costs of $43.79. 

    Multiply this through your 20% profit to raise it to $52.55 and
    that's what you'll need to add to your wholesale price. Multiply
    that amount by your 150% retail margin and you will add a total of
    $131.38 to the price the customer will or won't pay. Surprisingly,
    this reflects only about a 16.5% increase in the retail price. And
    also, as we have seen, it might be possible to cut that increase
    down, with quantity purchases, by another 3%. It's a significant
    change, but I think, manageable. 

    Here's a brighter note: 

    If, in the above example, we were only looking at the increased
    costs of gold in our project, we would see we have an increased cost
    of production, at the wholesale level, of only $25.79. Working
    through our profit factor and the retail margin, we'd see an
    increase in the retail price of $77.37, more like a 10% price
    increase. This might still affect the customer's perception of the
    price point of the article, but a little tweaking in the price might
    make it work. Suppose, instead of taking the price up to $870, we
    only raised it to $845. It appears closer to $800 that way than to
    $900. We'd then have to work harder to bring costs in line, but we
    might still move the same volume of product if we have the right
    clientele Discretionary spending doesn't follow the rules of other
    purchases. It's more emotional, and sometimes, when people feel
    threatened, economically, the find relief in some forms of risky
    spending. Just look at lottery ticket sales (perhaps an
    uncomfortable comparison, I know). 

    It's a shame that, as artists, we have to start whittling costs
    anywhere and everywhere, but at some point, art becomes business,
    and smart business is about being competitive everywhere you can.
    Again, keep in mind all your costs of doing business are going up
    all the time, but looking at it this way, it's not the call for
    panic that is our initial response to the seemingly dramatic rise in
    the price of precious metals.
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