When you are calculating your prices, you must learn the dollar amount of your minimum recovery cost. That is, exactly how much money do you have invested in making a piece. The formula below shows what numbers are involved:
For example, you want to know your minimum recovery amount for a set of earrings. You learn that your labor cost is $12 and your material cost is $2.35, which added together equals $14.35. You list the item on Etsy for $20. Etsy charges you $.20 to list and 3.5% when it sells for a total of $.90 for cost of sales. You work at home so you elect to estimate your overhead as 25% of your production cost which comes to $3.58.
Your minimum recovery or floor price is $18.83. But, the floor price isn’t necessarily or always equal to what you eventually price the item for. You must research the average market price for similar work to yours to learn if you can charge more. Suppose items like this sell for around $25. You would lose money by pricing yours at only $18.83.
Or your research may show that you can’t compete with your current costs so you have to look at making other items that you can sell for higher prices or find ways to lower your costs, like those described in Chapters 8 and 9 of How to Price Crafts and Things You Make to Sell.
Learning the minimum or floor price is essential to knowing if you have enough of a profit margin to sell wholesale. Figure the floor price of every item you make to determine if your current prices are realistic.