Cost Vs Price Vs Value

April 9, 2018

There have been some interesting comments on Twitter recently about selling price of handmade items. Fiora Aeterna shared an exchange from her friend a Cosplay prop and costume maker.

There were a couple of notable points about the exchange. Firstly the purchaser was very angry and that manifested in rudeness. The second was that the buyer and seller had very different ideas about the price. The buyer was using the price of mass produced items as a comparison. The seller estimating based on her costs.

A few days later I spotted a very similar exchange with a hobby crocheter where someone wanted a large blanket but wanted to pay shop prices. The crocheter pointed out that the a large blanket used a lot of wool and time to make.

Cost

For the cosplayer prop maker, there were two main costs. Firstly the materials which were high quality and secondly time, the maker estimated 50-100 hours for creation.

There are other costs such as design, ordering materials and shipping. These can both take time and expense.

So how do the shops/factories save on cost compared to the sole maker? The key way is on volume. By making lots of things they have lower costs per item. For example they can use automation which might have a high setup cost but the cost per item is much lower.

When I was working as an apprentice at Dowty I spent a few months in their purchasing department. One of the things they outsourced was washers made from specialist materials. For some of the items made they just needed one washer per part so they might only use 10 washers per year. Those parts got sent out to a guy in a shed who would make them by hand for a few pounds each. This was still cheaper than the CNC shops who had a minimum of £100 setup cost but could then produce washers for a few pennies each.

Related to volume is specialist equipment. For a supplier making millions of an item an injection moulding can be made. Although there is a very high initial cost the cost per item is tiny.

As a maker starting up neither of these strategies are particularly helpful. But as you get more established it’s possible to order more parts than you need and spread that cost over several projects. Also saving up for machines that will save you time on repetitive jobs is something that can be considered.

Embedded electronics expert Elicia White mentioned on her Embedded FM podcast that for mass produced toys they might swap in a lower spec processor to save cost and then spend longer shrinking the code to fit. As a maker you could take the opposite strategy and get a batch of middle of the range modules or processors that could be used over a range of projects. That way you save time learning new boards and can bulk order. You could also save time by not having to optimise or shrink your code.

Also by sharing your making process, others can see the effort and skill put into the process. This can help them understand why your items are not the same as a factory item.

Price

The price of an item is the amount of money that the buyer and seller agree to exchange for an item or service. As a maker setting prices is a difficult challenge. Too high and there will be no sales, too low and you won’t cover your costs. There are whole books and courses on setting price. But as the price is what a buyer is willing to pay it’s hard to have a direct influence over it so people feel forced to price too low. The difference between price and cost expressed as a percentage is known as the margin, for mass market items these margins are very small, say 5%. But because the companies are big it is fine if one product does really well and makes a big profit and another makes a loss. For a sole trader or small maker business these margins need to be larger to protect you from the variations and quiet times. So margins of 40-50% are more helpful.

The exchange that Fiora highlighted had an interesting point from the buyer. They perceived that the price should depend on how famous the seller was. This annoyed the seller no end as they were basing their price on quality, effort and cost. The buyer then further annoyed the seller by suggesting that because they would be showing off the costume this was effectively free marketting and should warent a further discount.

So why are the buyer and seller so far apart in their thinking?

This is because the buyer is basing their price on value not cost.

Value

Oscar Wilde famously wrote, “a cynic is a man who knows the price of everything and the value of nothing”.

The quote was a reference to the need to look beyond the financial to ethical, moral, philosophical or cultural values. But it’s not really those values were are thinking of here.

By value we need to think of what the product is doing for the buyer. Is the person buying a “costume” or are they buying the opportunity to be a star at a party or cosplay convention? Is the person buying a new tool or buying the ability to get their work done faster or more accurately.

So when pricing a make we need to look at what we can do to increase the value for the buyer. Can it be personalised? Can they have some input to the design even if that is just picking from a selection of options? If we can get the value higher than the price then the buyer will be very happy. If the price is greater than the value the customer will be disappointed.

So the key is that

Cost < Price < Value

What are your thoughts on how a small maker can ensure their customers perceive the value of their creations?

By Andy from Workshopshed 6 Comments

  Posted in: Inspiration