Part 2: How to Price Jewelry for Wholesale
In January 2012, retail stalwart JC Penney introduced a radical new concept, stemming from the mind of then-CEO, Ron Johnson. Johnson — the man responsible for Target’s 1990s merchandising renaissance and the retail mastermind behind the Apple Store — proposed that discounts and coupons would be eliminated from JC Penney. Rather than relying on what he deemed “fake prices” inflated to make markdowns more appealing, Johnson proposed a “fair and square” approach to pricing: all prices would automatically be at least 40% lower from the start. No more coupon cutting, no more 4 a.m. lines on Black Friday, no more pulling a fast one on the customer. This “fair” approach seemed so logical, but, as Johnson soon realized, people are often not. In the fourth quarter of 2012, JC Penney’s same store sales fell 31.7% over the previous year and and the company reported a net loss of $985 million. In the end, Johnson was asked to leave and the JCP coupons made their way back into weekly circulars.
Aside from suggesting that even the creator of the Apple Store can make mistakes in business, the point is that pricing matters. It is the primary driver of buyer behavior and can affect so many facets of your business, from brand positioning to marketability, to the money you make for yourself and for your business.
In this second part of our 7-part series on Growing a Profitable Jewelry Business, we’ll provide a primer on Pricing, breaking down price into its basic components. This segment will also make an introduction to pricing strategy, focusing on the Keystone method, which is the fundamental pricing structure for the wholesale world we introduced in our previous installment of the series.
Costs form the foundation of price and, on a macro level, determine where profitability begins. They not only establish the absolute baseline revenue needed to maintain a solvent and viable business, but also provide you with a starting point for thinking about pricing.
Price needs to cover not only the costs of your product itself, but also the costs of running your business. They fall into two main categories, both of which are important to consider: variable costs and fixed costs.
Variable costs are costs that are directly linked to your level of output.
For example: if you were a violin maker and knew that you could make 5 violins with 20 hours of labor and 15 boards of wood, your variable cost to make one violin would be 4 labor hours and 3 boards of wood. You could then assign a monetary cost to each labor hour (wages) and to each board of wood (material cost).
Some variable costs jewelry designers might consider include:
- Design labor (whether your own or that of a hired designer)
- Cost of materials
- Selling platform transactional commission
- Stock items: chains, earring hooks, polishing cloths
- Shipping (if you’re doing your own distribution)
Fixed costs are costs that you would incur regardless of your business’ level of output.
In the violin example, the rent on the workshop or the “corporate” Spotify premium account playing metal music in the background would be fixed costs. No matter how many or few violins you make, your monthly payment is going to be the same.
Some fixed costs you can think about for your jewelry business include:
- Monthly flat-rate bills
- Domain hosting fees to run your website
- Shopify or Squarespace subscription
- Google Suite
- Adobe creative cloud
- Microsoft Office
Now that you have a broad framework for costs in general, let’s dive into product cost.
Product cost captures the expenses required to get your product ready for sale.
There are different ways to calculate it, but generally, this includes variable costs coming from material, labor, and manufacturing overhead. Product cost can also be referred to as Cost of Goods Sold or COGS.
If you are stocking inventory, especially if the cost of that inventory fluctuates, you’ll want to consider which inventory method you want to use to keep your costing consistent. The most common methods are FIFO (first in, first out), LIFO (last in, first out), and Weighted Average Cost. You can find more information on costing methods here.
If you’d like to skip the accounting lesson and focus on the jewelry making, consider producing and selling your jewelry through Shapeways. We allow you to run a lean, inventory-on-demand jewelry business through the power of 3D printing. This made-to-order approach is accompanied by straightforward costing and set precious metal pricing that doesn’t fluctuate with the market.
Gross Margin (GM) is the bridge from product cost to price. It is essentially how much you’re earning on top of your product cost (COGS, or cost of goods sold), in other words, how profitable a product is. You can think of price as:
COGS + Gross Margin = Price
GM is a critical metric, because it determines how much of your sales can actually contribute to the cost of running your business and ultimately, to your take-home profit. You will usually see margin expressed as either Gross Margin Dollars (GM$) or Gross Margin % (GM%).
GM $ = Price – COGS
GM % = GM $ / Price
If you were calculating GM$ and GM% for your whole company, you would replace price with Sales Revenue.
When using GM to evaluate business or product performance, it’s important to be aware of both GM$ and GM% together. For instance, while you may have a product with a lower GM%, it may yield a high GM$ amount and vice versa. A good product mix should take into account individual product GMs to yield a desirable margin overall.
Determining the right amount of margin is a delicate balance. On the one hand, you have your motivations of covering operating costs and maximizing profit and on the other hand are the customer’s motivations and price sensitivities.
Keystone Method Pricing
With a solid grasp of cost and the lever that is gross margin, we can start to approach a pricing strategy. The Keystone Method is the benchmark and standard of the jewelry and retail industry. It’s not a perfect model, but it is where you should start when thinking about pricing.
The Keystone Method is broken up into two components: wholesale price (WSP) and standard retail price (SRP). Both are based on the product cost of the item.
Wholesale Price is the cost at which you sell the product to a stockist or wholesaler.
Standard Retail Price is the cost at which the end consumer will buy the product, either from you or from the stockist to whom you sell.
The Keystone Method implies that:
Product Cost = x,
WSP = 2x
SRP = 4x
For example, if the item’s product cost is $20, the wholesale price will be $40 and the standard retail price will be $80.
Typically, wholesalers will require at least a GM% of at least 50%, so the Keystone Method helps to position yourself for the inevitable wholesale discount that is expected for those types of sales.
Keystone is a great simple place to get oriented, but it is not always a one-size-fits-all approach. Experiment with pricing on individual products within your product assortment, check your prices against competitors, and consider where your brand and product sit within the market. If you’d like us to go deeper into pricing strategy in future content, please let us know in the comments below.
Stay tuned for the next part of our series, where we’ll incorporate our pricing lesson into creating Linesheets, the résumé for a jewelry business entering wholesale. These are critical documents to getting your foot in the door with stockists, so come back next week to find out how to prepare one.
Contact us if you have any questions on growing your jewelry business or have a bulk order that you’d like to scope out.
About the authors:
Ross Keong is a Strategic Sales Manager specializing in growth development for B2B users in the industries of jewelry, fashion, art, and design.
Virginia Gordon is the US Jewelry Community Manager, helping designers build a successful jewelry business using Shapeways and 3D printing