Suzanne Wade is a frequent contributor to and former editor-in-chief of AJM.

Everyone who has ever made the leap from producing jewelry for fun to producing jewelry for profit has struggled with the question of pricing their work. Whether you work with silver, gold, or gemstones, and whether it's your first craft show or your thousandth sale, you must be able to set a fair price or you won't be in business for very long. “Most people who get into making and selling jewelry don't come into it as a business; they get there because of a passion,” says Alan Revere, a San Francisco jewelry designer and founder of Revere Academy of Jewelry Arts, where he teaches classes on pricing and marketing. “But passion can only take you so far. Sooner or later, the enterprise has to pay for itself - really pay for itself, or things start to fall apart.”

For many newcomers to the business side of making jewelry, setting prices is an emotional judgment rather than a business decision. That can get you into trouble, because if your revenues aren't higher than your costs, your business is doomed to fail. Determining fair prices for your work means setting aside the emotional attachment to your pieces and looking at them with a simple equation in mind: labor + overhead + materials + profit = fair price.

To figure your labor cost, you need an hourly rate and the number of hours it takes you to make a piece of jewelry. If you've never done this before, start by keeping a log of all the time you spend working on the piece, including time spent designing and selling the piece and keeping track of your expenses. Remember to pay yourself just as you would any employee, and don't mark off for bathroom breaks, for example - you wouldn't expect an employer to dock your pay for this.

Once you know how much time you spent creating a piece, you need to decide how much to charge for your labor. “Ask yourself how much you would want if you were making it for somebody else,” Revere advises. “What could you earn at another job?” Once you settle on an hourly wage, add enough to cover benefits such as health insurance, FICA, vacation pay, and sick pay.

Overhead means the costs of operating your studio for a year, including rent, advertising, light bulbs, paper towels, stationery, and subscriptions. It also includes materials and supplies that are consumed but not delivered to the customer, such as gas for the torch, solder, polishing compounds, etc., and a portion of the cost of your tools and equipment. “Each item you make should contribute some small amount to the cost of the tools used to make it,” says Revere. “If you buy a torch and think it will last five years, then one-fifth of that price should go into your annual overhead figure.”

“Once you know - or can make a good estimate - of what it costs to operate and produce jewelry for a year, you have to calculate what your overhead is per hour,” continues Revere. “To get this number, divide your annual overhead by 2000, because that's approximately 40 hours per week for 50 weeks in a year. If an item took three hours to design, make, sell, ship, and do the bookwork, you will multiply the hourly overhead by three to determine the correct portion of overhead costs to add into the calculations of the price of the piece.”

Even in a home studio, overhead expenses should be included in your price calculations. “Whether or not you can deduct the expense on your taxes, your business should be paying one-seventh - or whatever the portion of your total space is used by your studio - of the insurance, the mortgage, the maintenance, etc.” says Revere. “You've got to think of this as a business.”

The cost of materials is relatively easy to figure, even for a newcomer: it's just a matter of keeping track of how much you pay for whatever goes directly into the piece, such as silver, gems, or ready-made pin backs. Revere also suggests that if you hold materials, such as gems, in inventory for an extended period of time, you may wish to add an additional amount to allow for inflation and profit on your investment in inventory.

To figure out a guideline for pricing silver, for example, you can simply buy and weigh a couple pieces of silver jewelry. Most of the silver jewelry out there is priced at around 15 to 20 times the cost of materials. Although this estimation is probably a good benchmark, it should not replace the fair price formula. It's tempting to substitute a quick formula for the work of evaluating costs, but this can lead to trouble, since it may not work for your particular approach - for example, if your pieces are more labor-intensive than those you're using to develop such a formula.

The last item to add into the equation is profit. “Let's say you come up with a total of $20 per hour, and you figure the price should be $200 for the piece. On top of that, you're entitled to make a profit,” says Revere. “You're an entrepreneur. You could have put your money someplace else and earned interest. You're entitled to make a profit on that money.”

What is an appropriate profit level? Check with the U.S. Department of Commerce, which compiles statistics on standard ratios for most businesses. “A small business that brings in a 10% profit after paying all the bills is doing very well,” Revere advises. “So you might want to add 10% over the total of all costs to your calculations.”

After adding together all four components of your price calculation, step back and consider whether the price you've come up with seems reasonable. “One benchmark for checking the price you come up with, at least for gold jewelry that isn't heavy with gems, is to take the materials cost alone and multiply it by seven,” says Revere. “This number should be close to your final price calculation. If you're coming out 15 to 1 or 3 to 1, you're probably doing something really wrong.”

Although your price for an item similar to that made by a competitor should be within 10% to 20%, “never compete on price,” Revere states. “Instead, compete on quality, originality, or design. In a price war, you will always lose because someone else will always be willing to go lower. The fact that your competition sells something similar for 10% less is irrelevant. For all you know, they may be losing money on every item and are about to go under. Stick to the prices your formula dictates.”

Revere also advises his students strongly against discounting. “Stick with your prices. Do not negotiate them lower,” he says. “If you're at a show and you advertise or announce that your prices are discounted 10 or 20%, it undermines your credibility. People conclude that if you're taking 20% off, maybe it should really be 25% off.”

Revere suggests a couple ways to respond to potential customers who want you to discount your price. “Tell them you have calculated your prices fairly and that you cannot reduce them without taking a loss,” he says. “Tell them, 'This is the absolute lowest I can go,' or even, 'This is the fair price - I don't mark it up and then mark it down so I can say it is discounted.'”

While all this may seem like a lot of work to set a price for your pieces, it's absolutely essential if you're going to make jewelry design a career, not just a hobby. “Once you've done it for a while, you can take some shortcuts,” says Revere. “But if you're a newcomer and you're figuring out what to charge for the first time, you want to do it as accurately as possible. The worst thing to do is sell your work for less than it costs to make it.”