How to Factor Overhead Costs Into Your Product Pricing (With Examples)

Last updated: April 2026

Most makers price their products by adding up their material costs and slapping on a margin. Which is a reasonable start. But it leaves out a whole category of costs that are quietly chipping away at every sale you make.

Overhead costs. The bills that keep coming whether you sell one unit or one thousand.

If you don’t factor in overhead costs into your product pricing, there’s a real chance you’re covering your materials but not your business. This article explains what overhead costs are, how to calculate them, and two practical methods for working them into your pricing. There’s a concrete before/after example so you can see exactly what’s at stake.

What is an overhead cost?

An overhead cost is any business expense not directly tied to making a specific product. Rent, utilities, insurance, and software subscriptions are the most common examples.

Overheads, for small product-based businesses, are any costs that are not directly related to the creation of your products. They’re also called “indirect costs” because they support your business around manufacturing and production, not inside it.

If you don’t factor in your overheads, there’s a good chance you’re not making enough profit from each sale to cover all of your costs. And unlike a materials mistake (which you’d usually notice at the end of a batch), overhead gaps are invisible. They show up months later when you check your bank account and wonder why it doesn’t reflect how busy you’ve been.

Common overhead costs for small makers

Here’s a practical checklist of overhead items to tally up before calculating your overhead rate. Not all of these will apply to you, so work through the list and record the ones that do:

Fixed monthly costs (same every month):

• Rent or mortgage payments (studio, workshop, storage)
• Business rates or property taxes
• Internet and phone bills
• Insurance (business, product liability, contents)
• Software subscriptions (accounting software, Craftybase, design tools, marketplaces)
• Loan or equipment finance repayments
• Accountant or bookkeeper fees (annualised monthly)

Variable costs (fluctuate with production volume):

• Packaging materials not included in your bill of materials
• Postage bags, tape, labels, and void fill
• Craft fair fees, table hire, and display costs
• Advertising and marketing spend (Etsy ads, social ads)
• Shipping supplies and postage (if not charged separately to customers)
• Photography and product shoot costs

Occasional/annual costs (prorate monthly):

• Annual business registration fees
• Website domain and hosting renewals
• Professional development (courses, books, memberships)
• Equipment maintenance and small repairs

Add up your totals for the year. That’s your total annual overhead: the number you’ll use in the calculations below.

Fixed vs variable overhead costs

It’s worth understanding the difference because they behave differently as your business grows.

Fixed overhead costs stay the same each month regardless of how much you produce. Rent is the classic example: whether you make 10 items or 1,000, the bill is the same.

Variable overhead costs change with your production volume. Packaging is a good example: the more you sell, the more packaging you buy. These costs scale with growth and need to be revisited whenever your volume changes significantly.

You need to account for both. Fixed costs set your baseline, while variable costs mean your overhead rate should be reviewed at least once a year.

How do overhead costs affect your pricing in practice?

Let’s look at a concrete example to make this real.

Say you make soy candles. Your material cost per candle is $4.20 (wax, fragrance, wick, jar). You’ve decided on a 3x markup, so you’re charging $12.60.

But here’s what you haven’t included:

Annualised: $4,260. If you sell 1,800 candles a year (150/month), your overhead per candle is $4,260 ÷ 1,800 = $2.37 per candle.

That $2.37 is coming out of your margin on every single sale. At $12.60 with a $4.20 material cost, your gross margin looks like $8.40. But once overheads are factored in, your real margin is $8.40 − $2.37 = $6.03. That’s roughly 28% lower than you thought.

And that’s before labour. The maker who doesn’t factor in overheads isn’t saving money. They’re just not seeing where it’s going.

How to calculate your overhead costs

The first step is to make sure you know which of your costs are direct costs: the costs directly required to bring your product from raw materials through to a finished, sellable product. For materials sourced overseas, your direct cost should reflect the full landed cost, including shipping, import duties, and any brokerage fees paid to get them to your door.

Creating a bill of materials (aka a BoM) for each product is a good starting point. It helps you clearly identify which costs are direct (inside the product) and which are indirect (running the business around it).

Check out our free BOM template for Excel and Numbers →

From your list of indirect expenses, you now have what you need to start allocating overheads to your pricing. There are two common approaches: pick the one that fits your product range.

Option A: Historical overheads

If your sales are fairly consistent from year to year and you have historical data available, you can calculate a per-unit overhead amount using last year’s figures:

Last Year’s Overhead ÷ Last Year’s Sales = Overhead per Unit

If you sold 2,500 items last year and had total overhead costs of $12,500:

$12,500 ÷ 2,500 = $5.00 per item

If you’re anticipating roughly the same overhead and sales volume for this year, add $5.00 to each product’s cost before calculating your selling price.

If your business is growing, use projected sales in the denominator instead:

Total Projected Overhead ÷ Total Projected Sales = Overhead per Unit

Say you’re growing 10% a year. Last year’s 2,500 items becomes a projected 2,750. And if overheads only rise by 5%, to $13,125:

$13,125 ÷ 2,750 = $4.77 per item

This approach is more accurate as your business scales because it stops you over-allocating overhead when volume increases. You can run this on either yearly or monthly figures, whichever is easier to work with.

Option B: Percentage-based overheads

If your product range varies a lot in price, a flat per-unit overhead approach can feel unfair. Adding $5.00 to a $200 product barely registers. But adding $5.00 to an $8.00 product? That’s a 62.5% overhead loading on your base material cost, which can push your price well above what the market will pay.

A percentage-based approach calculates your overhead as a proportion of the base cost to produce each product instead.

The percentage you choose is an estimate, so it requires a bit of testing. A common starting range for small makers is 10–20% of material cost, but run it against your previous year’s sales to sense-check before committing.

Here’s how: take your sales data from the prior year (Craftybase users can export order line items for 1 Jan–31 Dec) and add a column for your estimated overhead, like this:

Total the Overhead column and compare it to your actual annual overhead spend. If the figures don’t align, adjust the percentage and rerun until they’re close. Once you have a percentage that tracks reasonably well, you can apply it going forward.

Using your overhead calculations to set more accurate prices

Once you have a fixed per-unit amount or a percentage, work it into your pricing formula alongside your material cost and labour. Our guide on markup vs margin walks through how to build these numbers into a final price.

If you sell on Etsy, our free Etsy pricing calculator spreadsheet has an overhead field built in, so you can see the impact on your final price right away.

A few things worth knowing as you apply this:

• Group products before running overhead calculations. If you want to apply more overhead markup to one product line (say, a labour-intensive range) over another, segment your products first and run separate overhead calculations per group.
• Review your overhead rate at least once a year. Both your costs and your sales volume shift. A rate that made sense when you were selling 1,000 units a year may be too high or too low at 3,000.
• Factor in growth. If you’re scaling quickly, use your projected sales figure in the denominator rather than last year’s, to avoid overloading your prices with overhead that your higher volume will absorb.

For a deeper look at how overheads connect to your broader financial picture, the post on building a business budget for your handmade business covers how to forecast these costs across the year. And if you want to benchmark whether your margins are healthy after factoring in overheads, profit margin benchmarks by niche gives real reference points across 11 maker categories.

Using software to factor overheads into your product prices

Craftybase’s pricing software lets you set an overhead rate that is automatically applied to every product recipe, so your real-time cost and margin calculations always include your indirect costs, not just materials and labour.

As you record expenses in Craftybase throughout the year, you can compare actual overheads against your allocated rate and adjust as needed. Best of all, because Craftybase also tracks your raw material stock and costings, you get up-to-the-minute pricing guidance without manual spreadsheet updates.

Other features that help with pricing accuracy:

• Full financial reporting on your business performance
• Inventory management to keep your stocktaking and reordering in order
• Automatic order tracking integrations with Etsy, Shopify, and other leading marketplaces

Try Craftybase free for 14 days →

Frequently Asked Questions

Wrapping up

Whatever method you choose, the important thing is that you’re factoring something in for overheads. The makers who track this tend to find that their prices were lower than they needed to be, sometimes by quite a bit. Getting this right is one of those small adjustments that quietly makes every sale more sustainable.

Read next: How to calculate your internal manufacturing labour costs →