I'm a fan of Knitorious. If you live in St. Louis, you should be too! My wife started crotcheting back in the day and now is an addicted knitter. I love going into the store. No I don't knit but I can speak the lingo and always feel right at home at Knitorious. Last time I was there I saw Sandy and had the chance to show her a few tricks in photoshop to make her images pop a little. She's in the process of shooting and processing products for her website. I asked if I could use one of her images as an example for a quick and dirty way to get an all white background for those nice and crisp product shots.
There's literally a thousand different ways to get the same end result; A crisp white background without disturbing the original subject. There are no doubt better ways, longer ways, easier ways, etc. We all know how that goes.
For me, this method is the easiest to teach. It's especially nice when you can get consistent results over a couple hundred images. The old "hit auto-levels and pray it does what you want" method just isn't good enough. The Extract method is a hit or miss and using the pen tool to outline your subject is tiresome and difficult to teach to new users.
The tutorial is long because I am going into great detail to help Sandy. Please know
that this whole thing will take no more than 2 minutes once you know what you're doing.
In a nutshell here's what we're going to do

As you can see the original image isn't too bad. The gray in the photo makes the whole thing look a little drab but you'll see as soon as we remove that, it'll pop.
Get in the habit of always creating a duplicate of the background (original) layer. This way you always have the original unedited layer as a reference. In this case I want you to make two layers. Name the top layer something like "White Background" and the middle layer something like "Subject Layer" or "Good Layer". What you name it is up to you.

Here we're going to blow out the top layer. The term "blow out" really just means to make the image so light that the background nearly disappears. The reason I don't cut the background out all together is because you want to preserve little bit of the shadow directly underneath your subject. This makes it look like it's actually sitting on a surface. In my example I blow it out pretty much all the way, feel free to tweak it to whatever best fits your subject. Remember during this whole section "Blow out the top layer" we're only looking at the background. Don't be too concerned with what this does to the actual yarn, we'll fix that later. Just worry about the background.
Image > Adjustments > Levels

Levels Dialogue Box

You can see from the before/after dialogue box how I adjusted the levels. The black curves in the dialogue box represent your image from dark to light (left to right). You can
see in this particular image how the lights just fall off pretty fast. By moving the furthest right-hand arrow to the beginning of that fall off you will increase the brighness of the
background.
After Levels

So you can see our background looks better, but not quite where we want it. To increase the white even more let's look at doing a curves adjustment.
Image > Adjustments > Curves

Curves Dialogue Box

The before/after dialogue box shows how I adjusted the curves. Again you can see the curves (they're light gray this time instead of black like our levels adjustment). Same thing here; the curves represent the tonal values in your image - dark to light (from left to right). If you grab the top right of the diagonal line and move it to the left ever so slightly you'll start to see
your image change. Now a little further down the diagonal line create another point by clicking on it, now drag that to the left. Just play around with this a little until you get
the background where you want it. If you mess up, just click the point you created, hold down and move it off the display.
After Curves

Yeah that's better. You can see we still have a very slight shadow underneath the subject, that's okay we want that.
Here's what our layer palette looks like now. Our top layer is officially blown out. Along with that we distorted the coloring of the original subject so we need to fix that.

Applying a mask to a layer allows you to paint away parts of the layer. Select your top layer and click the layer mask icon to apply a mask to that layer.


Our top layer looks different now right? We added a mask to that layer and you can see initially the mask is all white. In order to remove the super bright yarn of this layer
we need to get a black paintbrush and start painting. Hit your "B" key and select black as your foreground color. I usually select a brush that has a harder edge, sometimes if your
brush is feathered you'll end up over-painting and you'll start to reveal the ugly gray background again. Now start painting where you want to see the underlying layer, in this case, the yarn.

Pretty much self explanatory right? Just keep painting away.
What if you painted too much?
Never fear, you will end up over painting your mask and in some parts the gray background might start to appear. No problem! Just switch your foreground to white and paint your mistake. Basically know this rule, where you paint black, the underlying layer will be revealed. Where you paint white, the underlying layer will be hidden.


Now here's our yarn with our fancy new white background. Problem is the yarn looks a little drab now right? We can fix that, select the middle layer and go back to Image > Adjustments > Levels and use the slider to brighten it up a bit, just like we did before to the top layer (but not as extreme).
You can also adjust the contrast, mess with the curves, etc. I also cloned out a stray fiber and a white fuzzy. See the "helpful links" below for info on how to clone.
Now, this is the point where you want to save the .psd file. This way you can always go back to this .psd and create any size image you need, whether for print, for the web, etc. I'm going to resize these photos at 600px (large), 250px (medium) and 100px (small). Typically when you view a list of products you would display the small thumbnail. Clicking that would take you to the product detail page with the medium thumbnail. Clicking the medium thumbnail will reveal the full size 600px image. Since constraints on the web are usually horizontal (e.g. - Sites are fixed width and scrolling horizontally is not good) I resize to standard widths and rarely pay attention to the height of an image. My thumbnails are usually square out of habit. Do whatever fits your business best.
Resize to 600px
I usually hit command+alt+I, you can do that or go to Image > Image Size.
Filter > Sharpen > Unsharp Mask
You'll want to sharpen your image pretty much 99% of the time if you're resizing an image. After resizing, and before saving for web, click Filter > Sharpen > Unsharp mask. Doing that will get you the following dialogue box.

When resizing for the web I keep the radius below .5, usually .4 or .3 depending on what I'm sharpening. Now adjust the % amount to the desired sharpness. Don't oversharpen your image and remember to view the preview at 100% so you get an accurate idea of what your image will look like.

Here is the full size 600px image. Nice right?
Save for web - File > Save For Web (Command+Alt+Shift+S)

Move the slider labeled "Quality" and view the preview to the left. If you're not already, view the tab called "2-Up" which will show you the before and after compressing as .jpg. I usually save around 75 to 80% but have gone as low as 50% and as high as 100%, it just depends on the image. For these I did approx 80%.
Crop to 250px, Resharpen, Save For Web
Select your crop tool. To make cropping easy I usually edit the top toolbar to crop to the square dimensions I need. In this case 250 x 250.
Drag out the crop, sharpen
Now just drag out the square of where you want to crop. Make sure the square you drag out is larger than 250px x 250px. Sharpen the newly resized image the same way we did before. Save for web.


Here's our medium image.
Resize to 100px, Sharpen, Save For Web
Now that you've created your 250 x 250 thumb we can simply resize this to get out 100 x 100 thumb. Again, resize & save for web.

Here you can see our small image.
Our finished image should only take a minute or two and we really brightened it up right? Not a hard technique to learn and it's a great way to make your product shots really stand out.
Below are a few links I just gathered quickly from google.
To address the image being gray in the first place I would try using a straight up lightbox and use a flash unit. Other options would include an overhead strobe/umbrella setup. If none of those things are possible try to get more light onto the surface by bringing your light source closer and/or shoot in "Manual" mode and shoot over a stop by decreasing your shutter speed / increasing ISO.
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