Chapter 10
Come on Down, the Price Is Right! Pricing Your Work
In This Chapter
Understanding pricing formulas
Making sure your prices make sense
Assessing the value of vintage items
Pricing items to move during sales
Years ago, a close friend developed a keen business idea: the million-dollar hot dog. The million-dollar hot dog would be just like any other hot dog, except that it would cost a million dollars. Yes, demand for the million-dollar hot dog may be low. But as our friend rightly points out, “You really only ever need to sell one!”
Ironically, most Etsy sellers err on the other end of the spectrum, underpricing the pieces they sell. Often they’re so thrilled that someone wants to buy something they made, it doesn’t occur to them that they could’ve sold it for more. But just as overpricing your pieces has its problems (you never sell anything), so does underpricing them. Specifically, underpricing results in lost profits and, worse, the perception that your pieces are “cheap” — that is, products of low quality. Particularly with one-of-a-kind items like yours, customers use the piece’s price to assess its value.
The trick, then, is to strike a balance with your pricing. You want to price your pieces high enough to cover your costs and turn a healthy profit. (After all, you’re running a business.) But you need to price your items low enough that you can sell a reasonable volume of goods. Finding that sweet spot is the focus of this chapter.
As you become more adept and efficient at crafting your pieces and running your business, your profit margin will naturally improve.
Formulaic Plot: Breaking Down Your Pricing Formulas
Hands down, one of our favorite Saturday Night Live sketches was the one with Chevy Chase as President Gerald R. Ford, taking part in a presidential debate. After being asked an extremely complicated question involving numerous dollar figures and percentages, Chase, sweating profusely, stammered, “It was my understanding that there would be no math during the debates. . . .”
No doubt, many Etsy sellers feel exactly the same way. After all, don’t most of us become artists or crafters specifically to avoid ever having to do arithmetic? Unfortunately, if you hope to run a profitable Etsy shop, you need to get comfortable with doing a little math, especially when it comes to pricing your pieces. But don’t freak out! We’re not talking calculus here or even trigonometry. All you have to learn are two very simple formulas:
Wholesale Price = (Materials + Labor + Overhead) × 2
Retail Price = Wholesale Price × 2
In the following sections, we break down each item in the preceding formulas and show you how to put the formulas to work.
Material girl: Calculating the cost of materials
When calculating your cost for materials, include the price of every little component in your piece. For example, suppose you sell handmade puppy plush toys for babies. Your material cost for each pup may include the cost of fabric, a label, rickrack, stuffing, and thread.
When you calculate the costs of your materials, you need to consider only the price of what you used to produce one piece. For example, if you bought 3 yards of fabric when purchasing your supplies, for a total of $12, but you used only a third of that fabric to produce a single pup, you want to divide what you paid for the fabric by 3, to calculate your material cost for the fabric — here, $4.
Labor pains: Figuring labor costs
While perusing the want ads in your local newspaper, suppose that you happened upon this listing:
Wanted: A skilled professional to expertly fabricate our product by hand. Must also run every aspect of our business, including sourcing supplies, maintaining and marketing our shop, interacting with customers, and ensuring that items sold are artfully packaged and shipped to buyers. Pay: Nil.
Odds are, that’s a job you’d pass up. Why, then, do so many Etsy sellers seem to pay themselves nada to run their shops? Don’t fall into this trap! Your time is valuable. Like anyone, you deserve to be compensated for your work. Your pricing formula needs to include the cost of your labor.
Calculating your labor costs requires you to first set an hourly rate for your time. Be sure to pay yourself a fair wage — one that accounts for the skill required to craft your piece. Also, think about how much you want or need to make for your time. (This consideration is especially important if you’re looking to quit your day job.)
If you’re just starting out, you may opt for a lower hourly rate. You can give yourself periodic raises as your skills improve.
Another approach to figuring your hourly rate is to work backward. That is, figure out how much you need to be able to “bill” for each day and divide that by the number of hours you intend to work. For example, if you need to earn $100 a day to survive, and you plan to work five hours per day crafting the items you plan to sell, then you can simply divide $100 by 5, for an hourly rate of $20.
Armed with your hourly rate, you’re ready to work out your labor costs. These costs must take into account the time it takes to design a piece, shop for supplies for the piece, construct the piece, photograph the piece, create the item listing for the piece (including composing the item title and description), correspond with the buyer, and package and ship the item.
As with materials costs (described in the previous section), you can amortize some of the labor costs — that is, you can spread them out. For example, if it took you four hours to develop the design for a piece, but you plan to make 50 of them, you have to amortize those four hours over the 50 finished pieces. Similarly, you likely shop for supplies for several pieces at once, meaning that you can spread the time that you spend shopping across all the projects that you plan to craft using those supplies. Oh, and if you’re collaborating with others, you’ll want to make sure you include the cost of their labor as well!
Let’s use our plush toy pups as an example. Suppose you spend four hours designing your toy, and another hour shopping for enough supplies to construct 50 units. Your labor cost — assuming that your hourly rate is $20 — is $100, or, spread out over 50 toys, $2 per toy. Suppose further that each toy takes 30 minutes to make, photograph, and package ($10 in labor). Your labor cost per toy is then $12.
If you clear more than $400 per year with your Etsy shop, you probably need to pay taxes on it (although you should always consult an accountant or tax professional before making any assumptions). Especially if you plan to quit your day job and devote yourself exclusively to running your Etsy shop, you want to inflate your hourly wage to account for that. For more information about taxes, see Chapter 18.
Heads up: Adding up overhead
In addition to calculating your costs for materials and labor, you want to account for your overhead. Your overhead may encompass tools and equipment used in the manufacture of your products, office supplies, packaging supplies, utilities (for example, your Internet connection, electricity used to power your sewing machine, and so on), and Etsy fees. (Note: These costs don’t include shipping. Be sure to calculate those costs separately and pass them along to the buyer. Chapter 15 has more details on calculating shipping costs.)
As with your labor costs, you need to amortize your overhead costs. That is, you total your overhead and then spread out that cost over all the items you make. As a simple example, if you calculate your monthly overhead at $100, and you produce 100 pieces a month, your overhead is $1 per piece. Of course, this calculation gets tricky when your overhead involves purchases of such things as tools and equipment used in the manufacture of your products. In those cases, you want to amortize the items over their life span. For example, suppose that you buy a $250 sewing machine that you plan to use for five years. In that time, you anticipate that you’ll sew 500 pieces. Your overhead for the machine is then 50¢ per piece.
If you simply can’t face calculating all these overhead costs, try adding together your materials cost and your labor cost for each piece you make; then multiply the sum by 10 percent or 15 percent and call that your overhead. It won’t exactly reflect your actual overhead, but it’ll probably be in the ballpark.
Two-timer: Understanding the “times 2”
In the formula we provide earlier in this chapter, you may have noticed that after adding together your costs for materials, labor, and overhead, you multiply the sum by 2. What’s up with that? Simple. That “times 2” is your profit. It’s what you invest back in your business. If your sewing machine breaks, the “times 2” is what you use to buy a new one. If you decide to expand your product line, that “times 2” is where you find the capital you need to grow. Or you may just use your “times 2” revenue to build a nice nest egg for your business or a fund to fall back on if times get tough.
Although some sellers may feel uncomfortable with all this two-timing, thinking that their labor costs are their “profit,” don’t make the mistake of omitting this part of the formula. Yes, you may be paying yourself to make your products, but if your business grows, that may not always be the case. Multiplying your costs by 2 enables you to ensure that your business is profitable, regardless of how it’s structured.
Double or nothing: Pricing for wholesale and retail
As the proprietor of your own small manufacturing business, you need to establish two prices for your goods: the wholesale price and the retail price. The wholesale price is for customers who buy large quantities of your item to resell it. That customer then sells your piece to someone else at the retail price, which is usually double the wholesale price. You obtain your wholesale price by using the following formula:
Wholesale Price = (Materials + Labor + Overhead) × 2
To determine the retail price, we typically multiply the wholesale price by 2. Some sellers, however, may choose a higher number, multiplying the wholesale price by 2.5 or even 3 to determine the retail price, assuming that the market will bear that. Basically, the multiplier you choose is up to you.
Wait, don’t say it. We know what you’re thinking: “I’m going to sell my stuff only through my Etsy store, so I’ll just charge everyone my wholesale price.” Wrong! Even if you plan to sell your items exclusively through your Etsy shop, you need to establish both a wholesale price and a retail price, and you need to sell your pieces on Etsy at the retail rate. Why? A couple reasons:
Even if you have no plans to expand beyond your Etsy shop, you don’t want to cheat yourself of the opportunity to offer wholesale prices to bulk buyers if the opportunity arises.
You’ll almost certainly want to run the occasional sale in your Etsy shop. By pricing your goods for retail, you’ll have some leeway to discount them as needed and still turn a profit.
If you do develop a wholesale business, it’s especially important that you sell the pieces in your Etsy shop at the retail price. Otherwise, you’re undercutting your wholesale customers! Unless it’s your stated goal to alienate these customers, avoid this practice.
Although it’s not yet available for public consumption, Etsy is in the process of developing Etsy Wholesale, a special marketplace for connecting sellers like you with wholesale buyers. If you’re looking to take your business to the next level by selling wholesale to bricks-and-mortar outlets, then you’ll want to keep an eye out for developments on the Etsy Wholesale front!
Some assembly required: Putting it all together
To help you get comfortable with pricing your pieces, we run through a couple examples here. Let’s start with the puppy plush toys mentioned earlier. Suppose the following:
The cost of materials for each toy is $2.50.
Your hourly rate is $20. Your amortized labor costs for designing the toy and shopping for supplies is $2 per toy. It takes you 30 minutes to create, photograph, and package each toy, or $10 per toy. So, your total labor rate is $12 per toy.
Your overhead for each piece is $1.10.
Your pricing equation then looks something like this:
Wholesale Price = (Materials + Labor + Overhead) × 2 = ($2.50 + $12 + $1.10) × 2 = $31.20
Retail Price = Wholesale Price × 2 = $31.20 × 2 = $62.40
Consider another example: Suppose you’ve designed a new bracelet for your jewelry line, and you need to determine how much to charge for it. The beads, findings, and thread you used to construct the bracelet put you back $12. Your labor rate is $14 per hour, and it takes you 45 minutes to make each bracelet (including amortized values for time spent on other business-related activities), which means that your labor cost is $14 × 0.75 = $10.50. Finally, suppose that your overhead for each bracelet is $1.75. Here’s what your pricing equation looks like:
Wholesale Price = (Materials + Labor + Overhead) × 2 = ($12 + $10.50 + $1.75) × 2 = $48.50
Retail Price = Wholesale Price × 2 = $48.50 × 2 = $97
Offering products at different price points is a great way to increase your customer base. For example, say you specialize in ceramics. In that case, you may make ceramic mugs to sell at a lower price point; simple, medium-size bowls to sell at a slightly higher price point; and ornate platters to sell at a premium price point. This structure enables you to reach a larger range of potential buyers, which may help you increase your overall sales. As a bonus, if you’re just starting out on Etsy, this strategy is a great way to nose out your niche in the market. You’ll soon see which products your buyers respond to best.
Eyes on the Price: Evaluating Your Prices
You’ve done it: You’ve used the pricing formulas in the preceding section to determine your wholesale and retail prices. You’re finished, right? Wrong. These formulas simply deliver the price you need to charge for your piece to turn a healthy profit. To ensure that the price you’ve hit on is, in the immortal words of Goldilocks, “just right,” you need to do a little research, as we explain in the following sections.
Many artists and craftspeople underestimate their worth. They lack confidence in their work and their vision. As a result, they inevitably underprice their pieces. Underestimating the value of your work doesn’t just hurt you; it hurts everyone who’s trying to earn a living by selling their handmade goods. Deflated prices are bad all the way around! If you suffer from this malaise, channel your inner Stuart Smalley: You’re good enough, you’re smart enough, and, gosh darn it, people like you!
Know thy enemy: Assessing your competition’s pricing
Your first order of business is to scope out your competition, both on and off Etsy. What are they charging? If their prices are roughly in line with yours, you’re probably in good shape. But what if they’re significantly higher or, more likely, lower? In that case, put yourself in your prospective buyer’s shoes and ask yourself the following questions:
Would I buy my product or a competitor’s product? Why?
Is my product made of better materials than my competitors’ products?
Did crafting my product or my competitors’ products require more skill?
Is my product different or special in any way?
What do I think my product is worth?
Your answers to these questions help you determine whether you need to adjust your price upward or downward. For example, if your product is better made than your competitor’s, you may be able to adjust your price upward. Ditto if it required more skill to build. Of course, if the opposite is true, you may need to lower your price.
As you research the price of items sold on Etsy, you’ll appreciate Etsy’s Market Research Tool. This tool enables you to see the price points of items sold on Etsy in general terms. To use the tool, log in to your Etsy account and conduct a search for an item you want to research — for example, cross-stitch kits. Then, on the search results page, click the Research View button next to the Sort By options. Etsy displays a graph depicting the prices of these items and the top tags used (see Figure 10-1).
Figure 10-1: Etsy’s Market Research Tool.
Your competition doesn’t consist just of people who make an item similar to yours; it’s anyone who’s targeting the same market you are. Using the puppy plush toy example, your competition wouldn’t be limited to shops that sell puppy plush toys; it would be any shop that makes toys or gifts for babies.
Here’s looking at you, kid: Studying your target market
In gauging your price, you need to consider your target market. Who, in your estimation, will buy your piece? How much disposable income does that person have? If your target market is 20-something hipsters, chances are, they’re not quite as flush as, say, your 40-something set, so you may need to keep your prices lower. On the flip side, if that 40-something set is the market you’re after, you may be able to command a higher price.
Has this ever happened to you? You’re shopping for a gift — say, earrings for your sister — but the pair you’ve found is priced far below what you want to spend, so you don’t buy the set, even though the earrings are gorgeous and you know she’d love them. People often shop for gifts with a certain price point in mind — say, $25 for a friend or $50 for a family member. If your product is aimed at this market, ask yourself, who’s the ultimate recipient for this gift? A best friend? An acquaintance? Someone’s nephew? Then think about what most people would spend on a gift for that person, and price your piece accordingly.
Floor it: Figuring out how to lower your prices
If your research has revealed that your prices will likely give your market sticker shock, you may need to lower them. The best way to make this work is to attempt to lower your own costs. Can you purchase your materials more cheaply from a different supplier? Can you spend less time making each piece? Or can you redesign your product to require less in the way of supplies or labor time — for example, omitting the decorative rickrack piping on your plush pup? After you’ve managed to lower your costs, apply the formulas we talk about earlier in the chapter to determine the new price.
Don’t lower your prices to compete with machine-made or imported items. Handmade items have more value and need to be priced accordingly.
Up the ante: Knowing when to raise your prices
True, you need to lower your price in some circumstances, but other times you can charge — wait for it — more. See, people perceive some products to be more valuable than others. For example, consider the fact that some painters can command stratospherically high prices for their paintings. It’s not because their raw materials were substantially more expensive — paint and canvas cost pretty much the same amount for everybody. And it’s not that their paintings took longer to create. No, these paintings are insanely expensive because the public perceives their paintings to be valuable.
When pricing your items, see if you can take advantage of this perceived value and position your pieces as “premium” products. Maybe you use exceptional materials in crafting your piece. Or maybe you’ve developed a unique technique that makes your piece especially beautiful or durable. Note that buyers will also perceive your work as more valuable if you’ve developed a reputation as an artist — perhaps by showing your pieces at galleries or gaining publicity in some other way.
Be sure to talk up your work in your shop announcement and item descriptions. Share why your pieces are valuable. For example, if you not only craft necklaces, but also make your own beads, be sure to say so. If you use only the best organic cotton to sew your baby clothes, include words to that effect. If you use a particularly difficult technique that only a few other people have mastered, spell that out, too. (Flip to Chapter 8 for details on creating a profile page, and see Chapter 12 for details on writing item descriptions.)
Sometimes the very act of tagging your piece with a higher price can make buyers perceive it as more valuable. Of course, that doesn’t mean you should offer some useless doodad or otherwise unremarkable item at an outrageous price. (Remember the million-dollar hot dog we mention earlier in this chapter?) People will see right through that ploy. But if you offer an item that’s beautifully crafted and truly unique, you may be able to capitalize on this phenomenon.
If demand for an item that you sell is so high that you simply can’t keep up, it may be an indication that you’ve priced it too low. On the flip side, when items don’t sell, many shop owners assume that it’s because they’re priced too high. However, your price may be too low. Before you start slashing prices in your store, try raising them. You may be pleasantly surprised by the result!
Evaluate and raise your prices on an annual basis. The beginning of the new year is a good time to bump up prices.
Something Old: Special Considerations for Pricing Vintage Items
If your Etsy shop specializes in the sale of vintage goodies rather than handmade items, you can forget about everything that we discuss earlier in this chapter. No “formula” exists for pricing these types of items. Instead, you have to rely on your knowledge of the piece. Specifically, you want to be armed with the following information:
What is the piece? Obviously, you want to know what, exactly, you have for sale.
How old is the piece? Older pieces tend to be more valuable than newer ones.
What company manufactured the piece? Certain manufacturers are held in higher esteem than others. That’s why a Tiffany lamp is a lot more valuable than one made by another company and can command a much higher price.
What condition is the piece in? Obviously, an item in good condition can command a higher price than one that appears to have passed through a farm thresher.
How desirable is the piece? Items that are rare or highly collectible generate much more interest than run-of-the-mill pieces.
When pricing a vintage item, also consider how much time you’ve invested in the piece, both in researching it and in finding it in the first place. Finally, assuming that you bought the item (instead of, say, unearthing it in your Aunt Mildred’s attic), you must take into account how much you paid for it, as well as any costs you incurred to clean it up, fix any broken bits, and so on.
Still not sure where to start? Try scoping out the competition. Search Etsy or, dare we say it, eBay to see if any other sellers have listed something similar. If so, how much are they charging? Assuming that your piece is in the same condition as theirs, it can give you a good starting point.
How Low Can You Go? Pricing for Sales
Many businesses use any excuse to run a sale. (“It’s Arbor Day! Take 20 Percent Off!”) The idea is, they’ll draw in loads of customers and move more merchandise. Although this may be an effective strategy for large, mass-market stores, it’s not the best model for your Etsy shop. Running frequent sales not only devalues your work, but it trains your customers to buy from you only when you’re running some type of promotion.
That’s not to say, however, that you should never run a sale. For example, you may run a once-a-year sale to celebrate your store’s anniversary. Or you may run a twice-a-year sale to let go of seasonal inventory. Another idea is to create a permanent “sale” section in your Etsy shop for discontinued, seasonal, or experimental pieces.
When you do run a sale, you want to ensure that you still turn a profit on your items — or at least break even. Fortunately, you can easily do so if you use the formula outlined earlier in this chapter to price your goods and you list them at the retail price. You can then discount them by as much as 50 percent and still make money. (Of course, how much you actually discount your items depends on how desperate you are to get rid of them.)
If you do decide to run a sale, make sure you spread the word. For more information, see Chapter 16.