This post is a continuation of our series on pricing your handcrafted goods. You can see our first post on this topic, including a thorough review of a profitable pricing formula, here. Please feel free to comment with whatever questions or feedback you might have! Our final post on this series will be a Q&A segment with answers to your questions.
Tweaking the Formula to Fit You
To refresh, here’s the formula we discussed last time: This pricing formula is just a suggestion and can be tailored to meet your business needs, as long as you are leaving room for profit. Remember, you want those profit multipliers to be cushioning for profit, not covering the expenses you forgot to include.
If your price seems too high…
- If the price seems too high there are several pieces of the equation you can examine, and then decide to tweak one, some, or all of the parts.
- Look at your current supply costs. Is there a way to find less expensive supplies? Can you buy at a discount in bulk? Can you only shop sales or use discount codes? Is there a less expensive supplier around? Have you compared suppliers online vs. locally? Finding the cheapest source of quality supplies is one of the most challenging parts of being a creative entrepreneur, but once you’ve found one, it’s a gold mine that can help you keep costs under control and your prices at a reasonable level.
- You can also try refining your overhead rates. Recall that your overhead rate is a little chunk of all the business expenses that aren’t directly traceable to a specific product. You include this in your price formula so that every time you sell something, you get reimbursed for a tiny chunk of those expenses. Sometimes, depending on the product, using multiple overhead rates can help refine your price. For example, with my products, I have a glue overhead rate and a jump-ring overhead rate. These are for expenses I have that I can’t trace the exact amount used to a specific product. Since I don’t use glue and/or jump rings in every product I make, I only need to use these rates in products that use them. I can leave that overhead amount out of my other products to get a more accurate picture of the expenses used to make that product. Another (perhaps better) example – let’s say I build an advertising campaign around one set of products. I might make an overhead rate for just those ad expenses and only apply them to that product group, rather than spread out that cost over all my products.
- Think about your pricing in relation to all of the products you sell. You might have different “levels” of products. The market for rosette studs is very saturated. Maybe I want to have a really low price on those earrings to attract viewers and sales, so I am going to adjust by either giving them a lower overhead rate, or using a profit multiplier of 3 instead of 4. To make up for that, I’m going to shift some of those costs to my higher-priced rhinestone necklaces. This might lead to a situation where I’d sell lots of low-priced earrings with a lower profit margin, but also a few necklaces with a higher profit margin to balance it out.
- Consider changing your profit multiplier for your retail pricing formula to a slightly lower number. Remember that your labor charge means you’re already paying yourself for your skilled work and time, and then your profit multiplier is (obviously) for profit. How much profit do you want and what are you doing with it? Are you saving for a vacation, or are you reinvesting your profits back into your business for an expansion? If you feel comfortable having a little less profit cushion, you can always multiply your wholesale price by 1.5 or 1.75 (or whatever) rather than 2.
- You might also consider tweaking the retail pricing formula to look like this, to more truly mirror the wholesale formula you used:
[(Supplies + Labor) x 4] + Overhead Rate = Retail Price
This way you are just using the x4 multiplier on your supplies and labor, and not your whole overhead rate as well. Make sense? Clear as mud right. Just another suggestion that you can try out to see if it works better for you.
If your price seems too low…
- Are you paying yourself enough for your skilled labor and time?
- Make sure you’re including all your estimated expenses (did you think of everything?) and be conservative when estimating your annual product sales when calculating your overhead rate.
- Don’t be afraid to use a larger profit multiplier. You are the dictator of your prices. If you believe the market will support a higher price, do it. Don’t price your items lower just because that’s what the equation says. Who DOESN’T want more profit?!
Monitoring Your Pricing Strategy
Don’t hesitate to re-examine and re-tweak your pricing formula from time to time. Periodically re-examine the overhead rate you’re using. As you become a more experienced entrepreneur, you’ll have a better idea of the non-product expenses your business incurs every year. Ideally, you’ll be able to calculate a more refined and accurate rate over time. Your business expenses are going to change over time as well. The overhead rate you calculated 2 years ago probably isn’t still a reliable estimate now.
Always be on the look out for ways to save on supplies. If your supply cost for the same product goes down, you then have the enviable decision of keeping your price the same and bagging more profit, or reducing your price and maybe getting some more sales. Your labor rate might also need tweaking. You might want to pay yourself more per hour as you become more experienced, or you might be able to spend less time making one item now that you’re more experienced.
But What about the Competition?
Your product, brand, and shop are unique to you. A lot of your competition is probably under-pricing themselves; this is a chronic problem in the Etsy marketplace and puts pressure on everyone else. Your under-priced competition might be making lots of sales but still losing money at the end of the day. They might not still be in business next year. Don’t worry so much about competing with everybody else. Even if a higher price means fewer sales, you’d rather fewer sales and more bottom line profit than lots of sales but a negative bank account balance.
You want your business to be sustainable, and that means covering your expenses AND still having some money to put in your bank account at the end of the day. Why are you in business? To be able to quit your day job? To finance your supply purchases? To have extra vacation money? It’s likely that you won’t achieve your goals without making some money from this venture.
Think about pricing for your target market, not for the competition. Pricing is also about value, and value can be defined by the qualitative (your brand, customer service, etc.), not the quantitative. Your ideal customer is someone who values your product at the price you’ve calculated. You don’t need to be the Wal Mart of handmade goods. Don’t feel like you need to have the lowest price in town.
Here’s an honest story from my own experience. I sell rosette studs, which sometimes seems like the most common thing sold on Etsy. I sell mine for about $11-$13, which is what I’ve calculated as a profitable sales price for me. I believe that they are worth this price based on not only the inputs of my pricing formula, but also the quality of the materials, the customer service I provide, and the work put into each piece. But I see other Etsy shops selling them for as low as $3. Three dollars! Does it keep me up at night knowing my potential customer might not buy from me when they could get earrings elsewhere for $3? No. You might think I’m crazy, but my rosette studs are still, by far, my best-selling products. I might not sell as many as my competitor selling them at $3 a pop, but I can sell a lot fewer pairs and make the same amount of profit at the end of the day as a competing shop selling more for less. Make sense?
Pricing Too Low – Working Harder for the Same Amount of Money
Am I beating a dead horse yet? I apologize. Let’s use a lovely hand-lettered calligraphy print as a very, very simplified example.
My high-quality archival paper costs me 75 cents per sheet. It takes me 30 minutes to letter one print and I pay myself $12 an hour. My pretty black ink costs me $10 a jar, and the calligraphy pen costs me $20. I have $600 of other business expenses. I’m estimating that I will sell 250 prints this year, giving me an overhead rate of $2.40 ($630/250).
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($.75 + $6) x 2] + $2.40 = $15.19 for my wholesale price, x 2 = $31.80 for my retail price, or $32 flat.
Maybe I feel a bit hesitant to charge $32 for a hand-lettered print. I do an Etsy search and it seems like everybody else is selling their prints for about $20. So, I’m going to try to compete with that and just sell it for my wholesale price of $15, that way I’m even lower than my competition.
What if my goal is to make $1000 in profit this year? Then, this is what I’m going to be dealing with.
Scenario 1– I sell my prints for $15 a pop. After doing a nice little equation ($15x -.75x – $630 = $1000) and solving for x, I’d have to sell about 115 prints this year to make a profit of $1000 (meaning money I get after covering 75 cents of supply expense per item sold, and $630 of overhead expenses).
Scenario 2 – I sell my prints for $32 a pop. To cover same said expenses, I’d have to sell only 53 (that’s less than HALF as many in Scenario 1) prints to make the same $1000 of profit.
[Yes, there are a lot of assumptions and simplifications here (for example, you probably bought your paper in bulk and not by the piece for each sale, so you’d have to cover that bulk purchase regardless of how many items you sold, plus I didn’t include labor in any of this), but the gist of it is still important.]
To sum up that discovery – you can work twice as many hours and make 115 prints that sell for $15 each and make $1000 net income, or you can work for half as many hours and make 53 prints that sell for $32 each, still make $1000 in net income, and have loads more free time to make other products, spend on other business tasks, go the beach, drink tea, whatever. You might be afraid to set your price higher because that might decrease your sales…but you can sell fewer items and still make the same profit as if you had a lower price. You can even sell fewer items and make MORE profit than if you sold more items at a lower price. With the higher price, each piece you sell generates more profit. I’d rather work to make half as many prints, than do twice the work for the same amount of profit, wouldn’t you?
Another Downfall of Under-Pricing…Wholesale
Yet another problem you might face if you’re under-pricing your goods – selling wholesale and remaining profitable will be nearly impossible. At some point in your creative journey, you will hopefully get the opportunity to sell your goods to other retail businesses at wholesale. These other business owners will expect a lower (wholesale) price in exchange for buying in bulk upfront. You might face a similar price ratio if you sell consignment. Wholesale prices are usually around (give or take) 50% of your retail price. If you’re selling at retail on Etsy for less than what you should be, then making a profit at even lower wholesale prices will be a challenge. This is yet another reason why it’s important to start out with well thought out prices to begin with.
Bottom Line – Be Sensible & Find a Formula That Works for YOU.
Obviously, if this formula is giving you a price that you feel uncomfortable about it, then you should adjust it. If you are hesitant to price your item as high as the formula is calculating, make sure you aren’t selling yourself short. Price your product as close to that number as you’re willing to go, and see how customers respond to that price. You might be surprised.
A lot of us under-price and under-value our goods. Don’t let the fear of not making sales due to a higher price and/or trying to compete with other shops keep your prices too low. Remember the reasons why you started your creative business. Chances are, being financially successful was probably on that list. You will feel so much more energized, encouraged, and productive if, at the end of the day, you see that your business is thriving and making money.
Keeping all this in mind, I challenge you today to take a hard look at your pricing strategy. Your prices will determine whether or not your business is able to make a profit, no matter how many sales you’re making. So it’s really important for you to hunker down, examine your expenses, and make sure you’re pricing yourself for profit. Again, please let us know what questions about pricing we can answer for you in our reader Q&A post.