So I’m going to assume that one of the reasons you’ve created an Etsy shop has to do with wanting to earn some income. It doesn’t matter if you want to this to become your only source of income or if you’re happy simply receiving a few extra dollars here and there, you need to price your products at a rate that is profitable for you. There’s no point in spending so much time making items only to sell them at a cost that barely covers your expenses.
There are a couple different algorithms followed by the ‘maker’ community and I would say that the one you end up utilizing depends strongly on the items you make and the competition in that category. Some items might not be worth making to you after you figure out the cost of production and your actual profit. That’s perfectly fine, just move on to something else.
First, Let’s Get on the Same Page
Ok, we’re going to be discussing a lot of terms that may be unfamiliar to you. Let’s go ahead and define them so that the following isn’t too confusing.
- Supplies- for the purpose of this post, supplies will refer to all items used to make a single finished product. The supply cost is the final value of all items used to create a single product.
- Here is an example using candle supplies: To make candles I need soy wax, fragrance oil, jars, lids, wicks, and wick stickers. I need to calculate the cost of each ounce of wax I purchase, how much each ounce of fragrance oil costs, and how much each jar, lid, wick, and wick sticker costs. Then I calculate how much the cost is of the total amount of wax used per candle, as well as the amount of fragrance oil used per candle. Add those costs to the other aforementioned costs and you have your supply cost.
- Labor- When referring to labor I’m talking about wage you’re paying yourself multiplied by the amount of time it takes you to make something.
- If you are paying yourself $10 per hour and it takes you 3 hours to make something, your labor cost is $30.
- Overhead- What that basically means is all the other stuff that you pay for that’s not directly related to the supply cost of a single product.
- So for example, if you got Amazon Prime because you order supplies on Amazon, you need to add that subscription cost to your overhead. If you pay for ads on Facebook, you need to add that to your overhead costs. You see what I’m saying– it’s all the miscellaneous stuff. So you need to add up the annual costs of all those fees and divide them by the amount of products you sold in the past year. That’s the overhead cost you need to be adding to your formula.
- Now if you have yet to sell any items and therefore don’t have a total for last year’s amount sold, consider skipping the overhead fee for right now. In a few months you can determine how many products you’ve been selling. It’s just hard to say in the beginning since your shop will likely increase in sales as the year goes on.
- Wholesale- At a certain point you might consider selling your items wholesale. Not everyone does, so if you don’t intend to then don’t worry about this portion of the algorithms. Basically, wholesale cost is typically 50% of the cost of your product. It can be 60% at times depending on the store, but this is rare. So if you were selling your products to a store, you would probably sell them to the store for 50% of your normal (retail) cost and they would then sell the product at an amount that will make them some money, too.
- Retail- This is the amount that your costumers pay you for your product.
The Traditional Pricing Algorithm
If you start browsing the internet for some basic information on pricing, this is likely going to be the first formula that you find. It’s perfectly fine if you feel that this will give you the most competitive pricing and this is a good starting off point if you’re a new maker. Just make sure that if you use this formula, you are not undermining the amount of time and energy that you put into making and selling your products. You’re spending time researching suppliers, comparing costs, learning how to make your business grow, spending time on social media, and more. It’s a lot to do and this really is a full time job. If you were working for someone else would you allow them to not pay you a wage? No? Good, then keep that in mind when you’re pricing your products.
The Best Way to Price Your Items
Now, if you want to make a better income from your products, you’re going to have to up the price a bit more. This is where you need to consider the items that you’re making. For example, I predominantly make candles and beard care items. Those are my best-selling items and I don’t usually make them one at time. If I’m making a batch of candles, I’m pouring at least a dozen. So if it takes me an hour to melt the wax, get the temperatures right, and pour the candles, then that means I spent about 5 minutes on each candle. If I pay myself $10 per hour, I only add on approximately $.83 per candle for my labor cost. If you think about it in terms of one candle sale at a time, this labor cost really isn’t affecting much in my prices, but once you start adding up all of my candle sales, it starts making a pretty big impact.
The addition of the overhead costs to this algorithm is where this can really change your prices a lot. I’ll admit that in the beginning, I was going by the traditional pricing algorithm and it did hurt a little bit to see my prices go up so much higher because of all my overhead costs. I thought I would be alienating some buyers by upping my costs, but if you think about it, what’s the point in selling an item without charging overhead? Not including this cost in your pricing is deceiving for your finances. You will end up getting excited by the sales you made, but you’re not considering the fact that you are paying for services and packaging and labels throughout the year and just deducting it along the way without charging your customer. You’re absorbing those fees and losing money.
Things to Consider
Now that we have established what the best algorithm is to start off with, let’s examine some of the exceptions to the rules. As I have stated, your prices need to be competitive, appealing for buyers, and profitable. Technically, these all sort of intertwine so bear with me as we go through this section.
A good starting off point before even making your products is doing a search on Etsy. Check out how much other makers are charging for what you want to sell. They will generally be around the same price with variations here and there. Doing this review does a couple things: First, it allows you to see if you think this is going to be something worth making. Is the average price suitable to you? Don’t put money and time into making these products if you’re going to be getting little return.
Were you thinking of charging way more and disappointed to see that others are not on the same page? Well, you can still price your products at whatever you want. The only thing is that you might not get as many sales if you’re priced much higher than your competitors unless there’s an appealing reason for your customer to pay more. If you make body care items are your ingredients all organic? You can probably charge a little more. Are your products larger than the ones being sold? Yes, you should sell them for more. Is your brand already well known? Good, supply and demand are your friend. Is your packaging amazing? Pretty things cost more.
Now something that I think every maker has gone through would be those conversations with possible customers who just don’t see the point in paying you more for something that they could easily buy at a store for less. Honestly, you don’t need to even worry about those people because they were never going to buy your products to begin with. Your time is precious and to you can’t afford to simply charge for supplies and not pay yourself for labor. They don’t understand and that’s not your customer base. If you haven’t experienced this yet, prepare yourself for it. If you’re getting ready to sell at a market, this is very likely going to happen. Don’t worry about them, don’t lower your prices because of these individuals.