Pricing is one of the things that many small retailers struggle with. Today my mission is to help you change your thoughts about the way you set your product prices and hopefully get you thinking in terms of “Pricing for Profit”.
I mean, let’s face it, you didn’t open your Etsy shop to give your product away; you actually would like to earn a profit – whether it’s for yourself or a special cause.
When it comes to pricing, there are a few things you need to consider, but I believe that the main consideration has to be, “what is the perceived value of your product?” If you haven’t noticed already, prices on Etsy are all over the board – some are so low that you wonder how the shop owner makes enough money for materials and others are so astronomically high that it makes you wonder, “who would pay that much for THAT!”
If I were to define what “VALUE” means in this context, I’d describe it as “how your product stacks up against similar products being offered on Etsy.“ The percentage of unique products out there is very small. If your product is one of these unique products then you offer a much higher value.
Before I get into methods, let me warn you that there is no single recipe to determine pricing – remember, “there’s more than one way to skin a cat” – the same goes with pricing.
Now, remember the goal is attract customers and convert them into buyers. Pricing is just a small piece of the puzzle but it can have a big impact. Price your item to low your customers will be skeptical, price it to high an they may never make a purchase. I strongly, strongly believe that you need to offer your customers options. Yes, option – pricing options that is. Let’s take a look at a few pricing methods you can use:
You can offer your customers pricing options using a “versioning pricing strategy” or what some would call a “tiered pricing strategy“. How does versioning pricing work? Let’s use the oh so popular iPhone as an example.
When you make the decision to purchase an iPhone, you have a choice of an iPhone 3Gs or iPhone4, then you to choose the memory capacity: 8GB, 16GB or 32GB. The price varies from $99 to $299, depending on the model you choose. It’s the same phone in different versions.
Now think of your product in these same terms, let’s say you offer handmade handbags; you could offer one handbag in 2 or 3 different sizes and have different prices for each handbag – this is versioning or tiered pricing.
What are the benefits of this pricing strategy? Well, it allows you to offer a product for every budget – one customer may be able to afford one of your lower priced, smaller handbags while other customers may be interested in the high-end, larger bag regardless of price. Keep in mind that for many customers price is the determining factor in their purchase – with the state of the economy and people being more budget conscious you need to offer options.
VALUE BASED PRICING
Another strategy is to price your product based on the value it creates for your customer. Does your product save your customer’s money? Does your product help reduce carbon footprint and can you translate this into some sort of dollar or impact value?
A good example for value based pricing would be disposable nappies. Now, it would be hoove you to break down the savings for your customers (being a mom of 3 kiddos, I know this nappy business all too well). The average cost of a jumbo package of disposable diapers is about $30 for a large box.
Research shows that over a 3.5 year span you would have used about 10,000 disposable diapers with a total cost of about $4060 (this does not include the cost of pull-ups for toilet training). The average cost for a a starter package of 5 reusable nappies is about $30, you may want to purchase 3 starter packages for a total of 15 nappies at a cost of $90. You may need to purchase at least 4 different sizes for a cost of $360. $2400 vs. $360 this is the dollar savings value. Add to that the carbon footprint reduction and you have a good selling point.
Let’s say you offer instant pant extenders for little ones, a fun fabric swatch that looks like a cuffed jean which can be easily attached to a child’s jeans to extend the length so the jeans could be used longer . Your cost of making the pant extender is $3.50, even if it delivered a cost savings of $1,000 a year, you would be hard-pressed to offer this product $75 – $100. Why? People would feel ripped off – the perceived value is not that high for such an item and so consumers will mentally place a “cap price” on your item before they even look at your prices.
Fair pricing does require that you do a little market research and find out how much your customers would be willing to pay for your product. This may require actually taking your product out and asking people what they would pay.
The last pricing strategy I’ll touch on is known as “Bundle pricing” also known as “Promotional price“. Offering a Bundle means that you combine two or three products and offer them as one combined product.
If you’ve ever watched an informercial and heard the tag line “but, wait there’s more! We are going to give you products b, c & d when you purchase product a” – you have experienced the art of “bundle pricing”. You are enticed to make the purchase because you are getting more for your buck.
When you offer a group of related products for a price that is significantly lower than the cost of purchasing each product individually, customers may be more motivated to buy. This is one clever way of offering discount pricing.
Let me give you an example. Let’s say you offer fabulous knit items in your shop, selling each piece individually. Your most popular item is your cool knit scarf for $20 but your funky gloves ($18) are not getting much love. If you were to bundle the two items together, the scarf and gloves and offer it at a bundle price of let’s say $30, you may see your sale increase significantly because customers will see the “value” of purchasing the scarf and getting the gloves for a lower price than if purchased alone. It’s a psychology thing that works.
Now these are just a few pricing strategies you can use, there are tons of other pricing strategies out there you can explore. So now, let’s put it to work.
SETTING YOUR PRICE
Now that you have chosen a pricing strategy you are ready to start the process of setting your price. Before you can price your items you need to figure out a few specifics, such as:
Materials Costs – how much did you pay for the materials you used to create your product. Pull out your receipts and calculate it all
How many items were you able to make with the materials? If you could only make one item, the to cost of materials is simple to figure out. If you were able to make 3 similar items, you would divide the cost of materials by 3 to get your material cost for one item.
How long did it take you to make the one item? 1/2 hour, 1 hour, 1 day? If you calculated the time for all three items, then divide the time by three to get the time it took to make one item.
Now let’s put this all into fancy little formulas to calculate your costs, wholesale price and retail price:
Cost of Materials + Labor + Overhead (10%-15%) = Your Total Cost
Let me put this formula into context for you. Lets use the handbag example above. You make these fabulous handbags, each bag takes you 1/2 hour (.50 mins) to make; you need to put a price on your time – I tend to use $14 – $20 an hour. Your material, all the fabic, thread and other materials for the one bag cost you $6. How would this fit into the formula format?
$6 (cost of materials)+ $7 Labor = $13
Now you have to figure out your overhead costs. Overhead is comprised of the things you normally don’t consider, like office supplies, electricity for your space, etc.. The easiest way to figure out overhead cost without stressing yourself out is as a percentage of your materials and labor – I use (10% – 15%). For this example let’s use the lowest 10%.
$13 x .10 (0r 10%) = $1.30
Now plug it all into the formula:
$6 (cost of materials)+ $7 Labor + $1.30 overhead = $14.30 Your Total Cost
Now that you figured out your total costs, we can move onto the pricing zone. We start off by figuring out what your wholesale price would using the simple formula below:
Your Total Cost x 2 = Wholesale Price
In the case of the handbags above your formula would look like this:
$14.30 Total cost x 2 = $28.60 Wholesale
This is the lowest price you would offer your handbags to anyone interested in purchasing bulk. I normally required my wholesale customers to order 3 pcs per product with a min. $50 order.
Let’s move on to figuring out your retail price, using the following formula:
Wholesale Price x (2 – 3)= Retail Price
The retail price for your handbags. The 2 – 3 is what we call keystones would be calculated as:
$28.60 x 2 = $57.20
This would be the price your would list your item for on Etsy when selling individual products. You would need to then need to match your price to your Pricing Strategy to ensure your customers get the best deal from you based on your pricing strategy.
Your retail profit is:
$57.20 (retail price) – $14.30 (Your total costs) = $42.90 Profit
This spiffy worksheet shows you all the calculations:
WHAT DOES THIS TELL US?
Once you calculate all your numbers, you know the range you can use to set your retail price. In the case of the above handbag, we could set the price anywhere in the range of $33.60 – $57.20 (I always add at least $5 to the wholesale price to figure out my lowest range). I can still offer the product at a wholesale price and make money at the same time.
When you set your prices correctly, you never risk selling your product for less than it cost you to make it. It’s Pricing for Profit.
I know this is a lot of information to take in, so to make it easy, I created a fun little spreadsheet you can use to calculate your Wholesale and Retail price, just plug in your cost of materials and your time and VIOLA! your prices are instantly calculated.
Here are my final treasures for you. Food for thought.
- Lower prices DO NOT automatically equal increased sales,
- Customers who buy from you because of price are not YOUR customers
- If business is bad cutting prices could make it WORSE
- Small price increases could SIGNIFICANTLY increase your profits
We’d love to here your experience with setting your product pricing. Have you developed a system that works for you? Have customers shared their sentiments regarding your pricing? What have been your challenges? Share your experience as a comment below.
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