Figuring out a price that covers your costs and makes sales is often one of the hardest parts of running a handmade business. If you set the price too low, you might be actually losing money by the time you factor in all costs of production, and if you wildly guestimate a price you might be pricing yourself well out of the market.
In this blog post, we'll cover how to create a solid pricing formula for your business that ensures you cover all costs of making your products, including your time.
Let's firstly cover the basic pricing formula that many Etsy sellers use.
The formula usually goes as follows:
Although this is a nice and simple approach to the conundrum of pricing, it can be extremely dangerous to simplify your production costs down to a simple multiplier.
The main issue with this "Etsy pricing formula" is that it doesn't factor in many of the hidden costs of getting your product made, sold and out the door to the customer. This all gets conveniently tucked away as part x2 and x4 parts of the equation, but never gets factored in properly so it's impossible to see what sort of profit margin you are making. Knowing your exact profit margins is essentially one of the biggest factors of success for a handmade business, so it's definitely worth spending some time on these calculations.
A Better Etsy Pricing Formula
Now that you know what is wrong with the simple pricing formula above, we can start to expand it out to include the missing expenses that are eating holes in your profit margins.
At a high level, the formula goes something like this:
As you can see, this pricing formula now allows for a couple of new (and really important) factors: your time to produce the product, your overheads and your fees to sell the product.
Your time to produce the product will result in an amount that you know you can pay yourself without cutting into your business profit margins.
You also have an additional markup now in place to cover your profits, which is applied to your Base Manufacturing Cost - the bonus here is that you know that your markup is directly going into your business profit as you have factored everything else into the equation here already.
Base Manufacturing Costs
Also known as the Base Production Cost, this is often guessed at by handmade sellers, however getting this part accurate is one of the most important parts of the pricing calculation.
Knowing exactly how much it cost you to make the item puts you in a much better position as you will know the minimum possible price you can charge before you will make a loss on your product.
For your Base Manufacturing Cost, you'll be trying to find out exactly how much it cost you to make a single quantity of your product.
For detais on how to calculate your base cost, our blog post here will guide you through the steps with some handy examples: How do I calculate my product cost price?
One of the biggest pricing mistakes Etsy sellers make is that they completely ignore their own labour costs. Being self-employed, it's easy to undervalue or completely ignore the time you put in to your business.
The improved Etsy pricing formula above factors this in to ensure that you remember to cover your own wages outside of your business profits. The beauty of the formula is that you can either decide to include it as a seperate amount or just factor into your profit margins via the markup.
The formula you'll want to use is:
Manufacture Time x Hourly Rate
For more tips on how to calculate your hourly rate: How to calculate your handmade labor costs »
Your Handmade Overheads
So what are "overheads"? They are essentially any costs that are not directly related to the creation of your products. Some common examples of overheads are phone, electricity, rent and machine maintenance - none of these costs can be connected with any of the products you make, so you consider them to be an "overhead" of running your business. Overheads and how to calculate them accurately deserve an article in their own right, so we have covered this in detail here: How to calculate overheads for your handmade products ».
Etsy Seller Fees
Due to the number of different services and payment structures that Etsy now offers, it can be really difficult to get a full idea of the costs involved in selling your handmade products on Etsy. Our blog post here will give you a detailed rundown of each fee and when it is applied: The Complete Guide to Etsy Fees »
Handmade Product Markups
Markup is defined as the amount added to your cost price to arrive at a selling price and is a commonly used technique to use in determining how much to charge for your products.
The improved handmade pricing formula above factors in a markup that is applied to your base manufacturing cost.
Markup can be typically be defined as a percentage – a markup of 100% would be cost price x 2, for example. The best way to illustrate how pricing markups work is with via an example:
Jane makes a scarf and it costs her $29 in manufacturing costs (materials and labour). She would like to add a markup of 150% in order to arrive at her final selling price. Applying the markup percentage results in $72.50 as the suggested selling price ($29 × 2.5 = $72.50).
More details on pricing markups can be found in our post here: How to calculate pricing markups for your handmade products »
Do your research!
Remember that the pricing formula is designed for you to figure out a safe pricing range for your products that ensures that you make a profit. From here, it's up to you to research and compare to see what others are charging for the same types of products and tweak your markups where necessary.
Some questions to consider when evaluating your competitors products: what are they charging? Is your item better made or a better quality than theirs? You might be able to charge a premium over their price for this. Have you created something unique and different? This is another opportunity to sell your products at a higher rate.
Experiment & Tweak
Don't be afraid to experiment with your pricing - if you feel that it might be too high and your sales are slow, you can always adjust and see if sales pick up (just remember not to go under your Base Production Cost as you will definitely be losing money on each sale!).
Likewise, if you notice that your prices are significantly under your competitors - try increasing them. Studies have shown that many people tend to equate quality with price and are thus prepared to pay more.
See our blog post here for other pricing tips and tricks you can try for your handmade product pricing: Handmade Pricing Psychology »
Don't be afraid to experiment until you find prices that work for you!