One of the biggest pricing mistakes Etsy sellers make is that they completely ignore their own labor costs. Being self-employed, it's easy to undervalue or completely ignore the time you put in to your business.
Your labor is however a key component of your pricing strategy as it allows you to factor in an amount you would ideally like to pay yourself. You don't necessarily need to take the entire amount you have allocated as drawings, however you'll know that you have allowed for a specific amount of your profits for this purpose.
Without allocating a set proportion of your profits to your wage, you'll need to rely on taking this amount from the overall business profits. This can be dangerous, especially if your pricing strategy isn't completely factoring in your costs of production and hidden costs like overheads.
The other big reason why it's important to separate your wage from your business profits is to ensure that your business has the funds to grow. If you need to draw everything the company makes each year, this leaves nothing in the bank for any planned or unexpected investments you might need to make for your business future.
To determine your labor cost, the formula per product you’ll want to use is:
Ideally you’ll want to time how long it takes you to make your product a couple of times and use the average. Understandably, this can be quite difficult to do for all of your products up front so you might like to initially take an educated guess at the time and refine this as you go.
Craftybase Inventory + Bookkeeping features the ability to log each manufacture along with the time it took you to create your product batch.
Setting an Hourly Rate
It’s understandably tricky to decide on a hourly rate as you are your own boss and only you do know exactly what you do. As a ballpark, you’ll want to try and ensure that you set a rate that is more than federal minimum wage. As of 2019, in the US this is federally mandated since 2009 as $7.25 per hour. Each state then has it’s own minimum hourly wage that can vary between $6.55 and $14.
Another way to do this is to figure out a ideal base salary that you would like to ideally draw from the business and work backwards from here by dividing this salary by the total number of hours you plan on working in the year.
For example, if you would like a salary of $45,000 and you estimate you will work on average 40 hours a week on your business (with 2 weeks of holiday/sick time), then your target hourly rate will be:
$45,000 ÷ (40 hours x 50 weeks) = $22.50.
If you have no idea of the salary you would like, one way of narrowing this down is to look at a salary comparison site like Salary.com for occupations similar to your primary craft focus in your local area. For example, "hand sewers" in Denver in 2019 currently demand a salary between $21,000 and $32,000. Jewelry creators in New York have an estimated salary band of $39,000 - $60,000. Keep in mind that these salary estimates usually include additional compensation like healthcare and bonuses.
Putting this all together to figure out your labor cost, if you decide on an hourly rate of $12 and it takes you half an hour to make your product, this would be a total labor cost for the product of $6.
Our improved Etsy pricing formula factors your labor costs 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.