Wednesday, January 11, 2012

The Power of Pricing

If anyone has happened to stop by my Etsy shop in the last day or so, you will notice that I am "On Vacation". I'm not really on vacation, (although after hearing the weather forecast for the rest of the week and weekend, I wish I were), I am making some much needed adjustments, and hopefully improvements, to my shop. Other than taking new photos using my photo box, I am also in the process of adjusting my prices. 

I have been told by several people that they were surprised at how low I have some of my items priced. I have also been told that I am undervaluing myself. I rolled my eyes at them at first, but then I sat down and actually did the math, and after figuring in the fees that Etsy and PayPal charged me, I realized that I ended up losing money on my Etsy sales! Obviously, this is no way to run a business (unless I'm trying to run it into the ground), so I needed to make some changes.

I enlisted the assistance of my fabulously helpful sister, and she directed me to what I will be referring to as the "Magic Pricing Worksheet", or MPW. Some brilliant person out there came up with an Excel worksheet (complete with formulas! No need for fingers and toes!) for dummies like me to help price their items. Prior to this, I was doing a lot of estimating, and basically pulling prices out of my tushy. Sure, I was looking around at similar items and what they were selling for, but basically my prices were guesstimates. (Side note, I find it interesting that Firefox does not recognize "tushy" as being a word, but it does "guesstimate").

Basically, what the MPW does is calculate different prices based on cost of materials, overhead (which for the purposes of my business, includes the cost of packaging, printing, materials that I cannot really estimate for, like glue and thread, etc.), and labor. It gives you four price figures: your total cost, wholesale price, retail price, and a "Safe Price Range" . I love that it does this, because these three different prices are perfect for the various places that I could sell my products: craft fairs/personal sales, online venues like Etsy, or a "brick and mortar" storefront that sells items from local artisans.

I don't know about other people who sell their crafts, but personally, I plan to have different prices for each venue. This may not sound fair, or the ideal way to conduct a business, but let me break down the reasons why. If I am selling my items at a local craft fair, then I need to be aware of who my customer is going to be, and most importantly, my location. Someone who is shopping around a craft fair in the boonies of Upstate New York is most likely going to spend less money on items than someone in New York City. Right? The typical craft fair visitor in my area is not going to be shelling out $30 for a felt flower headband, regardless of how well it is made or how much time has been put into it, (there are always some exceptions though). So ideally, my prices should reflect that if I want to make any sales and try to establish my business with "the locals", which I feel is an important thing to do when just starting out. As long as my prices are fair, and I'm still making money rather than losing money from these sales, then I see no reason why I can't sell them for less, using the wholesale price from the MPW.

Now let's take a look at selling on Etsy, or other online venues. In case you were unaware of this, listing items on these sites is not free, nor is it free to sell them. Etsy charges a fee for each item that you list. After a certain period of time, (a few months), if your item has not sold, then you can relist the item, paying the fee again. Etsy also charges a fee for each sale that you make. They will charge you a (very small) % of the purchase price of the item, (does not include tax or shipping). Unfortunately, the fees do not end there. If your customer is using PayPal to pay for their order, which they most likely are, then PayPal will charge a fee based on the full amount of money received (including tax and shipping). This is a small %, plus $.30 for each transaction. So, with all of that in mind, items that I list on Etsy should be priced higher to help cover those charges.

Another thing to consider when pricing these items is that Etsy has an International customer-base, which means a higher chance of reaching customers who will pay $30 for a felt flower headband (which they do). It would really be stupid of any seller not to take advantage of this, and this is where the middle "Safe Price" figure comes in handy.

The retail price would most likely apply to items being sold in stores. Although I currently don't do this, there are several local stores/venues that sell items for local artisans, kind of like a consignment shop. My sister does this, and if I remember correctly, she has to pay a fee each year for her space in the store, and they also collect a 30%-40% commission from the items that she sells there. Obviously, this means that she has to price accordingly if she wants to make any money at all, hence a higher retail price.

So with all of this in mind, last night I sat down with my receipts, (or at least the ones I had the foresight to save), and the MPW and got to work figuring out what I should be charging for my items. I calculated what it cost me to make each item, figured out how much time it took me to make each item, and plugged them into the MPW. Holy moly! What a difference in prices! I realized that the biggest difference in pricing my items was that I wasn't figuring in my time, the labor that it takes to make each item. Although, for some random reason I was doing this with my necklaces, but not my other items. Apparently I must think that 15 or 30 minutes of my time is worth less than one hour of it. In other cases, I underestimated how much it actually cost for the supplies to make certain items.

One of the tips that I see over and over again regarding pricing, is that pricing your items low (thinking that they will sell better) will actually hurt your sales. Apparently when people see a product that is priced low, they assume that it is cheaply made; they are more likely to buy a similar item at a higher price. This makes absolutely no sense to me because I always shop around and compare prices for the biggest bargain. I am all about finding the best way to save money, not spend more of it. But speaking of comparing prices, I also learned that it's best not to price your items based on what others are selling similar items for. The main reason for this is because you really have no way of knowing how those people are figuring out their prices. They may not have as much time invested, or as many material costs.

Overall, I think the biggest issue that I have to overcome is being able to appropriately value myself and my items. I often think, "Why would anyone pay that price for one of my items?". I guess I don't think that people actually consider the amount of time and work that I have invested in an item when looking at the price. They compare my products to similar items that they can find in the store, and think that I am overcharging for them. (I must assume that everyone is a bargain shopper like myself).  But here's the thing, yes, items in a store are going to be cheaper, there's no getting around that one. But in most cases, they are also cheaply made using cheaper products. I don't use prefabricated items for my products, (with the exception of the "hardware" like headbands and hair clips, but I challenge you to try to make those from scratch). I don't take a plastic or silk flower and simply glue it to a headband and resell it. I don't buy cabochons in bulk, glue them to a ring base that I have bought in bulk, and resell them. Each one of my flowers, each one of my poms, is unique. Each has been hand-cut, hand-sealed, and hand-assembled. I take my time with each piece, and put my best effort into making them look "perfect", and that extra care is worth something.