Selling handmade products can be a profitable business. However, you need the right pricing formula to ensure you cover all your business costs and enough extra to grow your business. Here’s a guide on how to price handmade items for Etsy sellers and other handmade business owners.
Some Useful Terms to Know
When pricing handmade products, there are a few different structures and terms that may impact your decisions. From retail price to wholesale price, here are the top terms to know as you price your handmade products.
Retail price is what an item is listed for when sold directly to customers. This can be the price in an online listing or in a physical retail setting. This generally includes retail markup to cover extra expenses like store overhead and marketing.
A wholesale price is the amount charged for an item sold in bulk to a large supplier or distributor. This may what you charge per item when selling to a local retail store that sells your products directly to customers. Your wholesale base price is generally lower than your retail prices, since it’s less expensive and more profitable to sell items in bulk.
The selling price is generally the final cost that customers are willing to pay for an item. Some handmade business owners or retail stores might set a price and later have to adjust based on what items actually sell for.
- READ MORE: 50 Craft Business Ideas
The Pitfalls of the Standard Pricing Formula
Many business owners use a standard pricing strategy to calculate what each product costs to make. This generally includes the cost of supplies and may factor in a small amount for labor expenses. However, this generally doesn’t factor in the extra work and money that goes into building a handmade business, like website costs, marketing, and shipping. You may end up losing money before determining how to price a handmade product in a more sustainable way.
The Profitable Pricing Formula
Instead, a strategy for setting profitable prices should factor in all expenses related to running your business, while still appealing to your target market. If you’re wondering how to price crafts in a way that factors in your overhead rate, supplies, labor, and profits, the following factors can help you find a good starting point.
Supplies: How much do the supplies used to create each item cost? Factor in both the materials used in each one, along with a small amount for tools or equipment used in the production of multiple items.
Profit markup: Each product should have a small profit margin built in. This amount will be higher when selling directly to consumers than when setting wholesale pricing. Profits may fall anywhere from 5 to 20 percent, depending on the perceived value of your items and your earnings goals.
Labor: Set an hourly rate for yourself or anyone who works for your business. Then consider how much time is spent crafting each item and doing any support activities that go into completing sales. This may include preparing shipments or marketing and web design.
Wage: Then determine how much to actually pay per hour to yourself or any team members. The US Department of Labor estimates the standard rate for craft artists at around $20 per hour. Rates may vary by location, level of experience, and type of work being performed.
Overhead rate: What are the extra costs that go into running your business? Overhead costs may include basic office supplies, PayPal fees, accounting services, website hosting, Etsy fees, and labor cost for professionals like tax accountants or other support.
Example That Shows the Formula in Action
When you add all these elements together, you should have a pricing strategy that helps you build a sustainable business with healthy profit margins. Here’s an example:
Say you sell handmade pottery. Supplies may include your clay and glaze, but you should also factor in the money spent on your kiln, throwing wheel, and painting gear. For a small mug, say materials cost about $10.
Then set a wage and labor standard for yourself. If you can produce multiple items in an hour and set a rate of $25 per hour, your labor costs per item may fall around $5.
Overhead costs may include a workspace in your home or garage, website, marketing, and selling fees. When you divide these costs by the amount of products you sell, you may add an additional $5 per product.
At this point, your product is priced at about $20. Add a small amount for profit, and you may price items around $22 or $23 when selling online.
Ways You can Market Your Business
Once you set your minimum base price and per item cost in your online store, you may adjust slightly over time. Your marketing and communication with customers can alter your strategy over time. Here are some tips to keep in mind as you set and change pricing formulas.
Do your research – find out what similar items are selling for:
Some simple market research can also help you find a reasonable price for certain items. Browse marketplaces like Etsy and Google Shopping to compare prices for related items.
Price your item accordingly and be willing to negotiate:
Pricing crafts can also involve some wiggle room. If customers regularly reach out to you to ask for a discounted price, setting a slightly lower rate may lead to more sales. However, if items frequently sell out quickly, a fair price may be a bit higher.
Implement Strategies to reduce the impact on your small business expenses:
Retail pricing may be flexible in certain instances. For example, offer discounts or offer free shipping if customers bundle or spend a certain amount with your shop.
Take good quality photos and write a detailed description:
Quality photos and descriptions can help you make more sales. Include images of the product in front of a plain background and on a model or near an item that shows its scale. Include all relevant details in the description, including sizing and materials.
Keep good records:
Craft businesses need financial records just like other businesses. Record what you spend on all your materials and other expenses and track your earnings. Over time, you may notice trends that impact your pricing.
What Benefits You Can Expect to See?
Factoring in all your business costs and leaving room for profit can help your business in several areas, including:
- Pay yourself a fair wage
- Make enough extra to scale
- Build a fund for unexpected expenses
- Keep organized records of all business transactions
Template for Pricing Handmade Goods
To standardize a pricing formula for your Etsy shop or handmade business, consider a workbook, calculator, or template. Here’s a template that may help: