Today we’re going to discuss how to price your handmade goods and my recommended “Etsy pricing formula”. Pricing your handcrafted products or designs can be one of the most challenging tasks for a creative entrepreneur or artist (that’s why I eventually created a spreadsheet that helps you do it!). You can have an awesome product, a cohesive brand, a great webpage…you can even have amazing sales, but if your product isn’t priced right, you won’t make a profit. Without a healthy profit margin, it will be hard to keep running your creative biz.
I could write a whole novel on this topic, and you’ll find several posts about pricing around here. This is a tricky but important concept that every serious business owner should take the time to research and understand. I’ve also created a free simple + flexible little pricing formula worksheet you can use to help you determine profitable prices for your handmade goods.
The Unprofitable Etsy Pricing Formula
Browsing the interwebs, you might see a pricing formula that looks a lot like this:
Supplies x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price (or basically Supplies x 4)
I’m hesitant to even type that one on here because I don’t want you to just see it, use it, and then leave. A pricing formula like this might be simple, but it most likely will not get you a profit. Why? Because it leaves out a whole bunch of other fees and expenses that you’re probably incurring. Sure, the “x2″ or “x4″ multiplier is probably helping you cover part of that, but it’s better to come up with a more accurate measure of all your expenses and include them in your equation.
Pricing for Profit – A Better Formula
Here’s what I suggest:
My Etsy pricing formula also includes labor and what I’m calling an overhead rate. Yes, my formula is a little more complicated. But, it’s going to give you a price that more accurately reflects how much it really cost you to create your good.
Let me explain my reasoning by defining each piece of the formula. Then, I’ll give an example of pricing two hypothetical products, a wire-wrapped ring and a pair of stud earrings (I’m biased toward jewelry due to my original biz Lazy Owl Boutique!).
Supplies: As I explained in this post, your supplies expense is the cost of whatever materials went directly into your product. You should always have a record of what you pay for your materials (don’t forget to include what you paid for shipping too). You should generally be recording this at the per unit level. Per-unit means tracking what it cost you per bead, per piece of paper, per foot or yard of fabric, etc., rather than just the entire string of beads, ream of paper, bolt of fabric, etc. (If you aren’t keeping track of your supply expenses, I highly recommend you get started with my inventory, cost & pricing template here).
You might need to do some dividing to get to your per unit cost. For example, if you bought 100 beads, you should take the price and divide it by 100 to get the price per bead. If you bought a bunch of fabric, you’d calculate the price per square inch, foot or yard. This will help you determine how much a product you made with 1 bead or 1 yard of fabric cost you. Getting your supplies down to the unit helps you accurately calculate exactly how much one finished good cost you to make.
Labor: Just like with a “real” job, you must pay yourself an hourly rate. Decide what you want your hourly rate to be (please, at least pay yourself more than minimum wage!), and determine how long it took you to make the product. Labor cost should equal Time x Wage, so if you’re paying yourself $10 an hour and it took you half an hour to make it, pay yourself $5 for that product. You aren’t necessarily taking $5 out of the bank account when you sell this item, but it’s important to build a salary for yourself into the prices of your items so you can afford to pay yourself.
Overhead Rate: Remember to refer to this article to get the full rundown on overhead. Basically, overhead is all the other expenses you have that 1) go into your product, but you can’t get the exact amount per product (the cost of the thread you used in your apron, the ink you used to write the calligraphy, etc.), plus 2) all of the other business expenses you pay that don’t have directly go into a product, but keep your business running (advertising costs, a web domain, your crafting tools, etc.).
The best way to include these expenses in your pricing formula is to come up with an average rate. You are basically putting a little chunk of these expenses into the price of everything you sell. Please refer to our overhead article for specific ways to calculate your overhead rate. I suggest calculating your rate based on your estimated products sold in a year.
Wait a Minute, What’s That “Multiplier” for?
We’ve covered the main three components of my suggested pricing formula, now let’s discuss the multipliers. The “x2″ and “x4″ is what I call your profit multiplier. It’s basically what ensures you a profit at the end of the day. You’re taking your costs, multiplying them by the profit multiplier, and getting your sales price. Your sales price means you are getting paid back enough to first cover all your costs, then actually make some money on top of that (so you can pay yourself, invest & grow your biz, etc.).
Want to see this formula in action and try it out with YOUR products? Grab this free pricing formula worksheet.
Now let’s work some hypothetical examples.
Wire-wrapped druzy ring
- Supplies – That’s the cost of the wire and the druzy stone. The druzy stone cost me $3. I buy the wire in 30 feet spools. One spool costs me $8. So, I can either measure exactly how much wire I used for this ring, or I can make an estimated cost based on an average for each ring. Let’s say I use an average of 2.5 feet for each ring, so that gets me about 67 cents of wire in 1 ring ($8 per spool / 30 feet = $.267 per foot x 2.5 feet = $.67). Am I confusing you yet? (If this math confuses you, check out the template spreadsheet that will do it for you!) So, my supplies expense for this one ring is $3.67.
- Labor – This ring takes me 10 minutes to make, and I want to earn $12 an hour. So 1/6th of an hour x $12 = $2 in labor for this ring
- Overhead Rate – In my hypothetical situation, let’s say these are my estimated overhead expenses for the year:
$800 – Etsy fees
$250 – Paypal fees
$250 – Advertising & printing expenses
$300 – Craft show fees
$50 – Photo props
$100 – Editing software
$75 – Tools
$275 – Indirect product costs
$15 – Website costs
Wow! That’s a lot of overhead! These costs add up, that’s why it’s important to include them in your pricing strategy somehow.
I’m going to calculate my overhead rate based on an estimated annual number of products sold. Last year, let’s say I sold 400 items. This year, I’m estimating that I will sell 500 pieces. $2,115 / 500 = $4.23 per item for overhead. So, my formula would look like this:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($3.67 + $2) x 2] + $4.23 = $15.57 for my wholesale price, x 2 = $31.14 for my retail price. If this were me I’d probably do some rounding and sell it for $31 flat.
Remember, there’s several ways you can calculate your overhead rate and incorporate it in your pricing strategy.
Rosette stud earrings
- Supplies – Let’s say the rosettes cost me 20 cents a pair, 20 cents for the studs, and 5 cents for the earnuts. That means my supply expense is 45 cents.
- Labor – I make a bunch of earrings at once, so each pair doesn’t take me too long. Let’s say I pay myself 50 cents for each pair.
- Overhead rate – $4.23 as I calculated it in the above example, and you can use that same overhead rate across the board for all your products.
So, my formula would look like this:
[(Supplies + Labor) x 2] + Overhead Rate = Wholesale Price
[($.45 + $.50) x 2] + $4.23 = $6.13 for my wholesale price, x 2 = $12.26 for my retail price. Again, that’d be $12 flat for me.
Handmade Pricing – The Big Picture
Does it seem crazy that a ring that cost you less than $4 to make should be priced at $31? Or a pair of earrings that cost you less than $1 could sell for 12 times that amount? That is why soooo many artisans underprice their goods, or make awesome sales but never turn a healthy profit. It all boils down to two things when coming up with a pricing formula that works:
- Covering all of your costs – find a reasonable, doable way to include all your business costs in your pricing formula, not just the obvious ones, whether this is by using an overhead rate, a percentage markup, or something else that works for you.
- Making a profit – here’s the kicker. If all your business expenses are represented somewhere in your pricing formula, that little “x2″ or “x4″ profit multiplier is what will allow you to be profitable (duh!). Too many entrepreneurs forget to include all their true costs in their formula, and profit multiplier that should be giving them a profit is really just covering all those forgotten expenses instead.
Trust me, it’s a lot easier to price your product for a profit now, even if it feels too high, and lower your price later for whatever reason, than to be in business for a while with prices that are too low, realize you aren’t going to have a sustainable business, and have to raise your prices later to stay open. Pricing high enough also allows you the flexibility to have seasonal sales and give out coupon codes. I delve more into the complexities of pricing in my other posts.
If this post gets your wheels turning about how you’ve been pricing your goods, check out this free handmade pricing formula worksheet. It’s got built-in formulas and comes with super simple video instructions to tell you exactly how to use it (even if you’ve got spreadsheet-phobia). Ready to master your pricing in order to grow a truly profitable, sustainable business? Don’t shirk off handling your pricing and grab your free worksheet here.