The way you set prices on your products may change over time due to many reasons: new market players, available information about your customers, better production technology, cheaper materials, etc. There are three basic ways to price your shop products:
- cost-based pricing (the price includes the cost of materials and cost of operating the business);
- competition-based pricing (the price covers cost of materials and cost of operating the business and is comparable to the competitor’s price);
- customer-based pricing (the price is based on the customer need for the product, also known as value-based pricing)
You may use one of these methods or may want to mix several pricing methods depending on the type of products you sell. You have to charge enough to cover your materials and labor, at the very least and make a profit. However, the method that uses labor costs does not work for everyone (for vintage sellers). There is no magic strategy that fits all Etsy sellers. So after you read about each pricing method, think about your shop and customers. Also be sure you understand each method disadvantages.
To calculate the final product price you need to include the costs of operating your Etsy shop, like materials, advertising, fees, home office rent, etc. Once you have a base cost, add the profit level you want for your shop to the product cost subtotal to determine your product price. The key to accuracy is to ensure all cash and non-cash costs are included in the product cost subtotal. You need to set a value for your management expertise and labor, the use of your equipment also must be valued along with depreciation on your machinery and buildings. Etsy recommends this simple formula in their sellers handbook:
Materials + Labor + Expenses + Profit = Wholesale x 2 = Retail.
Yes, seems to be very simple. However, this approach does not consider how customer demand affects price. If customers believe a product is in short supply due to heavy demand, they may be willing to pay more. Competition is also not included in cost-based pricing method. In a competitive market competition should affect how you price your product.
The big advantage of competition-based pricing is that you are focused on your niche. Once you know what your competitors are doing, you can better decide how you will manage your shop. You are able to charge a higher price if you can show how the product has a uniqueness or quality and is "worth" more for the value. Understanding your competition will take some research. You can use Market research tool to get detailed information about top players in your niche.
Use the following questions to learn more about your competition:
- how many competitors sell in my niche?
- are these shops larger or smaller?
- what pricing methods do they use?
- are my competitors close by or far away?
- is it difficult for new competitors to enter the industry?
- what types and number of products do they sell?
Scout out competitors and find out what they charge for similar products. This type of pricing works well if you make standard products. If you make unique products, you need to decide how specialized your product is. If you want to improve your market penetration, you need to select a price that will lure customers away from the competitors. This type of pricing intends to improve market share or penetrate the market. To motivate customers to notice your product, and to make a purchase decision, you likely will need to lower the price.
While competition-based pricing offers advantages you need to consider the following disadvantages:
- you may ignore your own production costs if you focus too closely on the prices set by competitors;
- more time is needed to conduct and update market research;
- competitors can easily mimic whatever price you select;
Most Etsy shop owners want to know “at what price do my customers think my product offers good value?” You need to find out how your customers feel about various product prices and what they would do if the price changed. Customers change their buying habits according to product price. As a seller, you need to know how your target customers view your product. Think about your target customer and try to answer the following questions:
- does your customer assume price indicates product quality?
- will customers think they are getting their money’s worth from your product?
- do your customers care more about prestige than product price?
- what are target customers prepared to pay for your product?
Prestige-oriented consumers believe a higher price means higher quality, while bargain seekers will only be happy with lower prices. Does your price reflect your product image? If you price is too low, a shopper could think that the product is cheaply made or made with less than quality materials. Most Etsy shoppers are looking for unique, quality made items and understand that hand crafted items won't be cheap, or they'd shop on other venues.
Promotional pricing uses lower prices to catch the attention of new customers. Methods you can use to expand customer interest include: loss leaders (products at extremely low prices), coupons, holiday sales, buy-one-get-one-free promotions. Slow-moving inventory can get a boost when packaged with a group of popular items. Bargain seekers will be drawn to product bundles that offer good value.
Before you implement a customer-based pricing method, note the following disadvantage. If you are too focused on the customer, you may ignore production costs or forget about the competition.
Good product prices are important to any successful business. Pricing takes time, research, good recordkeeping and flexibility. You need to balance the costs of producing a product with competition and the perceptions of your target customer to select the right product price. The three basics of pricing are product price, competition and customers. Blend pricing methods to ensure the three basics are in balance. Don't forget to keep good notes of how you arrived at a price so you can make similar assumptions in the future.