This post was written by the fabulous Janet of Paper + Spark! So excited to share it with you! Find more from Janet here.
Pricing formulas – you probably love ‘em or hate ‘em. Yes, using pricing formulas can be a chore because they seem to box you into setting your prices a certain way. Relying on a formula can seem inflexible or overwhelming. Plus – numbers. Yikes.
A lot of times you may plug your components into a pricing formula, and the number it spits out seems crazy or unrealistically high. So what do you do? Throw out the equation and decide to just wing it instead. Compare your products to other shops and set your prices accordingly. Take a stab in the dark.
However, using some sort of basis or thought process for setting your prices is important for so many reasons. Here are my top 4 considerations for why you should be using a pricing formula in your pricing strategy:
It forces you to consider your costs.
I’m not even going to dive into the specific components you should use in your pricing equation (although I do have a suggested worksheet with my personal pricing formula available for free right here). There are all sorts of different variations on calculating a retail price for your goods, and there’s not really a right or wrong way.
Most suggested formulas include the cost of the product or materials in the good at a minimum. Knowing how much an item cost you to create is an essential step in figuring out a profitable sales price. Skipping over the process and not knowing how much you spent on materials in your finished good (or at the very least, a basic estimate of those costs) is just bad business. You can’t know how much money you’re making on a sale if you don’t know how much the item cost you to begin with. This is what leads to making sales but ending up with zero in your bank account in the long run.
It forces you to value your time.
Most pricing equations include some sort of labor component or a variable where you pay yourself for your time. This is so important to not forget. You want to make sure you’re building this into your pricing strategy. Your time & energy is definitely worth something, especially considering this is your business and hopefully not a hobby. Making enough of a profit to pay yourself keeps you happy and fulfilled with your work. Making barely enough to cover your costs leads to that bitter, resentful feeling every time you make a sale or get custom request.
It forces you to consider the profitability of each product.
Using a pricing formula to set a base price for your goods forces you to take a closer look at whether the item is truly profitable or not. If you’ve ever walked through a formula and calculated a price that makes you scratch your head and say, Huh? I have to price my earrings that high just to make double my costs and cover shipping? Then you know what I mean.
Any basic pricing process that forces you to take a harder look at your good’s profit margin (sales price minus costs) is a good thing. You may love creating something in particular, but if you see it’s not going to make you a profit – you can make changes sooner rather than later. You can use this info to make smart decisions, like source a less expensive supplier, raise the sales price, or scrap the product altogether – before you start losing money.
It gets you out of comparison mode.
In an ideal world, we’d set sales prices for our handmade products based on a pricing formula and some internal qualitative factors. We wouldn’t bother with checking out what the rest of Etsy is doing (especially now that it seems like there are so many sketchy manufacturers competing with us there!).
I know that’s just an ideal scenario, but using a pricing formula is a more objective way of coming up with a sales price. And honestly, if your end goal is to be a profitable, sustainable business, then it should be the most important consideration. Then you follow that up with seeing what the rest of the market is doing.
Starting the pricing process by scoping out your competition is not a good thing. Basing your pricing on an objective formula gets you out of comparison mode and the pressure to compete.
Hopefully I’ve convinced you that, at the very least, using a pricing formula can be an important component of your pricing strategy. Don’t give up on your formula just yet. Use it as a starting point and learn how to tweak it to make it work for you. If you need help getting started with the flexible pricing formula that I recommend, grab your free worksheet right here.