Beth is an admin at Etsy on the Business Operations Team. She is writing about pricing in a multi-part series, so ask her your questions in the comments below.

Many artists set a price, stick to it and hope for the best. On Etsy, many people worry about the fine line between friendly competition and un-neighborly behavior in an often cooperative, community marketplace. However, there are approaches that can help make pricing easier and less stressful. So how do you approach your pricing strategy in this complicated context, you might ask.  Read on and get ready to do some strategizing! 

Cost-plus pricing — In my last article, “Consider Your Costs,” I discussed “cost based” or “cost plus” pricing. This is about getting an understanding of your total costs and applying a “wage factor” (how much you want or need to make on each item). This approach is important as a baseline, but is even more powerful when used with other pricing strategies discussed below.

Competition-based pricing — Simply stated, this is figuring out what your competitors are charging and adjusting your prices up or down accordingly.  This research should be done both on and off Etsy to give you a full range of prices for similar items. Once you have this range, evaluate your product against the similar products you found.  It is important to think about who you are competing with. Your competitors may not be someone who is making something very similar but someone who is targeting the same customer.  For example, think about your product not only as a wooden puzzle, but as a gift for a 6-year old boy.  This way you can compare your pricing more broadly.  Also ask yourself the following questions:

• Why should a customer buy my product instead of the other products out there?
• What is the perceived value and benefits of my product? How much does my customer think my product is worth?
• Is my product made of better materials? 
• Does my product have more intricate work or design elements?
• What is my reputation in comparison to the other artists making similar items?
• How differentiated is my product?  What makes my product unique and special?
• What is going to make me successful over the long term?  

So what do you do with the answers to those questions? Most of the questions above are to help you create your product positioning and give your customer a reason to buy your product.  Tell your customers what is distinctive about you and your product, which is something your competitors can’t reproduce.

It will not be unusual for your competitors to respond to your pricing move.  If you price at the low end of the market, some competitors may respond by lowering their prices below yours. You can do a strategic brainstorm where you anticipate reactions from your competition and prepare accordingly. 

But beware! This behavior can be a trap, a vicious cycle that will squeeze all of your profit in the blink of an eye.  Focus on what your customers are doing, if you are making sales, and adjust accordingly. If you are not making sales or see a drastic reduction in sales, evaluate your competition's strategy as well as sales records. Consider these factors when making an additional pricing change.  Leave cut rate pricing to Walmart.

 
Demand pricing  — This concept is determining what customers are willing to pay for your product ($200 for a tiny bottle of perfume or $4 for a cup of coffee, for example) and setting the prices based on this demand.  For example, one of our admin sellers, Reconstructionist, who designs handmade undergarments, realized if someone was in the market for an $18-$20 handmade garment, they probably would not be deterred if the price point went up to $35-$40. This seller increased her prices and did not see a drop in demand.  Her customer base valued the style and uniqueness of her products. "I went and did price research in boutiques as well as on Etsy. I figure it's more important to make a profit than to sell a ton and have to make a ton." 

Sometimes this is described as the price “the market will bear” — which means exercising your ability to charge more for a product that is seen as valuable or unique. This can be challenging and may take some experimentation on your part.  Test an increase in price on one of your products and track the progress.  I have heard many Etsy seller success stories using this tactic.

Another way to test demand is to have a good range of prices in your shop.  One seller who does this well is Flyballbags. Not only does she have the opportunity to gain trust with customers on less expensive items, she has lots of information about pricing her products, which will help her price her new products in the future.

Avoid asking friends or people in the forums what is the “most they are willing to pay” for your specific item.  People will perceive you are negotiating with them and the answers will inevitably be biased. You might ask, for instance, how much they expect to spend on a birthday gift for their nephew. Kfarrell, an Etsy admin seller, realized that when people are shopping for gifts for friends and family "$5 earrings? Naaahhh. Oh, but $15 earrings as a gift is good." The perceived value here comes into play, along with how people perceive themselves. In other words, people want to think of themselves as hitting that generosity sweet spot, between finding a good deal and being a spendthrift.

All of these approaches should be used when making a decision regarding pricing. One example of using a combination of approaches is from entrepreneur Rena Klingenberg, who outlines her formula for jewelry pricing on her website. She explains that her pricing strategy not only compensates her fairly, but more accurately reflects what the item is worth to the buyer.

In general, most entrepreneurs — not just artists and crafters — price too low. When this happens you run the risk of difficulty or resistance to increasing your prices. If you want to build traction and a reputation, one way to get around this is to announce the pricing as “Special pricing” or “Introductory Discounts” and let the customer know what the expected regular price is immediately. This will give you flexibility to test the market price and improve your pricing later. 

Regardless of your approach, being systematic will give you confidence in your pricing decisions and the information to adjust as needed.  

Check back in next week, when I'll be discussing price as indicator of value.