There are always so many threads about pricing. It’s often a tricky thing. Most people suggest a simple “double your costs” kind of markup. However, if you’re trying to get more precise pricing so you can maximize revenue overall, this article might help. Remember, the idea isn’t always to sell as many widgets as you can, but to have the highest profit margin from those you do sell.

Let’s start with some math. Let's say you’ve got a $50 price point and sell 100 of those every year. What if you found you could move 50% more product by lowering your price 20% to $40. Your total revenue would go from $5,000 to $6,000. Conversely, what if you sold only 20% less product by raising your price 50%? You’d still outsell your original price.

The idea is to maximize your total profitability while, at the very least, covering all of your costs. So to start, here are some cost considerations for all pricing models. Consider this a base.

OVERHEAD.
You may not need to consider too many overhead costs like keeping the lights on, having internet service, etc. Though they contribute to the cost of your business, you’d probably have those expenses without the business. So, for simplicity, you might want to use only those overhead costs that are incurred because of the business, like a postage scale, knitting needles, pliers, paintbrushes and other equipment that you wouldn’t otherwise need. So if you have $100 worth of overhead every year and produce100 items per year, your overhead costs are $1 per item. (If you want to complicate things, some items may require more overhead to product, so you can work that into your model.)

MATERIALS.
This is simple. Add up the cost of materials that went into any given item. Be sure to include seemingly inconsequential materials, like pins, finishing pieces, glue, etc.

LABOR.
You can set your labor rate as an hourly rate you would have to pay someone to do the hands-on work you do. Or, set it by whatever you’d like to make each hour. If an item takes you 30 minutes to make and you want to pay yourself $20 per hour, your labor cost would be $10 for that item. If you want, give yourself an hourly rate of $0. If you enjoy it and would do it without the revenue, there’s nothing wrong with just covering your costs.

A few questions to ask yourself to set your price.

1. Where do you want to go with this business?

A. I want to conquer the world, silly. Go to question 2.
B. I’d like to quit my day job. Go to question 2.
C. I just want to have fun, and don’t want the hassle of managing retailers. Go to question 3.
D. I just want to have fun, but would love to see my work in retail stores. Go to question 4.

2. Since your business is more than a hobby, odds are you’ll have to distribute to retailers in order to generate the kind of revenue you’ll need to generate to keep food on the table. It’s not mandatory, but it really helps. Wholesale lets you move a lot of product and generate a lot of revenue in a short period. So, do you ever think you might maybe in a zillion years want to do wholesale (sell to retailers at a different markup from the consumer markup)?

No? Go to question 3.
Yes? Go to question 4.

3. Okay, so you’re just having fun. If that’s the case, keep your pricing simple. A lot of people start with this kind of formula: (OVEREAD + MATERIALS + LABOR) x N = PRICE. Where N is some markup percentage. Many Etsians use a 100% markup (essentially doubling the cost of overhead, materials and labor). This is always a good place to start. It’s simple and you can watch how your product moves. If you find that your pricing isn’t working, go to question 5.

4. If wholesale is in the equation, you’ll need to get your head around setting a different markup than you otherwise would. Most retailers purchase items at half of what they sell them for. So if you sell an item to them for $10, they’ll turn around and sell it for $20.

A mistake many people make is thinking in terms of the discount off of their retail price so they think they’re losing money. However, if you’re building your pricing with retailers in mind, you can reframe your brain to think in terms of marking up, not cutting back.

Because retailers typically want to pay half of whatever you’re selling the product for online or at craft fairs, you’ll want use this kind of formula: (OVEREAD + MATERIALS + LABOR) x N = WHOLEALE PRICE (W). Where N is your markup percentage. Choose any number you like, but I’d recommend somewhere between 20% and 200%. To get a retail price, multiply W x 2.

If you don’t think you can move product at this price, go to question 5.

5. So, your pricing model isn’t working the way you want. Well, there might be other reasons you’re not moving product (not enough promotion, not understanding your market, etc.), so you’ll want to investigate those as well. But if you’re pretty sure pricing is an issue, ask yourself a few more questions. First of all, how saturated is your market?

A: Not at all. This is a completely, absolutely, fundamentally unique product you can’t find too many places. Go to question 6.
B: Somewhat. There are others out there, but there’s room for me. Go to question 6 (but also read C: Very. There’s a lot of competition. Go to question 7.

6. Are you sure people even WANT this terribly unique product?

Yes. Go to question 8.
No. Go to question 9.

7. Well, that can be tricky. When there’s a lot of competition, price often becomes a variable. After all, it’s easy peasy for someone to choose any of your competitors. There are some things you can do:

A) LOWBALL. Price lower than competitors to enter the market, with intent to raise prices later. This works particularly well for items people will purchase regularly like soap, food, etc. Also useful if product is highly elastic (if customers react dramatically to small price changes).

B) ADD VALUE. Align price with competitors, but price higher by adding value. Offer returns (including shipping, if necessary) where competitors don’t. Include free gifts. Ship next day. Do something extra for customers that they’ll want and be willing to pay a premium for.

B) BE MORE UNIQUE. This may require a fundamental change in what you produce, but the more unique you are, the higher a premium you can charge. Turn repeated products into true OOAKs. Use harder-to-find materials. Find some way to differentiate.

Go to question 10.

8. Lucky you. You’ve got an elite, in demand product with an unsaturated market. Guess what? You have the ability to charge a premium for that! In that case, play with your price. Use the old formula, but raise your markup by 2 fold, 3 fold, or whatever factor “feels” right. There is a value in uniqueness, so charge for it while you can.

Remember, though, that elite products go with elite service. Offer returns including shipping if you don’t expect many returns (or work it into your price). Make sure your packaging is spot on. Make it easy for customers to contact you and respond within a few hours. Make guarantees where you can. Heck, even toss in a free gift. After all, with the right markup, you’re working ALL of that kind of elite service into the price.

Go to question 10.

9. If you’re not sure people want what you’re selling, you might not yet have identified the right market. Go back to the drawing board (look over question 3), cover your costs, and spend your energy finding (and speaking to) your market. Worry about locking in your pricing later.

10. There are other things you can do, as well.

VALUE-BASED PRICING. For instance, have you got a product where you can charge a price based on its added value to the buyer? Graphic designers and other service-oriented sellers are prime for this. Disregarding how much time you put into it, you might be able to create more sales by letting the anticipated revenue you contribute create the price. For instance, if a customer sells $1,000 worth of product every year, but by giving them a logo you help make it $1,100, charge $100 for your logo.

TREND-PRICING. Not sure if this is an official term, but if your item is hot and trendy, you can charge more for it at the start. Apple does this religiously. iPhones were $499 when launched. Now you can get one for $200. If you’ve got something that’s hot, hot, hot (and hard to find, ideally), you can charge a premium for that and net greater revenues initially.

PORTFOLIO PRICING. If you sell many kinds of products (earrings, bracelets, and rings or hats, scarves, and mittens), you can create a more complicated pricing model based on demand. If customers seem to like your earrings more than your rings, you can use a higher markup for them. Using different markups can complicate things, but if you don’t mind that you can figure out how to maximize revenue.

Now, I didn’t go into how to test, analyze, and understand which strategy will work. I only presented what I feel are some of the more likely options for people on Etsy and the like. Maybe I’ll do something about that another day. In the meantime, Google “small business pricing strategies” to get some ideas.

Posted at 3:38 pm Sep 20, 2011 EDT