How To Keep your Product’s Price Competitive

There are many different pricing formulas out there and different ways to get to a retail price. 

Some are better than others (I personally find my method gives me the most accurate pricing…you can check that out here).

Even with all the different ways to price, many people email me or leave a comment fretting about how high their prices are when they plug their numbers into pricing formulas.

So this is a different approach to setting your product prices. 

It certainly won’t work for every business.

But it may be helpful to those who are new to running a business and don’t have a clue what their costs are or what to charge. 

This approach may also be helpful if you’re thinking about starting a business, and want to determine if you can be profitable selling the items you plan to make. 

 

How this pricing method is different

This pricing method is basically reverse engineering a price. 

When pricing your handmade products, you typically should never choose a price based on your competitors’ pricing. 

This is because you likely have different expenses and using a competitor’s price may not cover all your costs. 

But the way of pricing explained in this article doesn’t ignore your costs. 

It’s setting a price and then using that price as a budget. 

You must find a way to cover material and labor costs, overhead costs, profits, and discounts within that price. 

Here are the simple steps to follow.

 

Step 1 – Set your pricing budget

It’s important to compare apples to apples and find other handmade products. If you try to compare your prices to items that are mass produced by machines, this won’t work. 

*It can be hard to tell the difference between a handmade product and mass produced on on Etsy. But if a price is significantly cheaper, it’s likely mass produced. Disregard these items and their prices.

Etsy is the easiest platform to use for this pricing strategy, as you can analyze hundreds of products. But if you plan to sell your products through local shops, or at craft shows, you can also gather pricing information from those sales channels.

I’ll use Etsy for my research in this example.

Search your product on Etsy, and look for items similar to the one you make (or are planning to make).

Choose one as close to your product as possible. For example, it should be similar:

• Size
• Material
• Quality of material
• Quality of craftsmanship
• Quality of photography and branding you’re capable of
• Etc.

You should also filter the results by country to be sure you’re looking at products that are made in a similar location to yours (as material costs, shipping costs, etc. can vary from country to country). 

Gather several comparative listings to create a price range, based on your competitors’ prices.

For example, if I’m planning to sell vinyl cosmetic bags, I would search “vinyl cosmetic bag” on Etsy and sort through the results to find several that are similar to what I plan to make. 

I find products that are similar shape, size, and material with the prices:

• • $35
  • $47.99
  • $40
  • $50

Now I’ll take the average of these prices to get a realistic price for my product. 

Add all the prices together, and divide that number by the number of prices you have.

For example:

35 + 47.99 + 40 + 50 = 172.99

172.99 divided by 4 = $43.24

I’m going to round my number up and use $45 as the average price I’d like to aim for.

Now we have a budget to work with. 

My product’s budget is $45.

 

Working within the budget

The following steps will help tell us if we can work within that budget. 

We know we need to profit from each sale and we know there are costs associated with making, marketing, and selling our product.

We’re going to find out how much money we have left after we deduct our known costs and profits.

 

Step 2 – Deduct profit

A business must profit from the sale of its goods, or it won’t be in business for long. 

You can set your profits based on your business model and goals. 

For example, if you think you’ll sell high volumes of product each month, you may set a lower profit margin (e.g. 5%). If you can only make and sell a few items per month, you may want to set higher profit margins (e.g. 20% +).

Perhaps you have big plans and want to put the majority of profits back into your business so you can grow it each month, so you want a higher profit margin per sale (e.g. 20% – 25%). 

You can set your profits based on a margin you’d like to hit, or you can set a flat rate.

For example, if I want to be able to invest $100 back into my business each month and on average, I can sell 20 bags per month, I would need to profit $5 per sale to accumulate $100.

Determine the profit number or profit margin you’d like to earn per sale and deduct that amount from your existing budget.

For example, let’s say I’d like 20% profit margins.

$45 x 20% = $9

Of the $45, I need to set aside $9 for profits.

I have $36 left in my budget to cover costs and offer discounts.

 

Step 3 – Deduct Costs

When running a handmade business, you’ll have production costs and overhead costs to cover. 

Make a list of any costs associated with making, marketing, and selling your product, as well as operating your business (e.g. responding to emails, paying for licenses and permits, office supplies, etc.).

Start with the known costs associated with each sale.

For example, to sell a vinyl cosmetic bag, I will have the following costs:

• $20.28 Productions costs – materials and labor to make one cosmetic bag.
• ($5 Shipping fees) – although I may pass the shipping fees on to the customer and it’s not a cost I must cover, I do need to know the average cost to ship my item, as that will impact how much Etsy will charge me in fees.
• $5.20 Sales channel fees – how much Etsy will charge me in fees when I sell a bag through their platform at $45 + $5 shipping.
• $2.60 Order fees – I will need shipping supplies to package my order, as well as my time to pack and ship the order.

There will be other costs, however, I may not have a clear idea of what my marketing and admin costs are per product at this point.

Subtract your known costs per sale from your current budget (i.e. price minus profits).

For example:

$45 – $9 = $36

$36 – $28.08 = $7.92

After deducting my profits and known costs per sale, I have $7.92.

Play around with your numbers, based on the different sales channels you plan to sell through. 

For example, if I plan to sell wholesale to retailers, I know they want a 50% discount on my retail price. I may lower my profit margin per sale, because I know I’ll be selling my items in bulk to retailers, so I’ll plan to gain higher profits through volume (rather than higher profits per sale).

• Wholesale discount = $22.50
• Production costs = $20.28
• Order fees = $1.60 (although I may need to spend a little more on a bigger box to ship a bigger order, I won’t spend as much on marketing material, crinkle packing paper, tissue paper, and stickers.)

Total = $44.38

$45 – $2.25 (5% profit margin) = $42.75

$42.75 – $44.38 = negative $1.63

Even with the lower profit margins, I would be losing money when selling my products at wholesale prices.

If I wanted to keep my retail price at $45 and be able to sell wholesale, I would have to find a way to get my production costs down.

 

Step 4 – Assess remaining budget

At this point, you can check in with your remaining budget and assess whether or not you have enough money to cover the expenses you haven’t calculated. 

If you only have a dollar or two left, you’ll have to go back and rework your numbers to see if you can find a way to get your costs down. 

• Can you source your materials for cheaper prices?
• Can you find ways to speed up your production time?
• Can you buy shipping materials at wholesale prices to get those costs down?

In my example, when selling direct to consumers through Etsy, I have $7.92 left.

That seems like a healthy amount to cover a portion of my “unknown” monthly overhead costs or to offer discounts to customers. 

I would still walk through a month of operating my business to estimate as accurately as possible my total overhead costs per month and what those work out to per item made or item sold.

For example, if I have an additional $100 in overhead expenses to cover each month, and I typically make 20 bags per month, that works out to $5 in additional overhead expenses per bag. 

I would have money left after deducting the $5 from $7.92.

 

Make sure you can realistically stick within your retail price budget while profiting and covering all known and potential costs.

If you don’t have money left over, or don’t have enough, you’ll have to think outside the box to get your costs down.

If you already have your business up and running, you can’t keep doing what you’re doing and expect to hit your new pricing goals.

For example, if I’m currently buying my fabric from a local fabric store and vinyl is $50/yard, I won’t be able to price my vinyl cosmetic bag at $45, cover all my costs and be left with a profit.

I need to explore fabric resources outside of what I already know and use.