Are you covering all your expenses in your prices? At the end of the day, when you make a sale, are you covering all your trips to the post office and all those other little things that go into your time and energy that you spend on your products? In this episode of the Jam, we’re going to look at cost-plus pricing for Etsy, which is one way you can make sure you’re accounting for these things.
Part two of three on pricing
You have just joined us in the middle of a three-part series on pricing! So in the first episode, we talked about market-based pricing. If you haven’t checked that one out, you should probably do that first! This is episode two, and we’re talking about cost-plus pricing. Then in episode three, we’re going to compare and contrast the two of those against one another.
Cost-plus pricing for Etsy… what is it?
Cost-plus pricing for Etsy is figuring out what it costs to make your product and tacking on a profit margin. And boom, there’s your price. It is the simplest way to price your products. However, as we know, the simplest is not always the best.
There are advantages and disadvantages to cost-plus pricing like everything else. So let’s dive into some pros and cons of cost-plus pricing for Etsy.
A great handle on it
The first pro is that you’re going to have a very good handle on your product costs. You’ll also be able to set a profit point that you’re happy with for selling that product. This is a great starting point! Don’t sell yourself short, and make sure that you’re making money, not losing money. You don’t want the heartache of finding out months later that you don’t have control of your costs. You want to make sure your bank account isn’t getting smaller and that it’s growing!
Cost-plus pricing for Etsy is really easy
The next pro is it’s really easy. You run some numbers real quick, throw in a profit, and again boom, you have a price. You didn’t have to do a whole lot aside from figuring out what it costs. Let’s say you buy one hundred widgets that go into your pricing. Use four of them, and you know that 4% of whatever it cost you for those one hundred widgets go into your product price. You add that up in a spreadsheet and, boom! You have a price.
It’s also popular
Another pro is that it is such a popular way of doing pricing. There’s a chance that your entire market may be made up of competitors that are using cost-plus pricing to calculate their prices. You could end up in that spot anyway, even if you were doing market-based research for your pricing.
A new market
It also works well in a market that’s super new. If you’re saying, “Hey, I’m kind of creating this market! There’s nothing really in this market, and no one really does it like this,” well, this is probably a great starting point for you. In your market research, you’re not going to have a lot to bounce off of.
Bounce, bounce, bounce
Now, we suggest that you do your cost-plus pricing because it’s super new, and it’s going to give you a great starting point. But we suggest that you still bounce it off of some things, even if it’s different. Maybe this market over here is a little bit lower. This other one is a little bit higher. But you figure out, “Hey, I think these fit in here,” and cost-plus is a great start to figuring out where everything fits and being sure you’re not selling yourself short or going too high.
Cost-plus pricing for Etsy is not all sunshine and roses
So those are some pros for cost-plus pricing, but there are also some cons. We’re going to run through those as well! The first con is you might be underpricing your products, and that’s a huge con. You don’t want to be earning less than you would with market pricing. You don’t want to be in that position with your products where you’re charging too little. As we mentioned in our last episode, product positioning is important! If you charge too little, customers will equate this with a lower quality product instead of a higher quality product.
Too much! Too much!
Another con is that you might do the research and find out that your costs are higher than what the market is willing to pay. You end up calculating what your price should be and end up way too high. Which you don’t know because you haven’t done the market research yet. You start selling it on Etsy, and people aren’t willing to pay the price, and you’re not getting sales, but you have no idea why.
You might think there’s just not a market for that product on Etsy, which probably isn’t true. The real problem is your pricing. Do your market research, adjust your pricing (even just a small amount), and you might be surprised to see that you’re not just selling, but you might be selling a lot!
FOMO (Fear Of Missing Out)
Kind of hand-in-hand with the con above is another con. You could be missing out on the ability to position your product relative to other ones in your market. Now, what do we mean by that? We mean that you are missing out on the ability to say, I’m trying to sell a bargain-level product. I want to be lower than the average market cost. Or on saying, I want to be right in line, or I want to be a premium product. If you went ahead and calculated your cost, added in what profit you wanted to make, and listed your product as a premium product, that just kind of happened.
Missing the boat
You missed out on the ability to understand that that’s what you were doing. Yet, if you knew that’s what you were doing, you would be able to adjust for that and say, “Look, I’m selling a premium product. This means I need to mention that in my description and tell people why my product is better than others in my market. I need to invest in photos to make sure I knock those things out of the park! I’m really setting myself up as a premium solution for shoppers who are looking for that.”
Now you’re addressing those objections upfront. When customers ask questions like why is this more money, why does it cost this much, you’ve substantiated your price, and customers don’t have to wonder.
Scaling down while using cost-plus pricing for Etsy
There’s another con to think about in all of this. As you grow your business, you’ll benefit from scale such as volume discounts, buying larger quantities, getting bigger discounts for doing that, and making improvements in your production speed. Overall, you’ll lower your overhead per item basis with cost as well as just lowering your prices overall. So, as you improve, you are lowering your prices, and if your profit margins are percentage, you are making less money too because it’s all scaled down with you. It doesn’t make a lot of sense. The whole purpose of improving things and your efficiency is to increase your profit margin, not reduce it.
All those expenses
And another con for doing cost-plus pricing is that it’s really, really, hard to account for all the expenses you incur when you are creating your product. Yes, it’s easy to look at materials and add those things up, but there’s so much more that goes into it than that.
Obviously, there’s your time that you spend on things. There are trips back and forth to the Post Office for shipping. If you’re using any kind of printer or a cutter or electronic device, electricity costs are associated with that.
And as we mentioned above, as you scale up those little, tiny costs that are nickel and diming you here and there, they are going to amount to more and more. You’re putting yourself at risk for underpricing because you’re not accounting for all your actual costs. You could also spend so much time tracking your expenses that that itself becomes a cost! Tracking the cost of just tracking your costs could get nuts! So be careful with that.
Out of the market
The final con from our list is that you may over account for your costs and price yourself out of the market, because like we said, you can go nuts with it! You can either underestimate your costs, or you can overestimate your costs. Now all of a sudden, you’re factoring in that the Post Office line was quite long today, so you were there a little extra time, and you’re going to start factoring that in now.
Next thing you know, you’ve padded up these costs and your profit, which puts you way out of the market. Now you’re like, “Man, why does it cost me so much? How are these people making this for less than me?” When no, you’re just over accounting for your costs here.
Final thoughts on cost-plus pricing for Etsy
So there’s a good overview of what cost-plus pricing is. There’s a good chance you might already be using this on your listings without potentially realizing that that’s how you’re doing your costs or that there’s a whole other school of thought on this.
The obvious question is, which of these two is better? Does it make more sense to do market-based pricing, or does it make more sense to do cost-plus pricing? Or maybe even some crazy combination of the two, and if so, what does that look like? That’s what we’re going to be talking about next time on The Jam! We’ll be comparing these two methods. If you haven’t checked out how to do market-based pricing yet, you’ll definitely want to do that before the next episode drops!
Happy selling, everyone!
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