You may have heard of market-based pricing and cost-plus pricing, but which one is a better method of pricing on Etsy? Which should you be using in your shop to make sure that you’re not leaving money on the table and you’re covering all your costs? That’s exactly what we’re covering in this episode of the Jam!
Our conclusion
Today, we’re talking about pricing again! This is the long-awaited conclusion to our three-part series about pricing. The first episode (if you haven’t seen it already, you should check this out before watching the finale) was all about market-based pricing. The second episode (you should also check this out because we’re not really going into much detail in this episode) was on cost-plus pricing.
Which is better pricing on Etsy?
Now in this episode, we’re going to be talking about the answer to the question of which of those two is better. Which of those should you be using for the pricing in your shop? Is it market-based? Is it cost-plus, is it some combination of the two? What does that look like? That’s a good question!
Here’s a quick reminder:
Market-based pricing
Market-based pricing is the understanding of what buyers are willing to pay for your product. Buyers don’t care what your costs are. We can’t say that enough! They care about their money, not yours. That’s the same way you feel when you’re a consumer. They want to trade their hard-earned cash for what’s valuable to them, and they won’t pay a penny more than it’s worth. That’s market-based pricing.
Cost-plus pricing
Cost-plus pricing is figuring out what it costs to make your product, tacking on a profit margin, and BOOM, there’s a price. It’s the simplest way to price your product, but the simplest is not always the best. There are advantages and disadvantages to it, so let’s discuss how they both fit for you.
Clearing up any confusion about pricing on Etsy
First things first, we want to make sure you’re not confusing “knowing your costs” with cost-plus pricing. Those two are NOT the same. It’s important to know your costs when you’re doing cost-plus pricing, but that’s not all there is to it. And yes, you should absolutely know your costs; otherwise, you won’t know if it’s worth it to even make what you sell. Cost is a great place to start! Get a handle on what it costs to make your product, and then look at the market for that product.
A soap example to pricing on Etsy
If it costs you ten dollars to make a bar of soap and you see similar items priced at ten dollars, right away, you see there’s a potential mismatch. Either margins in general on soap are very slim (meaning that business survives on volume), or you’ll need to find a way to reduce your cost because they’re just too high.
With either of these options, you’ll have higher than average costs, and that will price you right out of the market since buyers may not be willing to pay your higher than average prices. This will tell you very quickly if a market is better passed up — and maybe, you’re not looking to be in a volume business.
Please don’t stop there!
Cost-plus pricing is a great place to start with your pricing, but you shouldn’t stop there! You don’t want to just use that. You want to consider market-based pricing too! This is because cost-based pricing won’t tell you what your product is actually worth, and it won’t tell you what the market is willing to pay for your product (which is very important to understand).
Here’s a quick scenario: Your costs as you sell might go up (or down)! Your supply prices may even go up. That doesn’t mean that the market is willing to pay more for something just because your material prices have gone up. This is something that you need to be aware of and understand.
We’re looking at you, Netflix
I mean, think about when Netflix raises its prices! They’re like, “Hey, we’re adding more stuff here! We’re doing this. We’re doing that. And so… we’ve got to raise your prices.” Yup, people were mad they raised their prices! Because it’s all about what’s in it for me.
If I just want to watch episodes of The Office and suddenly you don’t have The Office, well, I don’t care what else you add for someone else! Ultimately, the market determines what your products are worth. Not your costs. It’s true, costs go up and down. That doesn’t change the willingness of customers to pay. They still want that thing that they’re for.
An exception for essentials….or not
Now, sure there are essentials like milk and eggs. There’s some wiggle room there. If these prices go up a little bit, you might complain about them, but you’re still buying milk and eggs. Even then, though, we’ve read studies that there’s price elasticity with those.
What is price elasticity?!
Here’s an example of what we’re talking about. Basically, what happens is we buy more milk when it’s less expensive. Maybe you buy meat on sale. We know we do! You know you probably do as well! You’re looking to grill, you’re like, “Oh, what should I grill? Should I get steak? Should I get burgers?” You get to the meat section, and you’re like, “Oh dude, rib eyes on sale!” And you’re all over that…. unless you’re vegetarian, and then, here’s looking at you tofu/soy products 😊
Thinking about the markup
And that has nothing to do with what it costs the store to buy from the farmer or the farmer to raise and process it. We don’t care if they’re selling at a loss just to get it off the shelf before it expires.
We’re never like, “Hmm…they want $13.99 a pound for this. What do they pay for it? What’s their markup? You know what, I’m going to offer the store $10.00 and see if they take it!” That doesn’t go through our minds! It’s just whether or not this is worth it for me.
Like peas and carrots
One of the most important takeaways here is that these two methods of pricing go hand in hand. There are pros and cons to each of them, and the nice thing is that the pros from one of them help you with the cons to the other one. This is why it’s important to be doing both of them!
Utilize both for pricing on Etsy
You need to know what your cost-plus pricing is. Because if you have an idea of your cost (again, you are not going to be spot on, don’t get crazy with it) and what you’d like to make, that’s your baseline. Consider this more of your minimum.
Then, if you do your market research and it’s less than that, you’ve got to decide if you want to make this product and sell in this market and make less than this amount. Because that means you’re making less profit than you planned to. If the price is higher, that’s awesome because you’ve just established that the market will support more than your minimum.
A quick recap to pricing on Etsy
Hopefully, you now understand these two ways of establishing your pricing and how they should be working together. If you’re already practicing cost-plus pricing, make sure you look at those markets!
Run those keywords through Marmalead and see what that pricing spread looks like to make sure that you are, in fact, at the right spot. It’s a good opportunity to go through your products and increase your pricing if needed. If you’re trying to target bargain bin items, then make sure you’ve adjusted accordingly for that too and that your costs are being covered.
The markets broken down in Marmalead
Be aware when you go into Marmalead, and you’re looking at the pricing tools, that we break things out between those value brands (which will be more of a volume for profit). You’re going to need to churn out more products, which means more orders, more shipping, but lower margins in general. Then there will be the midrange (which can be harder to differentiate between).
Those luxury items
Then you’ll have the premium or luxury goods market. If you read different information on retail, you’ll find that luxury goods have huge profit margins. Louis Vuitton, Gucci, these high-end brands are not more expensive to make. They are simply in high demand. They’re premium, you’re purchasing “luxury” goods, and their profit margins are outrageous.
Keep all this in mind for your market and what you’re doing. There’s nothing wrong with this. If your quality supports high-end, luxury pricing, then awesome! This is what being an artist who makes handmade products is all about! If your customers wanted something cheap, they wouldn’t be searching out handmade products. They wouldn’t be going for a boutique experience. Ultimately, they wouldn’t be coming to Etsy.
Final thoughts for pricing on Etsy
So there you guys go! There’s a pretty good overview of diverse ways of pricing your products and how to make sure that they’re working together in the best way possible for you.
If you have questions about it, or if you want to tell us stories about how you handle your pricing in your shops, definitely chime in in the comments below!
Happy selling, everyone!
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