©Aksonat / Adobe StockNot all creative types share a general distaste for math, but lots of us do. Unfortunately, if you hope to run a profitable Etsy shop, you need to get comfortable with doing a little arithmetic, especially when it comes to pricing your pieces. But don’t freak out! We’re not talking calculus here, or even trigonometry. All you have to learn are two very simple formulas:
Wholesale price = (materials + labor + overhead) x 2
Retail price = (wholesale price x 2) + shipping
Calculating the cost of materials
When calculating your cost for materials, include the price of every little component in your piece. For example, suppose you sell handmade puppy plush toys for babies. Your material cost for each toy may include the cost of fabric, a label, rickrack, stuffing, and thread.What matters here is the cost of what you used to produce one piece. For example, suppose you spent $125 on materials to produce 50 plush pups. To calculate the price of materials per piece, you divide $125 by 50, for a total of $2.50 per piece.
Figuring labor costs
What if, while perusing the want ads in your local newspaper, you happened upon this listing:Wanted: Skilled professional to expertly fabricate product by hand. Must also run every aspect of business, including sourcing supplies, maintaining and marketing shop, interacting with customers, and ensuring that items sold are artfully packaged and shipped to buyers. Pay: $0.Odds are, that’s a job you’d pass up. And yet, many Etsy sellers pay themselves exactly nada to run their shops. Don’t fall into this trap! Like anyone, you deserve to be compensated for your work. Your pricing formula must include the cost of your labor.
To calculate your labor costs, first set an hourly rate for your time. Be sure to pay yourself a fair wage — one that accounts for the skill required to craft your piece. Also think about how much you want or need to earn for your time. If you’re just starting out, you may opt for a lower hourly rate. You can give always yourself periodic raises as your skills improve.
Another approach to figuring your hourly rate is to work backward. That is, figure out how much you need to be able to “bill” for each day and divide that by the number of hours you intend to work. So say you need to earn $160 a day and you plan to work eight hours a day. You simply divide $160 by 8 for an hourly rate of $20. We aren’t saying you should charge $20 an hour! This is just an easy round number that works well for this example.
Armed with your hourly rate, you’re ready to work out your labor costs. These costs must take into account the time it takes to design a piece, shop for supplies for the piece, construct the piece, photograph the piece, create the item listing for the piece (including composing the item title and description), correspond with the buyer, and package and ship the item.
As with materials costs (described in the previous section), you can amortize some of your labor costs — that is, you can spread them out. For example, if it took you four hours to develop the design for a piece, but you plan to make 50 of them, you can amortize those four hours over the 50 finished pieces. Similarly, you likely shop for supplies for several pieces at one time, meaning that you can spread the time you spend shopping across all the projects that you plan to craft using those supplies.
If you’re collaborating with others, you want to make sure that you include the cost of their labor as well!
Let’s use those plush toy pups as an example. Suppose you spend four hours designing your toy and another hour shopping for enough supplies to construct 50 units. Assuming that your hourly rate is $20, your labor cost is $100 — or, spread out over 50 toys, $2 per toy.Suppose further that each toy takes 30 minutes to make, photograph, and package ($10 in labor). (Yes, we know, 30 minutes is on the low end. Humor us. It makes the math easier.) Your labor cost per toy is then $12.
Underestimating the value of your work doesn’t just hurt you; it hurts everyone who’s trying to earn a living selling handmade goods. Deflated prices are bad all the way around!
Adding up overhead
Your overhead may encompass tools and equipment used in the manufacture of your products, office supplies, packaging supplies, utilities (for example, your Internet connection, electricity used to power your sewing machine, and so on), and Etsy fees. (Note: These costs don’t include shipping. You generally calculate these costs separately and pass them along to the buyer. More on shipping costs in a moment.)As with labor costs, you need to amortize your overhead costs — totaling them up and then spreading them out over all the items you make. As a simple example, if you calculate your monthly overhead at $50, and you produce 50 pieces a month as with those plush pups, your overhead is $1 per piece.
Of course, this calculation gets tricky when your overhead involves purchases of items like tools and equipment used in the manufacture of your products. In those cases, you want to amortize the items over their life span.
For example, maybe you’ve bought a $250 sewing machine that you plan to use for five years. In that time, you anticipate that you’ll sew 500 pieces. Your overhead for the machine is then 50 cents per piece.
If you simply can’t face calculating all these overhead costs, add up your materials cost and your labor cost for each piece you make, multiply the sum by 10 or 15 percent, and call that your overhead. It won’t exactly reflect your actual overhead, but it’ll probably be in the ballpark.
Understanding the “times 2”
Earlier in this article, we provide the wholesale pricing formula, which calls for adding together your costs for materials, labor, and overhead and then multiplying the sum by 2. What’s up with that?That “times 2” covers a host of things. It’s your profit. It’s what you invest back in your business. If your sewing machine breaks, the “times 2” is what you use to buy a new one. If you decide to expand your product line, that “times 2” is where you find the capital you need to grow. Or you may just use your “times 2” to build a nice nest egg for your business or a fund to fall back on if times get tough.
You may feel uncomfortable with all this two-timing, thinking that your labor costs are your “profit.” Don’t. Yes, you may be paying yourself to make your products, but if your business grows, that may not always be the case.
Multiplying your costs by 2 enables you to ensure that your business is profitable, regardless of how it’s structured.
Pricing for wholesale and retail
As the proprietor of your own small manufacturing business, you need to establish two prices for your goods: the wholesale price and the retail price. The wholesale price is for customers who buy large quantities of your item to resell it. That customer then sells your piece to someone else at the retail price, which is usually (though not always) double the wholesale price.As mentioned, to determine the retail price, you typically multiply the wholesale price by 2 and add shipping costs. Some sellers choose a higher operand — for example, multiplying the wholesale price by 2.5 or even 3 to determine the retail price (assuming that the market will bear it).
We know what you’re thinking: “I’m going to sell my stuff only through my Etsy shop, so I’ll just charge everyone my wholesale price.” Right? Wrong!Even if you plan to sell your items exclusively through Etsy, you need to establish both a wholesale price and a retail price, and you need to sell your pieces on Etsy at the retail rate. Why? Two reasons. First, even if you have no plans to expand beyond your Etsy shop, you don’t want to cheat yourself of the chance to offer wholesale prices to bulk buyers if the opportunity arises. And second, you’ll almost certainly want to run the occasional sale in your Etsy shop. Pricing your goods for retail gives you some leeway to discount them as needed and still turn a profit. (More on running sales in a minute.)
Adjusting for free shipping and handling
Anymore, thanks to big-box businesses (think: Amazon), most online shoppers pretty much expect free shipping — including shoppers on Etsy. In fact, according to Etsy, shoppers on the site are 20 percent more likely to complete a purchase if shipping and handling are free.To facilitate this, Etsy enables shop owners (read: you) to offer a free shipping guarantee. This guarantee automatically applies free shipping and handling to buyers in the U.S. when they spend $35 or more in your shop. Note: As an added bonus, Etsy’s search algorithms prioritize items that ship for free, making it easier for buyers to find them.
If you want to offer free shipping and handling on all orders, not just orders over $35, you can create and apply a special “free shipping” shipping profile.
Ugh. Does all this mean you have to eat your shipping and handling costs anytime people avail themselves of your free shipping guarantee? Negatory. It just means you need to factor these costs into the price for each item you list. So, if shipping and handling an item will set you back $5, you need to up that item’s listing price by that same amount.
Your shipping and handling costs aren’t limited to postage. They also include mailing supplies, like an envelope or box, tissue, tape, and whatnot, not to mention labor.
Enabling the free shipping guarantee
If you decide you want your Etsy shop to offer a free shipping guarantee, you need to perform a few steps to set it up:- Click the Settings link on the left side of the Shop Manager
- Click Shipping Settings
- Click the Free Shipping Guarantee tab.
- Click Get Started to open the Set a Free Shipping Guarantee dialog box and click Set Free Shipping Now.