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How Your Prices Affect Your Business More Than You Think

- September 18, 2013 | by April -

BlogGrocery2

You’ve seen the basic pricing formulas:

(Materials + Labor) x Markup = Wholesale Price

Wholesale Price x 2 = Retail Price 

You’ve run the numbers and wonder if anyone will pay that much for your stuff. And, when you asked your mom if she thought you could sell your hand-knit baby booties for $52, she laughed. Actually laughed and said, “Oh, honey. Make sure you marry rich.” Thanks for the boost of confidence! {P.S. Your mom usually isn’t your ideal customer, so it’s best NOT to ask her for pricing advice.}

You check out your competitors’ prices and throw up a little bit in your mouth. Do they really sell their stuff for half of what you need to sell yours for to make a decent profit? How can you compete with that?

You consider starting out with lower prices in order to get your business off the ground. What could it hurt? You pinky promise that you’ll raise your prices after your first fifty sales.

Instead of the $15/hour you want to make, you realize you’re only making $5/hour, and you cringe because you realize you could be making more working at your local Burger King.

But, then you remind yourself that you’re doing what you love, so it’s okay that you’re only making $5/hour.

Well, it’s not okay. Not if you want to run a viable, long-term business. It’ll never EVER work. Ever. You’ll get burnt out and end up resenting the very thing you love.

Let’s go over the critical reasons you need to price your products with your long-term goal {a successful business} in mind:

Your business won’t grow and support you if you don’t take pricing seriously.

Do you want your business to replace your full-time income? Want to be able to pay someone to redesign your website and an accountant to keep your books? Want to be able to buy that fancy schmancy Nikon you’ve been eyeing and that new Macbook Pro so you can stop working on a computer that’s slower than those damn employees at the DMV who couldn’t care less that you’ve been waiting for two and half hours? Want to make enough money that you don’t have to worry each month if you’ll be able to pay the bills AND eat something other than ramen noodles and Wonder Bread?

Did you say yes to those questions? Then you have to take pricing seriously.

You not only need to make enough to pay yourself, but you also need money to reinvest in your business. And, what about savings? And, health insurance? And, taking a vacation every once in a while?

How will you ever be able to do those things making $5/hour?

The realities of pricing will slam into your chest going eighty miles an hour, and you’ll feel stuck and hopeless.

In the beginning, you may think that sales are more important than how much you’re making.

In my experience of working with hundreds of creative entrepreneurs, many of them get “stuck” in their pricing. They’ve offered the same prices for a year {or two} and then they get worried {like I can’t-fall-asleep-because-all-I-can-think-about-is-my-failing-business kind of worried} about losing most of their customers if they double {or triple} their prices like they REALLY need to.

They look at the reality of how many products they’d have to make and sell to earn enough to replace their full-time income {or at least make it worth it to keep going}, and they know something has to give.

Let’s take a real life example that I’ve experienced working with a jewelry artist.

Her average piece of jewelry sold for $32 {after subtracting fees, shipping and taxes}, and she’d spend about $9.50 in supplies, including shipping supplies.

If we subtract that $9.50, she made about $22.50 per sale.

It took her between thirty minutes and two hours to make each piece of jewelry. Then, it took her an additional hour to take the photos, edit the photos, write the product description and get it listed on Etsy or her own website.

And, we’re not even counting any of the time she puts into marketing like writing blog posts and email newsletters, submitting her work to blogs and magazines, and connecting with customers on social media. Or, the time it takes her to package and ship the product.

Let’s stick with the minimum—the very basics. If it takes her thirty minutes to make the piece and an hour to get it online, that’s one and a half hours per piece. That means, not counting anything else, she’d make $15/hour. If it takes her two hours for creation, she’s earning $7.50/hour.

She wanted to make a minimum of $150/day {five days a week} for a total of $750/week or $3,000/month. So, she’d have to average selling seven pieces of jewelry per day, five days a week. And, if she sold that many pieces each day, she’d have to make at least that many pieces each day—along with marketing, responding to customer emails, shipping the products, etc.

At the point that I worked with her, she was averaging two sales per day and struggling to keep up with everything. But, she wasn’t making enough to hire anyone to help. Eventually, she wanted an assistant who would package and ship the products, take the photos of the jewelry, edit the photos, and get the jewelry listed on her website and Etsy. However, there’s no way she could’ve afford that making what she currently made—and she was already feeling burnt out even though she loved creating jewelry and couldn’t imagine doing anything else.

She raised her prices so that she would average $47 {after fees, shipping and taxes} per sale which meant she made about $37.50 per sale.

This meant she could pay herself more per sale. It also meant that if she could average five sales per day {five days a week}, she’d be making $750/week and have over $180/week left over to reinvest in her business—to possibly hire a part-time assistant.

Raising her prices meant her business could actually work for her.

With her lower prices, her long-term goals were unrealistic. There wasn’t enough time in the day for her to make and sell seven pieces of jewelry per day, five days per week without any help, especially since creating jewelry wasn’t the only thing she needed to do to keep her business running and she was raising two children who also needed her time and attention. And, there was NO money to reinvest in her business—to grow.

After another six months, she raised her prices again, because she was receiving wholesale requests and she wanted to say yes to them while still making a decent profit. She was able to hire an assistant who worked with her fifteen hours/week which meant she was able to spend the majority of her time on the thing she loved the most: creating jewelry.

Afterwards, she couldn’t believe what a difference raising her prices had made. She thought it might decrease the amount of sales she got, but the opposite happened. Her sales increased and she was able to reinvest in her business, making it better and more appealing to her target market.

Do this for me {and for you!} right now. Answer these questions:

1. How much money do you want to make per week?

2. What’s your best-selling product?

3. How much PROFIT do you make from selling ONE of those products?

4. How many would you have to sell per week to make what you want to make per week?

5. Is that realistic? {Can you actually make that many products? Do you think you can get that many sales?}

6. Will you be able to sell MORE than that number in order to reinvest in your business and grow?

This is the bottom line. Your prices have to make sense when you look at how much you want to make and the growth you want to have in your business. Do they? If not, what changes do you need to make?

People make snap judgments based on price.

You might be happy with the profit that you make, but what do your prices say about your brand and business?

When someone sees one of your products, one of the first things she does is look at the price and make an immediate judgment based on that price.

I know it feels icky, but you’re a businesswoman, so you’re going to have to get over it.

Think about your own experiences.

Consider when you’re shopping for art supplies. You know the cheap paint isn’t going to be as vibrant or concentrated as the pricey Golden paints, right?

Or, what about when you’re at the grocery store? Do you think the bargain-priced hot dogs are as good as the premium, all beef hot dogs? {I haven’t eaten hot dogs in a very long time, but I remember turning my nose up at the $.50 packs cause I never knew what was in them.} Or, what about the cheap tomato sauce versus the organic, tomato basil sauce?

Without even thinking, you instantly draw conclusions based on price. It’s natural. We equate “more expensive” with “better.”

A research study at Stanford University and Caltech showed that people got more pleasure out of drinking a $5 bottle of wine when they were told that it cost $45. This means that people even have a different experience when they think something costs more!

Take this into account when you’re pricing your own products and services. If you don’t take your business seriously, no one else will either.

You get different types of customers based on your prices.

Do you want bargain shoppers or do you want customers who adore your product because they LOVE your product?

In my experience, bargain shoppers tend to be pickier, complain more, and are harder to please.

For example, when I raised my consulting prices, I started working my “right” type of customer—the type of customer that was so invested in her business that she’d do whatever it took to make it work. She’d be so excited about the consulting session she could barely sleep the night before. And, she picked ME to work with because she wanted to work with ME, not because she just wanted someone to tell her the one thing she needed to do to be successful {as if that one thing exists}.

You know this is true. When you’re looking for a bargain, you’re not as invested. You just care about what you’re getting for the price.

I’m not looking for that type of customer. Are you?

I’m not saying bargain shoppers are bad. I look for discounts and deals like everyone {This past weekend I got a REALLY good book at Barnes and Noble for $4.99–score!}, but there are certain things I don’t bargain shop for like handmade products. I’m more focused on the product and maker. That’s why I’m so excited by each handmade purchase I make–it’s like Christmas morning when they show up in the mail.

I hope this helps you understand why taking your prices seriously is so super important for the success and viability of your business.

Do you factor in these things when pricing your products? What’s your formula? Please share in the comments below.

44 Comments · Filed Under: Creative Business Development, Success

Comments

  1. January says

    September 18, 2013 at 5:51 pm

    Awesome and so SPOT on!! Thank you for the reminder!!

    Reply
    • April says

      September 18, 2013 at 7:27 pm

      You’re so welcome! 🙂

      Reply
      • Marlene Woods says

        March 30, 2017 at 10:47 am

        I’m stuck in my business. Been making jewelry for 10yrs. now and have many customers that are use to my prices. I need to make more money on my jewelry. Not realizing, I needed to do this as my experience in jewelry making has come a long way. I need to make drastic changes in my prices and don’t know where to begin. Thinking about changing my name and adding more precious metals and gems in. I appreciate any help you can give me. Thank You

        Reply
    • Marlene Woods says

      March 30, 2017 at 10:53 am

      What are your thoughts on changing your business name, because of price changes and higher end pieces?

      Reply
  2. Natascha says

    September 18, 2013 at 5:53 pm

    A super interesting article, thank you so much for this! I am currently reworking my prices. I found for one Item that the materials alone were around 35 USD, and it takes me at least half an hour to make it, and I sold the first few pieces of it for 40 USd including fees…. isn’t that crazy?

    I wonder why it is so hard to value ourselves…

    Reply
    • April says

      September 18, 2013 at 7:26 pm

      You’re not alone! I’ve worked with soooooo many creatives who undervalue their work. I’m so glad you’re reworking those prices! 🙂

      Reply
  3. Mercedes says

    September 18, 2013 at 6:00 pm

    I thought I was pricing my bracelets well according to the formula, but I am in EXACTLY the same situation as your example. And I also sell them wholesale which really pinches. Also, they say if something flies off the shelf it might be priced too low and my Wraps sell like hotcakes. This article came at just the right time!!!! Thank you. I will keep you posted on my changes.

    Reply
    • April says

      September 18, 2013 at 7:26 pm

      Please do keep me posted! I wish you all the best!

      Reply
  4. Vicki Allwardt says

    September 18, 2013 at 6:01 pm

    My favorite art teacher once said to the whole class of 30 students:
    “if you take your things to market (shows, etc) and they don’t sell, RAISE your price!”

    If the price is too low, people also value it lower.

    Reply
    • April says

      September 18, 2013 at 7:27 pm

      Love it!

      Reply
  5. Tabassum says

    September 18, 2013 at 6:06 pm

    Awwe-some article, April! You really drove the point home! I’ve always been worried about putting the “real” prices on my products, but after reading this post, I’m not now 🙂

    Question: how do we explain to people why our products cost more than a competitor’s product? I usually tell people about the story behind my products, but is there another compelling way to do it?

    Reply
    • April says

      September 18, 2013 at 7:29 pm

      Do you often get questions about why your prices are higher than your competitors? I’ve never gotten that question–but I have been asked about certain prices like individual consulting. I try to make it clear where the value lies in the product description, so there’s no question about it. I also believe that if people are hesitant because of the price, they aren’t my target market.

      Reply
      • Niki Jackson says

        September 19, 2013 at 5:11 pm

        That is really helpful to know. Thanks.

        Reply
    • April says

      September 19, 2013 at 11:35 am

      Also, your entire brand should be different than your competitors…customers should come to you because of YOUR brand. You know what I mean?

      It’s like I go to Anthropologie, because I loooooove everything in that entire store. It’s as if someone went shopping for me and put all my favorite stuff in one place. Some of the stuff in there you can actually get for less money other places. Lots of it is unique to Anthropologie, but there are plenty of things I’ve bought there that I could have bought somewhere else, but there my go-to shopping place for clothes and cute house stuff like my adorable spoon rest! 🙂

      Reply
  6. Patricia Paquin says

    September 18, 2013 at 6:12 pm

    Very informative Post-you ARE a very good writer.

    I am sorry you are having some health problems and agree it is good for you to take things a bit easier! I actually remember more of what you say when I read it than when I listen to you on the Video. It is also easier to save and re-read, I don’t usually store the videos(sorry!) Maybe once you are feeling better, you should do one video per month (just so we know you can still speak and bug your husband) and do the remainder of your Wisdom in written form. Just think of all the creative things you can do with the extra time!

    Reply
    • April says

      September 18, 2013 at 7:29 pm

      THANK YOU! I may end up doing more written ones–we’ll see. 🙂

      Reply
  7. Kristy says

    September 18, 2013 at 6:50 pm

    I’m loving your perspective on pricing! Thanks for adding in a real life example.

    Reply
    • April says

      September 18, 2013 at 7:30 pm

      Thanks Kristy! Real life examples always drive points home for me… 🙂

      Reply
  8. Michele says

    September 18, 2013 at 7:33 pm

    Thank you. I needed this today. Going to start reworking my prices pronto!

    Reply
    • April says

      September 19, 2013 at 11:36 am

      Awesome! Hope you don’t want to pull your hair out afterwards…I know I have been in need of a cocktail after pricing stuff!

      Reply
  9. Reshma says

    September 18, 2013 at 7:44 pm

    Thanks April! It could have been me all along. I was actually looking at some of my designs today and wondering why they are not selling. I have various price points but like you said, the ones who want discounts will always look for one and they are not my ideal clients. But I’m afraid I did a very huge discount last year because I was going a month long vacation and its kind of triggered out to some of my clients that they should wait until I do that again. Ugh!

    Reply
    • April says

      September 19, 2013 at 11:39 am

      Offering sales like that can be very tricky because then you do have customers who wait for them. But, if you don’t do it often, many of your customers will buy from you when you’re not having a sale.

      For instance, I almost always go the semi-annual Victoria’s Secret sale. Bras for $10? YEAH! But, when I need {or want} a new bra {or four}, I don’t wait until the sale. I’ll go in and pay full price, because that’s where I buy all my bras. So, they get my business regardless of whether or not they’re having a sale.

      Reply
  10. Dawn Petrill says

    September 18, 2013 at 8:05 pm

    Just what I needed to hear today! Thanks so much!!

    Reply
    • April says

      September 19, 2013 at 11:39 am

      You’re so welcome, Dawn! 🙂

      Reply
  11. marie says

    September 18, 2013 at 8:43 pm

    Thanks for the motivation, April! I just raised my prices last week on my handmade switch plate covers after I completed a few large custom orders and started to really resent the amount of time that they were taking. My prices are still to low compared to the time that they take, but higher thank most of my competition. I started to feel “guilty” about raising the price and I was second guessing whether or not “I’m worth it.” This post kept me from lowering them back down again.
    THANK YOU!!!

    Reply
    • April says

      September 19, 2013 at 11:41 am

      You’re so welcome! Don’t lower them back down due to guilt! You’re putting in time and effort to create something–and you should never feel guilty about that. You’re worth it!

      Reply
  12. Laura Hagan says

    September 18, 2013 at 8:56 pm

    Woah this could not have come at a better time! I’ve been scooting around on my prices for a new venture I’m launching soon, and I really needed this kick in the pants. And I agree with Patricia above, this was a gorgeously written article! Thanks for sending this one out today 😉

    Reply
    • April says

      September 19, 2013 at 11:41 am

      I love when the timing is perfect like that! And, I always love providing a necessary kick in the pants! 🙂

      Reply
  13. Julie says

    September 19, 2013 at 3:48 am

    Perfect timing! I am really struggling with my prices. Thank you so much for this article.

    Reply
    • April says

      September 19, 2013 at 11:42 am

      You’re so welcome! Glad I could help a little! 🙂

      Reply
  14. Cathy says

    September 19, 2013 at 5:11 am

    Hey!

    What a huge success with this written Wednesday Wisdom! Weeeeeeeeeeeeeeee!!! ;D

    Oh, but I knew you’d do just fine… 😉

    And you know what? I love your videos and your creative backgrounds and the interaction with your hubby and all…and I do keep them all filled in a special folder on my e-mail to go back to whenever I need it (and I’ve done it already!)… but I do understand when they say that the message sticks with us on a stronger way when its written. I guess the thing goes about the attention we must have about it – with the videos we might get more easily distracted and perhaps loose a bit. But that’s the viewer fault, not yours! We should be the ones to pick the right time to watch/read your Wednesday Wisdoms!

    Anyway it goes, you do share amazing insights and I’ll keep on following it. Even when they are about something that doesn’t quite apply on my case (like this one, for I’m not selling anything just yet), you give us value information and I’ll make sure to keep it on mind for the future!

    So, to short it up, thank you!

    XOXO,

    Cathy 😉

    Reply
    • April says

      September 19, 2013 at 11:45 am

      THANK YOU, Cathy! I’m glad that there’s such an amazing community here that’s super supportive–and seem to be thrilled whether it’s a video or written post! 🙂

      Reply
  15. Coral says

    September 19, 2013 at 6:41 am

    One of the things I love about what I’m creating is that it is supplies. So once I do a listing, I can just hit ‘relist sold item’ and I instantly have a new item up. I know handmade is so much more time consuming with photographing and listing each item. I loved the idea of supplies because it was scalable in a way handmade wasn’t. And I know when I am ready to sell original pieces and prints, I’ll make fewer of them and price them higher.

    I think seeing arty girls who are selling something similar to what you create and seeing their high prices can give you the courage that it’s possible to raise your prices. I’ve seen mail art for $80 and handmade cards for $45 (and yes, they sold). That makes me feel braver about my pricing.

    Don’t look at the people selling cheap to compete on price. Look to the people respecting their work and charging the true value. Those are the people to look to for encouragement and inspiration. Look up, not down. (miss seeing you and hearing your accent…. big hugs that you feel better soon).

    Reply
    • April says

      September 19, 2013 at 11:48 am

      That’s one of the things I love about offering digital guides and online courses–you make it once and many can enjoy! But, I also love buying handmade products so I never want artists to stop creating them. 🙂

      YES, it is possible to charge what you really need to charge–and sell it. And, seeing others who do it is so incredibly inspiring.

      I tell almost every consulting client that I have that part of their homework is to look at others who are succeeding at something similar to what they want to be doing. Just seeing that it’s possible can be the kick in the pants you need to keep going.

      Reply
  16. Ashley says

    September 19, 2013 at 4:51 pm

    Oh, how i love this post!

    I am a web designer and pricing is so exciting (the potential to make cash money!!) and so difficult (did I price myself too/high low??). I’ve been doing this for a couple of years and still struggle with it. I hope this will save some newbies from underpricing themselves and having to raise their prices drastically like I did.

    Honestly, I used to sell things I sewed on Etsy, but I think it got too hard to compete with what people expect to be able to pay at Target for goodies.

    Reply
  17. TONJA says

    September 20, 2013 at 4:39 pm

    This was what I needed to read today lately I have been receiving alot of requests for dolls I make they take a day or two to make and I was (until I read this) charging next to nothing for them…thank you for this wake up call

    Reply
  18. Kristina says

    September 21, 2013 at 2:00 am

    Great article, thank you! Before I started on Etsy I spend days on calculating it all through and it was worth it because I am comfortable with what I charge.
    With my portrait photography business I started really low and regretted it…exactly what you’re saying, you don’t want the bargain customers who don’t see the worth in your work. I once spend a whole day shooting in the pouring rain at an event (putting my equipment at risk even) and another whole day editing plus money on printing out the images. I asked 15 Euros for a digital image on CD and was told that was ridiculous because “people know how much a CD costs”. Really?? That’s what my 2 days of work were worth, the price of a CD?? I stopped doing this kind of work immediately and raised my prices. I am now comfortable pouring hours and heart into my work because I know I get paid decently for it but it was a tough lesson to learn.

    Reply
  19. Jennifer P. says

    September 21, 2013 at 5:16 pm

    Oh man, that first paragraph is exactly how the conversation went with my mother. “Oh honey, no one’s going to pay that much for a necklace.” Thanks for the support, Mom.

    I fight the urge to lower my prices; I’ll just come back to this article when I feel weak.

    Thanks for more awesome Wednesday Wisdom!

    Reply
  20. Jenny says

    September 24, 2013 at 7:46 am

    Thanks April, I am going to send this advice and discussion on to my creative friends. I found it very useful and I am sure they will get a lot out of it too.

    Reply

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