PRICING BASICS FOR HANDMADE BUSINESS

PRICING poster

Whether you are just starting your handmade business or you are already a seasoned artist, pricing your products is always one of the biggest challenges. Pricing is not as easy as it may seem and there are quite some aspects you should consider if you want your prices to work for you. Whether you like it or not, a pricing strategy is an important factor that can make or break your business.


PRICING IS MORE THAN JUST WRITING NUMBERS ON YOUR PRICE TAGS

Price, next to product, place and promotion, is a vital component of a marketing mix, also known as the “four Ps” of marketing. And it is the only one that generates your return, as it supports (or it should support) the other three elements that are generating costs.

Before we move on to looking at some pricing strategies and formulas it is important for you to understand the  role that pricing plays in your business and see why developing the right pricing strategy might be the very one thing making the difference between success or failure.

You have to see that pricing is not only about the money that falls into your pocket when you are selling an item, it is about so much more.

So, what exactly does good pricing mean and why is it so important?

The most important thing to remember is: pricing has nothing to do with guessing prices for which your products might sell. Simple putting your numbers in a predefined pricing formula is not exactly what we are discussing here, either. Pricing is a whole process that has to be done right if your business is to bring profits. And you better don’t say you run too small a business to go through all that! Believe it or not, it is the small businesses that have to be extremely careful when setting their pricing. The bigger the business, the more options and possibilities for long-term profitability it has. In a small handmade business you need to put some effort into setting prices that will allow you to maximize profits from single sales keeping the customer satisfaction at a high level all the time. But watch out! Not every price you set has to maximize your profit. You can use your prices to compete, get to new target groups, make statements etc. When you understand how pricing can affect your business you can create various scenarios and set optimal prices for your products and/or services.


PRICING FACTORS

Running a small handmade business might seem to be quite different from running a global corporation but that does not mean that some rules that apply to big businesses don’t apply to your small enterprise. One of such rules is stating that the profit is always whatever is left after deducting expenses from the amount of revenue gained.  This is how things work, no matter what you do. Therefore you have to make sure to calculate all your expenses, otherwise your actual results will be quite different than expected. It seems to be obvious but somehow it happens that artists and crafters quite often tend to forget about some costs. Or they just skip them as insignificant, that happens as well.

So, costs are a very important factor to be considered while working on prices, no matter what business you run. We will discuss this in detail when we get to the pricing methods and formulas, and for now let’s get to know some other factors that might have quite an impact on your prices:

  • BUSINESS GOALS. Your business goals will pretty much determine your pricing objectives on which, in turn, your pricing strategies will be based. You will learn more about pricing objectives and strategies in the following sections of this article.
  • COMPETITION. If you don’t have to worry about what your competition is doing, you can consider yourself very lucky. Most of businesses, even the smallest ones, have to watch what’s going on on the market and react to it, sometimes also by adjusting their prices.
  • POSITIONING STRATEGIES. Positioning helps to establish your product’s or service’s identity in front of the person who buys it. In many case price plays a big role in positioning, so be very careful not to spoil otherwise a good strategy by setting inadequate prices. For instance, you  won’t establish yourself as a luxury jewelry artist by selling your earrings for two euro per pair, you can trust me on that.
  • TARGET MARKET. You can read about the importance of defining your target market in our earlier article HERE. In the same article you will find some useful information on finding your ideal customers. Good knowledge of your target market is quite essential when making pricing decisions, as your prices should fit within the expectations of your customers. Even if you are sure your products are the greatest stuff in the world you won’t sell anything for more than your customers will be willing to pay. Being realistic about what your customers can and are willing to pay, and setting your prices accordingly, can save you a lot of disappointments.

PRICING OBJECTIVES

A pricing objective is a goal that sets the guidelines for your business in setting the price of a product to your potential buyers. The pricing objective of your choice should reflect your business goals as well as your target group’s price expectations which means that your pricing objectives should be revised and adjusted every time your business goals change or you try to reach out to a new target group.

You also have to remember that for every pricing objective you will have to come up with an appropriate pricing strategy in order to successfully achieve your goals.

There are many pricing objectives suitable for different situations and different businesses. Being an artist or running a handmade business you might consider implementing one of the objectives listed below:

  • PROFIT MARGIN MAXIMIZATION.When the total number of items to be sold is rather low (quite typical for handmade businesses) this objective will orient you towards looking for maximizing the per-item profit margin.
  • PROFIT MAXIMIZATION. You should implement this objective when you wish to collect the greatest possible money amount  in profits. Remember, it is not always tied to the profit maximization objective, as your money might be coming from more sales with a lower profit margin rather than the other way around.
  • SALES MAXIMIZATION. This is the right objective to use when maximizing the number of items sold is your priority. You might want to plan either volume increase (measured against your own sales across specific periods of time) or market share increase (measured against your competitors sales). If you want both, volume and market share, to increase, you have to remember that they  are independent of each other and an increase in one does not necessarily make the other one increase.
  • PARTIAL COST RECOVERY. If you have a source of income other than just selling your products (workshops, tutorials, etc.) you might find this pricing objective interesting and useful. The benefit of implementing this objective is providing your customers with quality products at a cost lower than expected. Of course, you don’t have to implement this objective for all your products. You might also consider reducing prices for some customers only, let’s say for those who are taking part in a workshop or buying a set of tutorials.
  • QUALITY LEADERSHIP. This is the very objective to think about when you want to make a statement on the quality of your products as well as your position as an artist/crafter. Just be careful, as this is a tricky one. Before you start implementing this objective you better be sure that the design and the quality of your products are really the best.
  • SURVIVAL.  In the times of struggle the goal of making a profit might be set aside for the goal of survival. Implementing the survival-based price objective means that you are willing to accept some short-time losses for the sake of long-term viability so you will be cutting your prices to a level that will just allow you to stay in business and cover the most essential costs. This objective is meant to be used on a short-time basis and the prices have to be set to an appropriate level as soon as possible.
  • STATUS QUO. This is the pricing objective to be implemented if you want to stay in line with similar products offered by your competitors. Basing your pricing strategy on this goal will let you maintain a stable level of profit from your products.

Now, if you wonder which pricing objective might work best for your business, you have to remember that you don’t have to stick to just one. And, in most cases, you won’t. Unless you are in the survival mode you will most likely use different objectives for different groups of items, or even for different items. For example, you can implement the Profit Margin Maximization for your more unique and cost-consuming items, the Profit Maximization or Sales for easier to make and cheaper products which you can sell in bulk, the Partial Cost Recovery for items that you are also teaching how to make (possibly people buying tutorials or taking your workshops will be happy to have a good example of what they are about to learn) and the Quality Leadership for your most outstanding creations. You can come up with any combination of the pricing objectives listed here, or you can figure out your own very specific goals and use them for developing your pricing strategies.

It is very important that you take your time and select pricing objectives carefully, as your pricing strategies will depend on that choice. Remember that not all pricing strategies work well with each of the pricing objectives. Choosing a wrong strategy for an objective might lead your business to a big failure.


PRICING STRATEGIES

So, once you have selected your pricing objectives it is time to look at pricing strategies that could be helpful in reaching your goals. This again is a very important step as the strategy (or strategies) you choose will be assisting you when you start to actually price your products.

There are numerous pricing strategies available from which you should choose the ones that are corresponding with your pricing objectives. If you are not sure if the pricing strategy you decided to select is going to work well with your pricing objective, take a look at the diagram at the end of this section. It will help you to see if the decisions you are making are the best ones.

As with the pricing objectives, you can use different strategies for different products, or at different times. Just remember one thing: your pricing strategies will need to be revised and adjusted every time your pricing objectives change.

  • COMPETITIVE PRICING. Your prices are based on the prices your competitors have on similar products. This pricing strategy might be useful when you cannot clearly differentiate your products from other similar products on the market. Unless you are able to adapt your products, make them stand out and convince your customers that it is worth it to pay more, you better fall in line with your competitors and introduce prices similar to theirs. This way you will avoid price wars (because of prices being too low) or falling sales (because of prices being too high) and that might allow your business to maintain profit.
    It is not the best long-term strategy, it works best when your business is in the Survival or the Status-Quo mode.
  • GOOD-BETTER-BEST PRICING. This strategy is about selling the same (or similar) products in different formats, with the price for each level raising above that for a previous level. This is very typical for selling fruit and veggies, but can work for handmade businesses as well. Imagine a basket full of various earrings (possibly not from the newest design line), the customers have to spend time on picking the ones they would like to buy. These earrings are priced at the “good” price. The “best” earrings – those more expensive than the others – have been packaged into small jewelry boxes to look more luxurious and give the customers the feeling of buying something special.
    As you can see, this pricing strategy may attract more customers to your business, as there are more price and standard options available for them. This strategy well corresponds with the Revenue Maximization and Sales Maximization objectives.
  • MULTIPLE PRICING. This strategy is about getting your customers to buy more items at a time, you do it by offering discounts if more items are bought. Or not really… The customers feel they are getting discounts, while in fact most often they are being “punished” when buying a single item. Imagine you are selling winter hats, and their regular price would be 15 euro. When you want to implement the multiple pricing strategy,and you expect the majority of your customers to buy multiple items, you will price one hat at 20 euro (just an example) and two at “only”30. This way you can be sure that your costs are going to be covered and you don’t face a loss at the end.
    The multiple pricing strategy works well with the profit maximization and quantity maximization objectives.
  • OPTIONAL PRODUCT PRICING. You use this strategy to attempt to get your customers to spending a little extra on your product by purchasing options or extra features. What you can offer is up to your creativity, but you can think of personalizing your items with monograms, offering special packaging suiting different occasions, etc. The purchase of each option adds value and uniqueness to the basic item. And there is something really interesting about the Optional Product Pricing. By offering options to complement your base product, you are projecting an image of quality to your customers. They will likely recognize your offer of additional products or services as awareness of and sensitivity to their needs. There is just one thing you have to remember: with this option it is very important to keep the extra fees at a really reasonable level. Optional Product Pricing is very useful when your pricing objective is Revenue Maximization or Quality Leadership.
  • PREMIUM PRICING. This is the strategy to be used when the products you sell are very unique and of very high quality, and you only expect to sell a small number of pieces over a period of time. Also because you only can make a small number of pieces over a period of time. Anyway, people who buy such things are usually looking for luxuries and their price sensitivity is very little. Now, mind the word “luxuries” and be critical when you look at your products. Premium Pricing Strategy might seem very tempting, but attaching a premium price tag to a simple strand of cheap beads would be a bit silly. And quite ridiculous. The advantage of Premium Pricing strategy is that thanks to the high prices you can recoup a profit large enough to make up for the small number of items that you sell. This strategy will work absolutely great with the Profit Margin Maximization or the Quality Leadership pricing objectives.
  • PRODUCT BUNDLE PRICING. This strategy is something to think about if you need to get rid of overstocked items: the idea is to group several items and sell them together. Your customers will buy the products they want, plus for a little extra they will receive one or more additional items. This seems to be an easy way to get rid of some overstocked items, but there also is some risk involved: actually, your customers might not be interested in paying anything for items they didn’t plan to buy and instead of selling more you might end up selling less.  This strategy fits with all pricing objectives listed above, except for the Profit Maximization one. However, possibly the best results can be achieved if you use this strategy with the Partial Cost Recovery or Survival objectives.
  • PRODUCT LINE PRICING. This is a strategy very similar to the Product Bundle Pricing, with the difference that you are grouping items complementing each other, i.e. being parts of the same design line. It is also similar to the Multiple Pricing strategy, but here you are selling sets of items rather than a greater number of just one. Basically, this is how you can sell sets. Jewelry sets, clothing sets, home decoration sets… Anything, that fits together. The price of a set would be slightly less than what a customer would pay in total when purchasing each of the
    same items individually. The Product Line Pricing works well with the Profit Maximization and Quality Leadership pricing objectives.
  • DECOY PRICING. In this strategy you offer at least three products, two of them having a similar or equal price. These two products should be the most expensive ones, and one of the two should be less attractive than the other. This strategy will make people compare the options with similar prices, and as a result sales of the most attractive choice will increase. The Decoy Pricing strategy will work well with the Profit Maximization and Sales Maximization pricing objectives.

SUMMARY

 

Choosing a pricing objective and a related strategy is a serious task and the well-being of your business requires you to do the job right. You have to carefully consider your business and financial goals, the state of the market (not only at the present time, think of its past and possible future), and the products and prices of your competition. You want to select objectives and strategies that will position your product and business for success.
And as it has been already said, the objectives and strategies that are appropriate for your business at the current time won’t be appropriate forever. That means that you will need to evaluate and adjust them as the circumstances change.



This is the first article of a series. In the next one You will find useful practical tips and examples of implementing strategies and using pricing formulas in your handmade business.
See you in a week (I hope) !

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