Handmade Business 101: Choosing A Price Point For Maximum Profit

Posted Monday, April 16, 2012

Business 101 is a new monthly series from Sarah of CuriousWorkmanship designed to help you improve the success of your handmade home business.  

Last month we learned about the difference between revenue and profit. This month we're going to focus on profit and learn how to make the most profit we can.

If you want to make more money, you might think you should just sell more crafts. And if you had an unlimited amount of crafts to sell and a steady supply of materials at the same cost, you'd be right. But you don't. There are only 24 hours in your day, and a large number of those are spent eating, sleeping, cooking, cleaning, traveling, shopping, and (if your life situation is like mine) wiping noses and behinds. So the amount of product you can make has a maximum. You might think that if you sold that maximum amount of product, you'd make the maximum amount of profit. But you'd likely be wrong. Your profit depends not just on how much you sell, but the price at which you sell.

If you can sell your goods at a higher price, you make more profit per item. And if you can sell all your items at a higher price, then you should do that. But, as my dad always told me, the price of an item is precisely that which the market will bear. If I could get people to buy my baby booties at $100 a pair, I'd be selling them for that much-- but few would be interested at that price.

It's widely known that people generally buy more of stuff when the price is lower, and less of it when the price is higher. But allow me to illustrate how selling more items might actually mean LESS money for you. (I'm going to pick some nice round numbers to make the math easier, so bear with me if they're not 100% realistic costs and prices. We're also going to disregard labor as a cost, just to make it easier to illustrate the point.)

Suppose you make hair bows. The materials for these bows cost you $1.00 per bow. You sell them for $3.00 each. Each hair bow you sell profits you $2, so if you sell 50 of them today you've made a profit of $100.

Now suppose you raise your price to $5. Your customers are looking at these hair bows and saying "Gee, it's cute, but is it $5 cute?" Some, the ones who think they're so cute they'd have them at just about any price, are plunking down the $5. Some are not. At the $5 price you're only selling 30 of them today instead of 50. "Oh no," you say, "I've driven off nearly half my customers!" But how much PROFIT have you earned? At the $5 price point, your profit on each hair bow is $4 ($5 minus the $1 cost). So your profit from today's sales is $4 times 30 or $120. That's $20 MORE than you earned selling them at a lower price!

Now you're thinking, "Wow, that was cool! Why don't I just raise the price to $20?" So let's try it. You raise the price to $20 and now you have only 3 customers. Each hair bow makes you $19 and so you've profited just $57. You can't keep raising the price forever; at some point your profits will drop off. Somewhere between $5 and $20 is a price that will maximize your profit on these hair bows.

Now if you're into calculus, you can use this information to create a mathematical model and calculate the price you need to charge to get maximum profit. But you don't have to do any advanced math to figure out (more or less) what the price is that will give you maximum profit. Just give it a try! Sell at different price points at similar craft shows (or similar times of year on Etsy). If you notice you make less money at a higher price, go lower. If you notice you make less money at a lower price, go higher. But now you know a business secret: selling more doesn't always make you more money!

Next month we'll discuss how to calculate shipping and handling charges and make them work with Etsy's system.


Miss Sarah said...

Good advice! Thanks for sharing. Pricing is always one of my hard points. I know so many people in my target audience who can't afford to pay as much as I might be able to charge for my clothing. It's tricky finding a balance.

Ali Bean Baby said...

Good reminder for me and very timely -- I have been considering my pricing recently. Think I'll leave things where they are! Thanks!

Erin said...

Thanks for another helpful post!

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