Wednesday, April 23, 2008

Econ 101: Jill gets sick of dumb pricing advice

I am not a brilliant pricer. I haven't mastered magic numbers for my shop. I haven't spent enough time researching it, but I have the advantage of knowing the economic theory behind it. It has nothing to do with the cost of my time and supplies multiplied by a magic number. In fact, for products I've already made, those things should barely come into account.

WHAT?

Yes. Revolutionary. And a little bit counter-intuitive.

Maybe you never took Econ 101. Maybe it made no sense. Maybe you hated it. But you've heard of "supply and demand." The part of supply and demand we care about right now is that a buyer will want to spend less money and you want to make more money.
Now let's do an imaginary Etsy example.
Let's say you make one-of-a-kind hand-sewn fish swimsuits. Even if they are free, some buyers still won't want them because they don't have fish, or their fish can't wear Lycra, or they just don't like your particular style. Fine.
Let's say this month you made 25 fish swimsuits. If you keep lowering your prices and your fish swimsuits are still not selling, you're probably at the point where all the people who have found your shop and would actually want to buy your fish swimsuits at any price have already made their purchases. Go advertise, fix your photos, change your product line, etc. Lowering your prices more probably won't help. After all, you aren't the only fish swimsuit seller and there is a limited total number of people who need handmade fish swimsuits in their lives.
But what if those 25 suits flew off the shelves at $1 a piece? Then you made $25. Swell.
The next month you again make 25 fish swimsuits. You want to see how much you can possibly charge, so you start with your price at $1,000 a suit and lower it until you get a sale (NOTE: this is not something I'm advising you do, since it's not like Etsy or your personal site has the traffic to make this really work, though it might be fun to try on one item just to see). Your sale finally comes in at $250. Holy crap! Someone paid $250 for a fish swimsuit! You rule!
So you should start charging $250 for your fish swimsuits and list one a day.
NO. WRONG. BAD.
Because let's say you lowered it to $200, maybe you'd sell two a month (that's $400 total per month, FYI). And what if you lowered it to $100? Holy crap, you just sold 10 of them! that's $1000 a month! $75? 20 of them, giving you $1,500!
"Ok, so then I want to lower my price until everything sells."
NO. WRONG. BAD AGAIN.
Because now let's say in order to sell all 25 of them, you have to lower your price to $50, and that gives you $1,250. When you were charging $75, you only sold 20 of your 25 sweaters, but you made $1,500. That's an extra $250. $250 buys a lot of really cute felted crap from other Etsy sellers.

"So, wait. The best price to charge is some arbitrary-seeming number that probably doesn't sell all the stuff in my shop but also isn't the the most people are willing to pay and has nothing to do with how much it cost me to make it?"
YES. If it's already made and it's not doing you any good to hold onto it. Because once you've made it, all of those "how much it cost me, how much time it took, etc" things become what the econ world officially calls fixed costs or sunk costs. They don't change if you get $1 or $10,000 for the item. As a person who handmakes things myself, I understand the sentimental attachment involved, but I use that as a sort of base worth it has to me, so no matter what I'm not willing to part with it for less than that amount.

More on fixed costs: if I spend twice the time making a card because I did the whole thing with my left hand because I thought it would be more artistic and force me to be more mindful of my creation if I made the card lefty, and it comes out looking almost the same but a little worse than the card I made immediately before it with my right hand, a buyer is not going to pay me twice as much for the one lefty card to cover the two righty cards I could have made in that same amount of time.
"But it took me twice as long!"
Yes, please, whine like that to the buyers, too. If you're doing processes that take double the time and really sinking your teeth into the integrity (note: this is different from the actual product quality, which would lead to repeat customers. I'm talking about things that aren't visible in the final product, like the fight I had with my printer because it's my grandpa's old printer but I'm loathe to get rid of it because part of me thinks he haunts it except not really) then you need to be doing it for the integrity and not expect your buyers to pay you more, too.

"How the fuck do I find this arbitrary-seeming perfect pricing number?"
How do I get a flat stomach by June? Sorry I don't have a quick-fix. Unfortunately, you need data. And even all the data in the world won't get you a perfect solution, because even if you had an entire year's worth of data, there are all sorts of other things that come into play (maybe a major movie comes out one month in which Brad Pitt makes out with a fish wearing a fish swimsuit that's totally like the kind you make! Or maybe you finally re-do all your pictures and your sales jump up) and how are you supposed to know how much that changed things? And this is all assuming you have a fairly homogeneous (most of your crap is similar) product line. How the hell do you price that one random item? Yeah, good luck with that. But as a start, try playing around with your pricing in an orderly fashion. See how many items you've been selling and your total income week by week or month by month for the lasts year or six months or however long you've been on Etsy. Now try raising your prices a bit at a time week by week and see what it does to your income. If it goes up, keep going up. If it goes down, try lowering. See if you sell more. If not, don't keep lowering. It's like that lemonade stand computer game (less than 20 years ago I played it on an Apple IIe with no graphics...I'm too young to feel this old...) only your shop is your lemonade stand. You can play a free version online here.

What would be really nice is if sellers got together and could share data, or if Etsy could release some data to sellers. Maybe I'll ask my Aquatic Animal Lycra Team (AALT) to start sharing data on Google Docs or something so we can all have a better idea about pricing, but that might be considered price-fixing and might be a little illegal. Still, if just a few of us pooled resources, how is that any different from standard market research? Clearly, I need a marketing department. Where's my dog? He could totally do it.*

Ok, deep breath.

Now, let's say you make felted boogers. Hundreds of them. You frequently make them to order, and you can easily make more or less depending on what people want and seem to be buying. You are the seller who needs to worry about the time it takes to make each item and your materials costs and things. You are much more complicated. I'm too tired to deal with you right now, but if you're lucky, I might try to figure out a way to make the theoretical crap actually practical and useful another day.

But the more immediate reason I bring you up, oh maker of felted boogers, is that it will be obvious to you that if you are at the point where all the people who know about your shop and want your felted boogers have already purchased them, you stop making them until the demand returns. You work on your advertising and your photos, or maybe you stalk Alchemy and notice a lot of requests for resin boogers and try going into the resin booger business as a supplement or instead. And this is obvious to you because you weren't covering your variable costs. Those are the things that change with the selling of each item, and since you make each item to sell each item, materials and time kind of creep in there for you. They create a bit of a pricing floor, below which it's not worth it to you to be felting boogers.
What do I mean by a FLOOR?
A level below which it is no longer worth it to you to sell your crap.

So when we go back to our friend, the fish swimsuit maker, if she's not moving her stock of 25 swimsuits, she'd better not be making any more, either. That would be dumb. When people talk about pricing things and say that they "can't charge enough to cover their materials and pay themselves a decent wage," I know this is an asshole response, but THEN DON'T MAKE IT ANYMORE! If you're doing it because you love the art, then you're going to have to consider love part of your salary. It goes in the bag with integrity. If you're trying to make a living, go play Lemonade Stand, keep track of your weekly and/or monthly sales, stalk people who sell similar items and their sales, and if you're still in the red, your magic highest number may still be red! Hopefully, it will be huge and gorgeous and positive and you can quit your day job and buy all 25 fish swimsuits. I hear that shop is having a clearance sale.


*This is assuming "Market research" involves barking at other dogs and pawing my face at 4 AM

20 comments:

Miriam said...

This is great. I came into that lab late and could not for the life of me figure out what you were talking about...so thanks for blogging about it. And I have to tell you that as a painter...I find pricing to be a big pain in the patooty because intuitively this is how I've always felt about it, but I'm always listening to someone and thinking I should raise/lower prices here and there trying to come up with that magic number. You've made me feel good about just letting it be, and pricing it according to how much I like it, or want to keep it. Anyway, that's what I got out of it and I'm glad to read this. :)

Michelle said...

Wow, awesome post! Very intriguing ideas! This pricing thing is a cruel mistress, and theories abound. Ok, now you have me thinking! ~HeyMichelle

miznyc said...

this was friggin' fantastic!!!! I kind of feel like right now folks know what I do and everyone who wanted to buy has bought and so now I need to focus more on people who don't know about my shop. Felted boogers for the masses!

Gini said...

Pricing handcrafted items (even the ubiquitous felted boogers) just plain sucks. You've summarized the issue in a most entertaining way though. And if you ever figure out how to get a flat belly by June, please let the rest of us in on that secret too.

Liz said...

LOVE your post - putting a blurb about it (and link to it) on my blog - hope you don't mind!
thanks for the laugh! :)

LazyTcrochet said...

haha I think I have a haunted printer too. Very interesting article. Thanks

fenrislorsrai said...

The ideal price is going to end up on the good 'ol bell curve. I own a used bookstore. Most books will go trotting out the door at a nice solid midpoint.

Some won't move. About half of those will go out if I lower the price and toss them on the bargain rack. Sometimes they still won't move. If I RAISE the price on those same items, then they'll sometimes move. Reverse is also true.

The majority will sell at the hump of the curve and will generate the most net profit. The trick is thus figure out where the top of the bell is for your item... which will take some trial and error. If you already tried down, might as well try up! it'll tell you where the other edge of the bell is.

And market research is your friend. Check out other sellers that make similar things. Sure, you can't see price on sold items, but odds are they aren't wildly altering their prices all the time. Items in their sold that are similar to current items are probably the same price.

And before you start making a new type of thing, you might want to do the research and determine if it will be profitable for you. If the market is already saturated and the profit margin is poor, you may want to skip investing in that market.

JillHannah said...

fenrislorsrai, you are AWESOME! I read this comment on my feed thing not knowing it was written by you and I was all excited and yelling "AMEN! YES! EXACTLY!" and so I went to my comments to see who it was and it was you!

Amen! Yes! Exactly! I'm pushing for EtsyGreetings to pool data now. Everybody just needs to pool data. Data is good. The more data, the bellier your curve, and the best way to find your ideal prices! Yay!

fenrislorsrai said...

Data is good. More data is even better!

I am a total statistics whore. I'm actually just waiting for April to end so I can do my six month snapshot and plannogram the book store.

I am THAT nerdy. I did an article on planograms for BookShopBlog a few months ago where you can see the maps:
http://bookshopblog.com/2007/12/06/have-you-planogrammed-lately/

Most Etsy shops won't have much use for a planogram because they don't have a physical layout. If you also do craft fairs and find there's a big difference between what you're selling on Etsy verses what you sell in person, a planogram may give you some startling data. It may not be that the craft fair vs online prices are different, you may just have a dead zone on your table.

JustAnotherDay said...

lovin' your article.

Beadiful Things said...

Fun read! Thx for sharing. I've been pricing my stuff along your lines the whole time, but now I have the econ to back it up.

Anonymous said...

This is a most excellent article and entertaining too. I pretty much knew intuitively what you were saying, have experienced it, don't always use it, but it was most helpful to read it put so well. I'm going to refer this article to whomever gives me crap about the way I price items. Sometimes people say my prices are too low, but I always say "they're not too low if no one's buying!" And I'm not going to make them at all if I have to lower the prices more.
And another thing...sometimes you just can't figure out what people will buy, or how much they'll pay. It can be a crap shoot.
Thanx - Karen L

Rachael said...

You are so 'on the money'. So bloody comical too.
All the whingers and whiners need to read this article as it is so succinctly put. I love it!

MonsterBug Blankets said...

Thanks, this was informative and oh so entertaining to read! The humor helped! :) I hate all those pricing rants that tell me I have to sell my blankets for $500 (yes, an exaggeration!) if I do their math but deep down I know there's a price point where people will stop buying.

Working on changing some things--the whole if it's not selling then stop making it! I've also stopped making some things that sold well, but weren't worth my time and energy. I made very little on them, even though they flew off the etsy shelves!

Anyway, THANKS!
Jennifer
www.monsterbugblankets.com

jdavis said...

Thank you for sharing the stuff in your brain! (especially the felted boogers ;) I keep nudging my prices up and people keep buying (in person at art festivals, if not on etsy...) I think I'm at the "higher prices = greater perceived value" part of the bell curve.

Of course, I could just say to hell with all of it and go play Lemonade Stand. I LOVED that game!

Snowberry and Lime said...

Great article, entertaining and quite accurate. I keep talking about supply and demand myself, as sometimes these pricing threads are just not realistic. However most of the time more marketing or better pictures can make a greater difference than lowering prices. The middle way is where I am headed, but it was definitely interesting to read your thoughts on this.

Heather Leavers said...

I never tire of reading this - and I've just linked to it AGAIN on etsy.

MegansBeadedDesigns said...

The BEST article for pricing Etsy good available to date!

JillHannah said...

You guys are too nice!

Free Spirit Designs said...

love the humour, love the thinking - great post! x