When it comes to your pricing strategy, do you take an offensive stance or are you constantly on defense?
Defensive pricing is reactionary. You set your prices by responding to the prices of similar products on the market. But when you do this, you are letting someone else dictate the rules of the game. When they change, you have to respond as well.
On the flip side, offensive pricing puts you in control. You are the one on the attack. The one controlling the game.
If you don’t really have a pricing strategy, then it’s likely you’re opting for a defensive strategy by default. By loosely basing prices around other things you see in the marketplace, you are letting someone else dictate the price of your products.
And the result of always playing defense? You often end up lowering your prices to the point where you aren’t making a profit. (Or worse, not even covering your costs and taking a loss.)
There is another, even more troubling result of employing a defensive pricing strategy. When a large portion of a community relies on defensive pricing (like in the case of Etsy) the result is a downward spiral in price. If one person lowers, everyone else playing defense lowers their prices in response. This cycle continues as people believe the only way to sell more products is to lower the price to compete.
While there are situations where a defensive pricing strategy may be necessary, your primary pricing strategy should be offensive. You should be the one in control – the one leading the attack.
So how do you move towards an offensive pricing strategy?
- Know the real cost of your products
- Combine cost analysis with value-based pricing
- Differentiate your products
- Be confident in (and promote) the value of your products
1. Know the real cost of your products
Any pricing strategy needs to begin with a thorough understanding of what your products cost to make (and what your business costs to run) so that you can be sure you are making a profit. I’ve talked about this pricing formula before:
labor + materials + overhead + profit = wholesale price
wholesale price x 2 (at a minimum) = retail price
While there is wiggle room in this formula, it’s important to have a basic understanding of your costs, and set your prices accordingly, if you want to take an offensive pricing strategy.
2. Combine cost analysis with value-based pricing
Once you know your costs are covered, offensive pricing strategy requires setting a value-based price. Value-based pricing means setting your price in regard to the value the customer places on your product based on the next best alternative. This does not mean basing your prices on the market. Instead, what it means is looking at why your product is different than other available products (what value it provides) and pricing accordingly.
3. Differentiate your products
In order for you to employ a value-based pricing strategy, you need to be able to explain what unique value your product provides. Which means your product needs to provide a unique value. Part of taking an offensive pricing strategy means finding ways to differentiate your products from everything else on the marketplace. If your products are identical (or barely distinguishable) from everything else on the marketplace, then you will have to take on a defensive strategy by default. The only thing you have available to you is to compete on price. (And be now, we all know how I feel about craft trying to compete on price.)
4. Be confident in (and promote) the value of your products
In creating a culture of profit, I talk about the importance of being confident in the value your products provides. This is critical for an offensive pricing strategy. This is especially critical when taking an offensive strategy leaves you with prices that are higher than the majority of prices in the market in which you sell. When you are confident about and able to articulate the value your product provides, price becomes secondary. And when that happens, you can take complete control of your pricing strategy.
How do you approach pricing in your business? Are you merely reacting to the prices around you, or are you taking control of the price (and value) of your products?
If you’d like to know more about creating an offensive pricing strategy for your products, there is still room in my upcoming Pricing for Profit workshop. You’ll leave the workshop feeling confident in your ability to set prices that put you in control.
We’ve priced our product NOT to be competitive with what is probably our main competition. Our core product (recycled vintage book journal) is about $3 more (which is somewhat considerable for an item under $20) but we do go the extra mile to make sure we really show the customer that our journals are made from recycled (nice quality) paper, the binding wire is also recycled and of course the covers themselves are recycled.
We have a lot of signage in our craft show booth to educate the shopper, we have a library card pocket with our own library check-out card (printed on recycled paper with soy-based inks) AND we stamp that card with the date we made the journal as well as the date that they buy it. No one leaves our booth without us ‘checking out’ their books! The flip side of that card also talks about all of the recycled content in our journals, just so they have the reminder with them that we handmake everything and that they’ve purchased an eco-friendly product. Plus, they seem to really enjoy the fact that we try to give them an old-school library experience when they are in our booth. We do stamp the dates when people buy from our shop online, too.
We have also tried to really set ourselves apart from any competition by having a wide variety of items (necklaces, earrings, coaster sets, DATE PLANNERS(!)) that are ALL made from recycled books, too. So we hope that this also helps a shopper understand that we are so passionate about what we do and that we are trying to really fully utilize all the books we recycle in really creative ways.
We aren’t afraid or ashamed of being priced higher. We know how much work we put into every item we make. We don’t take short cuts.
I do hate to see others fall into that trap, of pricing their items so low that they are basically barely being paid for their materials, let alone their time. Fact of the matter is, if you want to do something as a business, you MUST price things according to YOUR costs, not someone else’s. You don’t know what their bottom line is, but you do know your own, so make sure what you are doing is actually getting you OVER that bottom line. If it isn’t and the market won’t support a higher price (closer to what you need to realistically be charging) then you might want to supplement your line with something that can.
Kellee – I love to see makers who are comfortable with their products prices! And I love that you are providing a total experience for your customers. Talk about value-added.
Your last points are totally true – in fact, I’m planning a few more posts for the near future about some of those very ideas!
Totally letting someone else dictate.
When my entire business is built on me doing what I love and me being my own boss.
How do you make the transition though – raising the prices? Prices which have been the same for a long time?
Prices cannot remain the same for ever as the cost of things and your business expenses fluctuate or likely increase. You have a perfect reason to raise your prices right now as you recognize your actual expenses. I suppose you can let your customers know that you are re-vamping your price structure starting July xx to reflect increase in expenses. I raised the prices of my cup cozies from $12 last year to $14 this year and I’m still selling. My own unique line is $16. But I actually still need to raise these prices to make better profit on wholesale. I chose to be cautious as I wasn’t sure of customer response.
Depending on how much you need to raise your prices, you can also do it gradually with a set schedule. Maybe you decide you need to double your prices – instead of raising all at once, you could raise them a little each month.
This will probably ease customers into it in such a way that they don’t experience extreme sticker shock.
Oh that dastardly downward pricing spiral!
We’d do well to work toward a value-based pricing strategy. And it’s so true, the more we can differentiate our work — making it unique, remarkable, and valuable to our customers — the easier it is to feel confident commanding higher prices.
Right on, Megan.
We need to put an end to that downward pricing spiral – how do we encourage an upward one instead?
I think by clear demonstration of value. Spend $x, get back $2x.
Tough one.
Thank you for this article. I’ve really been loving this series- and this article addresses something I’ve been frustrated with the last few days. I really try to price offensively, and make sure that I’m asking what an item is worth in time, materials, etc. It’s difficult because I know that my prices are above most similar products on Etsy, and I get frustrated that so many people are bringing the value of handmade down by asking so little for the work.
I’ve been shopping and selling on Etsy for 3 years now, and have recently been keeping an eye on the Alchemy feed for custom orders. I’ve seen so many examples of people only willing to pay a tiny amount for something specific and handmade that they want. It’s insulting, really, when I read that someone is only willing to pay a mass-produced cheap price (as in $10) for something that takes love and energy and creativity and effort and lots time to make.
How can we make people realize this? Is it possible to change the way people think about “handmade” versus “mass-produced”?
Re: changing the way people think about ‘handmade’ vs. ‘mass-produced’ is mostly impossible. You are never going to be able to run some giant all-reaching commercial that can convince people to go for handmade over factory-made. Even US-made vs. foreign-made – which is perhaps easier for people to wrap their heads around! It has to be done face-to-face, almost. One person at a time. Believe me, I have TRIED to get popular talk shows (Oprah, hellooo?) to do a show about handmade + cottage industries, but until there seems to be a demand for more info about the movement, big dogs don’t want to give the little dogs a bone. When we REALLY need the bone, you know?
As with any form of art or craft, there are DEFINITELY people who ‘get it’ and those who don’t/won’t/will never. It’s so wonderful, really, really unimaginably wonderful to do a craft show and to meet these people and see how they react to the things you’ve worked so hard to make. I highly recommend it. If you sit all day on the computer and hope for sales, it’s depressing. I know, I’ve been doing it since our last craft show a week or so ago. Getting out and meeting fans of handmade does wonders for your faith that not everyone requires the cheapest, most mass-produced things.
As far as Etsy alchemy goes, if someone only wants to pay $10 for something that should be $40, they are going to get what they pay for. Or the most likely thing, nothing at all, because no one in their right minds will do it if they aren’t having their costs + time covered.
Hi Jess!I was just curious to know if you do any famliy photo’s for Christmas? I’m not interested in Santa or anything but I wanted some photo’s to put in Christmas cards.
This is a great article megan. We need more of this kind of encouragement to makers to really know their value proposition. One of my higher end products, ketubahs (jewish wedding contract) are sold by a few folks on ETSY for peanuts when you consider the time that goes into customizing and communicating with couples. But I’ve stood my ground and I am still getting customers, not as many as others, but for double the price I only need half the customers to make the same amount and do half the work! plus, the price you set send s a message of what the piece is WORTH. And, like wren, I have also been disgusted by the alchemy requests for so little money. but when artists really want to sell without thinking about the longevity of their business, I think they panic and dive downward…
susie – i share the same mentality you do. if i charge double, sure i may only sell half as many products, but i make the same amount of money with half the work.
and i totally agree that part of that downward spiral is a result of panic – people confuse sales with profit and think they have to sell more at all costs (especially when so-and-so is selling lots)
Thank you for your suggestions!
I will probably introduce limited editions first since I mostly sell via Etsy and you cannot “batch” change prices! In many ways, it’s a good venue, but listing and changing listings is a pain – you have to go through lots and lots of steps PER ITEM and can’t even list similar items quicker…
But I take everything into consideration and am really happy you responded!!
We have finally set our prices to where they need to be to set a profit and not according to what the demands of others determine. Our competitors are able or willing to set their prices at a lower level and while it irks me greatly, I remind myself that we are a handmade entity from start to finish. We make all our own molds for our soap from actual products and offer items which are just now starting to get cast into molds from china allowing our competitors to play catch up with our brand.
Yes we have seen a small dip in sales from places like Etsy but we know that our customer base is loyal and look to additional revenue streams to maintain our business.
As long as we stay true to our talents we know that we will continue to thrive and grow. Also by adding new products every few quarters we continue to be cutting edge and give our competition a true run for their money.
ok megan, i have to ask – does that mean you made your molds from actual grenades? (and doesn’t that make for great marketing material?)
This conversation is playing out nearly everywhere in the West.
So much has been outsourced to places we’ve never heard of.
But I think it’s starting to come back.
Here’s why: outsourcing makes perfect sense for large corporations ramming generic products through a sales and marketing chain. Or even custom products, as long as the customization is automated.
The first time a human gets involved, the entire system screeches to a halt.
Example: call centers, coming back on shore. Great customer service evidently requires more than grammatically correct English and the ability to read from a script. Something about shared culture, perhaps?
Another example, need something one-off? Sure, you could outsource for mega-cheap, provided you built a relationship in advance… with someone in many time zones away. Or, you can pick up the phone and call someone you know with a vague description of what you need, and have it in the mail within a day or two.
We all have too much stuff now. What we don’t have is time. Which is the fatal flaw in offshoring, it really does take some time to build those relationships.
dave – lots of great thoughts here (some of which i’m going to spin off into a separate post)
i also think work that was off-shored is starting to come back because people want to know where their stuff (and apparently their customer service) is coming from.
not to mention the fact that having something produced overseas often requires you to order huge quantities to make transportation costs worth it. (often times, it can be something like half a shipping container worth of product)
The problem of pricing seems to relate to two sources. First, we have the whole mass-production thing, where rock bottom factory pricing is the norm. A lot of crafts of a handmade nature are mimicked in this sector, where consumers are content to have the “look” of handmade. In general, they aren’t into spending more money on handmade because the store bought works just as well- for them.
Here’s the bigger problem, the second source: the crafter who doesn’t value her/his products, who does the equivalent of shrugging shoulders and “little ol’ modest me” thinking when asked about what they make. In talking with these crafters, they don’t really have a mental investment in their wares- sure they are handmade, but they don’t talk the materials talk or engage in educational matters concerning their crafts.
Often these are the crafters who attract the “store bought is fine” crowd described above. Their low pricing makes it difficult to present one’s items and educate at the same time.
Faith – I think your second problem is actually a two-fold problem in itself. not only do many makers not value their time and what they make, they don’t ever take the time to understand the true costs of their products.
When I first opened shop on Etsy I majorly under priced my pieces. When I first began to receive wholesale orders this became a huge issue for me. I still struggle with pricing, but as time goes on and the quality of my work gets better and better, I am becoming more confident. Being aware of how much time one puts into creating an item and the true cost of materials is critical. Thanks for the encouragement to take an attitude of defensive pricing!
I’m going to echo Susie: “For double the price I only need half the customers to make the same amount and do half the work!” Pricing is aways such a struggle, but I’m getting there. What helped me most was someone asking me this question, which I come back to over and over: “Why imagine your customers have to be in the same income bracket as yourself?”
and it’s true – I can’t afford to buy from me (but fortunately I don’t need to!)
heather – i frequently tell my students that “you are not your customer” when it comes to price.
i think part of the reason prices have gotten so low is that makers want to price their work so that they (and presumably other makers) can afford it. but this idea just perpetuates the stereotypes of the starving artist (if we never raise our prices, we will be)
if i had to buy the amount of my own work that i wear, i wouldn’t be able to afford it. (fortunately, like you said, i don’t need to!) and there are certainly designers and makers whose work i love that i can’t afford at the current moment.
fortunately, there’s another solution – trading! when pricing, we shouldn’t worry if other makers can afford our work. instead, we should aim for deeper pockets and trade amongst ourselves for the things we truly love.
Yes. We make our molds from their actual real life counterparts, WWII grenades, a used mixed tape, a baby doll head we found at the thrift store.
Having that kinda bragging right has offered many marketing opportunities for us and we continue to push that we are the only company, to my knowledge and googling prowess to do so.
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Thank you for this post – all of these issues are coming at the right time for me as I am just setting up my business.
What do you think about having some items that you can charge more for and make a bigger profit and some that you don’t make so much profit on but may bring in people into getting acquainted with your work?
Just this evening I ran into this same thing. I sell handcrafted jewelry and am careful to try to price my pieces to cover all my costs. I sell on my own website as well as Etsy. I did a search on etsy for a specific type of jewelry I made and found almost the exact piece of jewelry with almost the same components listed for nearly half the cost. I was very frustrated because if I sold at these prices I would barely break even and it would leave absolutely no room leftover for selling wholesale in the future. Some of us want to get paid for our time and effort and it frustrates me no end that others are willing to short change themselves…it devalues my product and makes it that much more difficult to make a living at what I do.
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