Friday, February 11, 2011

Feature Friday - Sarah Natividad

Sarah Natividad is a former math professor, wife and mother of 4, and owner of Curious Workmanship, a home-based business selling hand-crocheted baby booties.  She lives in Tooele, Utah.  Sarah was kind enough to offer some insights into pricing.  (Don't you just love that she's crocheting so fast in the picture that her hands are blurred?)

Choosing A Price Level
or, Why Higher Sales Don't Necessarily Mean More Profits

You may think you're in business to sell crafts, but you're not.  You're in business to make a profit.  Think about it for a sec.  Sure, crafts are what you sell; but would you still sell them if they cost you more than they brought in?  Probably not.  Craft sales are just the way you make money.

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 believe it or not, you'd be wrong!  To sell that much product, you'd have to sell it cheap.
"Raise my prices?" you say. "But then I'd sell fewer products!"  Yes, indeed you would.  It's a widely known fact that people generally buy more of stuff when the price is lower.  But allow me to illustrate how that 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.)
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 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 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.

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!  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!

I don't know about you, but Sarah's explanation really helped me to understand some things about pricing.  I'd much rather sell fewer things at a somewhat higher price rather than work myself to death to crank out tons of products to sell cheaply.  With the unique nature of some of the items in my shop, I've noticed that price doesn't matter much to my buyers once they've decided they want something.

Looking to have your shop featured?  Click on the "Feature Friday" tab for more information.

2 mad comments:

Hannah said...

Great insight. I know I naturally price things low because I hate asking people for money and I never think my stuff is as good as the next persons. Definately something to think about.

Michelle Cheney Larsen said...

Great article! I just posted a link from my blog.

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