April 7, 2011

Re-Thinking the Etsy Model

There was a really good article about the profitability of Etsy. Simply put, Etsy‘s profitability is dependent on the individual stores profitability. Creating a profitable Etsy store, however, is no easy feat. The biggest hurdle is determining how much to charge for a given item: too much and the shop keeper loses customers, yet too little and the shop keepers profits may not out way costs.
So how much should one charge? It’s easier to think in terms of profits and work backwards. A simplified formula for profits is

YearlyIncome = NumberOfSales * Price – Expenses

Solving for price, you get

Price = (YearlyIncome + Expenses)/NumberOfSales

You can substitute DesiredYearlyIncome to get a price target. To give a concrete example. Let’s assume that I’m striving to be one of those $30,000 a year etsy merchants as a jewelry maker, and I think I can reasonably sell 1,000 pieces a year. Then I will need to charge $30 above the materials cost for each piece I sell. This $30 is basically the cost of labor. But as Max Chafkin points out, “The vast majority of Etsy sellers are hobbyists who aren’t in it for the money and, consequently, end up charging rates for their labor that would make even a Walmart buyer blush.”.

With similar products being offered at barely above the materials costs, it’s difficult to raise the price too much without impacting sales. Why buy a necklace from me if someone is selling a comparable one for $30 less? As a result, the price I can charge is basically fixed. This means the only two variables in the equation left that can change are expenses, and number of sales.

Expenses can be difficult to change. If you’re already buying whole sale, or in bulk, you’re not going to find much wiggle room. You can also substitute cheaper supplies, but you run the risk of losing customers who want jewelry made of higher quality materials.

Increasing the number of sales is also not easy. In my example, I assumed 1,000 sales and needed to charge $30 per piece in labor costs. If I only want to charge $5 in labor costs, I would need to sell 6000 pieces. That’s roughly 16.4 sales a day. Some visitors to my store front will not purchase anything. Some visitors may be other shop owners or crafters looking for inspiration. In order to get enough potential customers to my store I will have devote time to advertising, time that won’t be spent crafting.

The way I see it, the best bet to be profitable is to reduce competition, primarily by changing the product you offer. One way to do this is by offering a product that few others can. Fill a niche. There may be many wire jewelery makers on etsy, but there are far fewer casters. There will always be crafters who will mimic cool designs they see, so you can’t just differentiate yourself by style alone. Another approach I’ve seen recently, is to take advantage of the fact that many of your shop visitors will themselves be crafters. A few etsy shops owners offer instructions for how to create their crafts for very small sums of money. There’s no materials cost, once the instructions have been created, so the $1-$2 is pure profit. It’s also a small enough sum of money that you’re unlikely to be greatly undercut.

Despite the difficulties, there are those who do manage a thriving business out of etsy. You can either look at the numbers Max Chafkin points out and either lament that only 1,000 etsy shops make 30k a year, or rejoice because 1,000 shops make 30k a year. If you’re of the latter camp, and are eager to give your business a try, there’s lots of advice about selling on etsy, including custom work to help maximize your chances of being successful.

If you’re curious, there’s also a consulting rule of thumb for determining your hourly wage that also applies to crafters doing custom work. The formula is:

(DesiredYearlyIncome + YearlyExpenses)/2000.

The 2000 comes from 40 hour work week, 50 weeks a year. Why not 52? Well you’ll need some (paid) time off, for sick days or even just to recharge. We all need a break some times.


Edited to add: I recently developed a tool called Scale-Up which can help you find out what it will take to grow your etsy business to your desired income level.

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Comments

  1. Love this post. I have always stuck to my guns with price. The few times that I caved, I lost out in a big way. I give myself a flat hourly rate with all my pieces. Haven’t put anything on my ETSY account maybe I should give it a try. ALthough, I’d llike to see more than 30K!!!
    Thanks, Kathleen

    • Glad you found this post useful. Good luck with your Etsy store!

  2. I sure wish that I would have read this before starting my store.

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