Hi, Kristen.
I do a fair bit of custom stitching, and I've wondered this, too. Since going through the pricing online labs last month, I've been slowly revamping my prices (which were, of course, too low -- and still are, mostly), but before that I'd been doing custom orders for a basic rate of about $30 for a 5x7 with some text and a motif.
I found that with at least two of my custom projects, I ended up spending HOURS longer than I'd anticipated designing and stitching these projects, and in one case thanks to the pricing scheme I was offering I only got paid $16 for something that took at least that many hours to stitch. Ouch.
So clearly my pricing is still a work in progress on the larger items.
On the smaller ones, I've gotten a bit better, now that my shop is full of stuff that makes me feel more "branded," at determining which custom items would actually help me reach a wider audience, and which are just genuinely a one-time custom order.
If I decide that a particular item (like the "your mom" cross stitches in my shop, which began as custom orders) will fit into my shop and appeal to other customers, I charge the same amount I'd normally charge for an item of that size. If it turns out to be a lot more work than I'd expected, it's okay because I increase the price to a reasonable amount for future customers in my shop.
If the custom order is truly one of a kind, though, I don't feel bad charging a higher rate than usual. I need to do the design work, which takes extra time, and oftentimes the stitching is more detailed and complex than my other "made to order" projects. It also offsets the fact that if I spend a lot more time on this one order, I won't get that time "back" from future sales, because this item's only selling once.
Oh -- I've also ended up dealing with this in specific terms with a particular Godzilla cross stitch with customization options that I offer. I have the "standard" Godzilla for one price, then a customize-a-portion option for a few dollars more (a limited amount of design work, not much more stitching), and finally (because it requires more stitching and has been a popular customizing option) another "standard" Godzilla in NYC/Brooklyn for a few dollars more than that.
But that's only one of my items, not an entirely new custom order, and it took me a few months to develop that pricing scheme based on what customers were asking for and what work I found I was putting into the different options.
From a buyer's perspective, I think charging more for customization is fair, and I'd be inclined to pay more for a customized item. After all, that's why people are coming to Etsy, right? Perhaps if customers are asking for a personalized version of one of your items -- they want their initials added, etc -- you could consider having a separate listing for the personalized version, if you know how much time and effort you'll be spending to add that to the item.
I hope this helps a bit...I'll be watching this discussion to see what others say.
