Pricing is a tough one.
First off, Tasha may be right about some of the people on Etsy. I've seriously seen $20 Tandy kit projects on there marked at 5x. Then again, I've also found a lot of leather websites where they take the kits, use the tooling patterns provided, and price the exact same way, so I don't think Etsy is to blame. I have found some of our board members on Etsy; some of their prices are literally through the roof, but most tend to at least try to keep it reasonable.
I think "per hour" pricing is very much the wrong way to go, though. For one thing, it's hard as hell for me to keep track of how much time I spend on a project : how do you figure in drying time after tooling or staining, how do you figure in the time developing your artwork, or developing your designs? And what exactly is your customer paying for, a product or your play time? As you develop your own designs, material pricing also kinda becomes irrelevant, I think.
What it really comes down to, in the end, is what the market will bear. I find that I get the blink-blink from a lot of folks when I tell them what I get for my work (as in, they stop speaking entirely while they process what I said, and stand there blinking for a few), but there are honestly a large proportion of my customers who think that for custom artwork I'm totally undercharging. Helping to educate your clientele will be a huge help in this regard. If you can show them the qualitative difference between your handiwork and that of mass producers/lesser talents your value goes up instantly. Starbucks was genius at this kind of thing, getting people who were used to paying 69 cents for coffee to pay 5 bucks.