Friday, December 5, 2008

Profit : )



Just the sound of the word profit and margin can make me giddy! Go figure, that I am in my full time career and inventory and financial planner for a large box retailer. I know all about how all the retail metrics work together...sales, markdowns, margin, cost of goods, labor, etc. These are skills I take for granted in knowing that help my Etsy shops to be profitable.
I will say running something like an Etsy shop, which I call my "micro-business", is very different from running a multi-million dollar business. Some of the metrics are different...for instance I have never considered myself over-inventory, or had an inventory plan. However, I look at margin very closely. Gross margin determines profitability. Here are some things to consider:

What are your costs:
-Cost of materials
-Cost of labor
-Cost of fees

What should your pricing be then. Most retail looks at a 50% mark up as bench mark. Mark up is (Retail Price- Cost)/Retail Price. So for instance, look at this example for pricing for profit:

A Greeting Card
- Card stock 10c
- Embellishments 50c
- Craft Paper 5c (Remember, you may only use a quarter of the sheet, so the cost is only 25% of the whole sheet purchased)
- Labor: If you pay yourself $6/hr, and it took you 10minutes to make the card, labor is $1
- Fees, 20c listing fee, transaction fees between Etsy and Paypal 45c
TOTAL COST: $2.30.........................so with 50% markup, your Retail should be $4.60

There are games to this however. Let's say, you know the market will no0t bear a $4.60 card (although technically the average card at Hallmark and American Greetings is between $3.99 and $5.99, and they are not handmade), you can mark it less, but your profitability is less. It is up to you what you want that percentage to be. However, keep in mind the lower your markup, the less room there is to have sales, any kind of blunders (damaged inventory, under charged shipping). I took shorter mark up on my cards, to keep with the average of card sellers on Etsy, which seemed to be between $3.50 and $4.50.

However, this game can change. What about when you get a 40% off coupon for Joann's or for Michael's? That gives you lower cost, and higher markup, which in the end gives you more PROFIT! Another thing that can help is buying in bulk. In my candle business this has helped a ton! I bought 50lbs of soy wax. It was literally 1/8th the price of what I was paying, buying it by pound. I also bought 100 tealight casings for double the price I would pay for a pack of 6 at a local craft store. As a business, this is a survival technique.

You also have to know your limits. For instance. I can love, love, love a container, and know it will sell, but it it costs me $6, and I know the candle could only sell for $10, it is a no go. After you take in the cost of the fragrance, the wax, the wick, the labor, and the fees, I'd maybe make $1
, and that really isn't worthwhile (please note in mark up we haven't talked about marketing, gas for the post office, and shipping materials). The point is, you need to have your boundaries, of what you can afford, and what you can't. Even if you love it, and a customer may too, if the price is too high, it may sit and not sell.

So here is how I get my bottom line. You've seen how I calculate pricing, and what the "mark up" is. Now take all the mark up of items sold, and out of that comes, some of your costs of running a business. This could include a monthly fee for your own website if you have one, marketing fees (I calculate Etsy renewals under this), shipping materials, gas to get to the shops and post office (although sometimes these can be eat up, if you were already going anyway). Now after you take all of that out, you have profit!

Keep in mind for me, I average out the cost of shipping materials and gas. I do set an Etsy renewal budget and grimace if I go over it. See below on tips like twitter, to help for FREE promote your shop.

Here's an example of my Monthly Spreadsheet:

6 comments:

Homemade Zen said...

very nice explaination bubba!

Dancing Monkey Jewelry said...

Great explanations!

Darla, Pencil Portrait Artist said...

This is a good explanation. I'd love to be able to subscribe to your blog, but didn't see a link to subscribe (Feedblitz is pretty good).
Your blog link was shared on Twitter, that's how I found you. I think this blog post is very useful, so I will pass it along to my Twitter followers, too!

Chelsea Ling said...

definitely something to think about... although.. I make no labour $$ because otherwise I couldn't sell my cards, and they're already a bit high priced as it is because of the materials I use.

I don't think many crafters think about margins and things.. at least I have experienced that many tell me they don't when I have brought it up on chat.

Maura McGovern said...

thank you, very helpful!

Kreated by Kelly said...

This is an awesome blog post!! Exactly the kind of thing I had just been pondering when trying to get my prices more competitive. I have to keep reminding myself "don't be competitive at the price point, compete with a quality product." I don't think people realize what goes into a product nor do they realize that profit is what occurs after you pay yourself and pay your biz bills. Three cheers for being business minded -- we need more people like you in this world....cause then "they" would get it.