Profit Margins 101

Alright let's get down to business! Ideas are great, but they are a dime a dozen. Unless you can tell me your bottom line, you don't have a business. You need to understand how your business makes money!

 

So let's start from the beginning.

 

What is your business model?

 

In other words how does your company make money!  If you are serious about making your hobby your full-time that supports yourself and your family it's vital you get a grasp on this subject. You should have earning targets set up, or be able to answer the question 'how much do I want to earn?' This is usually the amount you need every week (or month) to pay your bills and support your family. Without targets, we burn out quickly and lose motivation.

 

Once you know how much you need to earn, you'll want to consider what your product costs to make. This includes materials, labor, shipping, and overhead (rent, utilities, taxes). Don't forget, as your production costs rise,  your sales margins drop.

 

So what can you charge? Very often people confuse wholesale pricing with retail pricing and undersell themselves. Don't make that mistake! The basic rule:

 

Wholesale price = Cost of materials + labor + expenses + a markup for profit

 

I see many people factor in one or two of these things, but very few factor in all four. I want to add a special note about the markup, profits are what help your business grow and offer a cushion for emergency situations. Do not skip this! And for retail you want to at least double your wholesale price.

 

Your margins are the difference between what you make per item, and what it costs to make each item. Many successful businesses earn 5, 7, or even 10+ times what it costs to make a product. And that's perfectly okay, and something you should consider if you actually want to grow your business.

 

In figuring out your margins and how you should price, you will also want to consider your output. If you need to make $3000 a month and your margin is $10, you'll need to make 300 items. Is that viable? Can you do that? You don't want to be busting your butt working 80 hours a week just to meet your profit targets!

 

And moving into another subject often forgotten by makers, customer acquisition costs! What do you pay to get your customers?  Look at 3-6 month timeframe ad calculate all the expenses you incurred to get your customers through the door. You want to aim for at least triple profit margins to acquisition costs.

 

In our handmade world, many of us get very lost and lose sight of what it takes to run a sustainable business. If you really want a profitable business that takes care of you, and gives you some cushion please consider all of the above points.