As I have mentioned before, research has shown me that the two biggest mistakes I could make as a seller are (1) not charging enough, and (2) not planning for growth. Both of these can be avoided by having an appropriate profit margin built into my prices.
About a year ago, when we received our tax return, my husband and I decided to invest $1,000 into my starting a business up. (Yup, that is how long I have been trying to figure out how to do this.) Since then, I have sold several items to friends and family who have shown an interest when I have shared what I am doing. Every last penny I got from selling these items (almost another $1,000) has gone back into purchasing materials (without ever cutting myself a paycheck for my time). So far, I have a lot of both time and money invested….and hope someday soon to see a return for it.
You see, I sew. And as a seamstress, I am an employee of SnugasaBugBaby. I am also the owner and sole proprietor of SnugasaBugBaby. The only way the owner me can cut a paycheck to the employee me is if I have other money set aside from which to pay to run my business. Because I have only been charging my break-even cost or less to my friends and family (I was so clueless about all of this and was basically calculating my prices as the cost of materials x 2 or cost of materials + a guestimated cost of labor), I have not yet cut the employee me a single paycheck. I am not complaining…I was glad to have the money to invest back into my business, but I am saying that I can’t keep doing that forever. It would be really wonderful if in the not-so-distant future it is actually “SnugasaBugBaby” money that I use to purchase fabrics instead of my own.
A helpful link which spells out much of what I have found from multiple sources is this article on “Crafting an MBA”. In it, Megan Auman, describes the difference between profit and wages and strongly argues of the need for both. Basically, she says, profit is necessary so that you have money to put back into growing your business.
The most obvious thing I need to reinvest in is materials (fabrics, clasps, etc.) for future projects. But it is not just the supplies that I need to have money set aside for… there are other ways that I would really like to grow my business as well. Someday, for example, perhaps I could purchase an embroidery machine in order to offer monogramming and other customization in more than the one font I am currently capable of:
I’d also love to invest in a nicer camera that is capable of nicer pictures to take some website development classes. Last fall, I did take a couple of very basic, one session courses on blogging for a business, online networking, and using WordPress. Pretty much I learned some survival tactics to make it look like I know what I am doing and became painfully aware of all that I do not know. I know there are blogging conferences and really great seminars and classes out there. First, I need the money to pay for them.
There are several things that I really want to do and am certainly willing to invest in. But there is a difference in being willing to do something and truly being able to. In short, making my business better requires money with which to do so. The money that I invest into these things really shouldn’t be the hourly wage I make sewing. The whole reason I wanted to start SnugasaBugBaby in the first place is so that I can work as a stay-at-home mommy and make necessary contributions toward paying our family’s expenses. I want to grow my business, I want even more to grow my family.
In addition to financing a better business, I need to make a profit on the products I sell in order to make up for those things that just don’t. Otherwise, I’d be cutting losses from money that doesn’t exist. Some might suggest this is a separate thing called a loss margin which is incorporated into a price independently of the profit margin…since both take a bit of guesswork and a lot of trial-and-error, I have decided to lump them together.
I hope you are convinced, as I am, that a profit margin needs to be incorporated into the prices of my items. Figuring out how much it should be is not so simple. According to Shauntelle Hamlet’s eHow article on setting a wholesale prices, finding the ideal profit margin is done through trial-and-error. She says that many wholesalers start by doubling their break-even price and then adjusting it as needed according to their competitor’s prices. She does not suggest, however, that one should try to beat their competitor’s prices. Rather, it seems that the goal is to see how close (through trial-and-error) you need to come to a competitor’s price to convince a buyer that the additional amount they pay for your product is worth it.
So, here is where the formula and number crunching get’s all out of whack and “un”crunched.
The past several days we filled in the details of this formula:
When it comes to this formula,
“break-even” cost + profit margin = wholesale price
we have a big ugly blank…
“break-even” cost + __________ = wholesale price
or maybe its a question mark…
“break-even” cost + ? = wholesale price
And we are not finished yet. We still have this formula:
wholesale x 2 = retail price
and this formula:
retail price + additional fees like those charged by paypal & etsy (and shipping and applicable taxes) = the price that a customer should pay
to go. I’ll see ya tomorrow.
Follow the Whole Pricing Process:
Adding a Profit Margin (You Are Here)
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