Business with Evy’s Tree: Finding the Right Profit Margin

Before I start out here, I want to make a HUGE disclaimer:

I am NOT any sort of business maven AT ALL. To be honest, I have no idea what I am doing most of the time. I am actually VERY, VERY nervous to step out and do this post, to be honest. I was trained as a teacher and taught 4th grade for 6 years { ok, I taught 5th grade for one of those years… but it definitely was not a year worth mentioning, ha!}, so the creative side of me is much stronger that the business side of me, obviously. But, I am surrounded by several very, very smart business people, namely my Dad and my brother, Brad {who is ultra smart and works in the fiance field, and did I mention he has an MBA from Dartmouth? Uh, yeah, I’m a proud sister. :)}.

Anyway, when I first started embellishing hoodies, my dad came over to my house. It was the first time he had seen me since I had embarked on this adventure. I had hoodies stashed everywhere and it truly looked like my house had exploded. It was a disaster. After he got over the initial shock of what a mess things were, he realized I may be onto something, so he sat me down and helped me figure out a profit margin. He also helped me figure out how to hire some help {we’ll discuss this in next week’s business talk}, which was the turning point of my little business. Regarding profit margin, he made me write everything out and once we were done I am ashamed to say I was making only about $5 off each hoodie. At that time, each hoodie took me almost an hour to make. YIKES. We promptly raised prices and things looked much better after that, thank God.

So, thanks to my Dad, I am a huge advocate of finding the appropriate profit margin for your product and sticking to it. Nobody wants to work for free. I may not do everything right with Evy’s Tree {in fact I’m not sure I do much of anything right for that matter, ha}, but I do know this: I definitely know how to find a profit margin. I value my time too much not to.

Over the past couple years I have had many, many emails and friends asking me how to figure out pricing. I feel, as most people do, that pricing correctly is the definitely the most important and first step you can do as a business owner. Not that you will always get it right the first time, but you need to find a starting point. I’m going to share a few questions that I have gotten over the years regarding pricing, profit margin and knowing if you have a viable product.

Sidenote: I put a call out there today on FB asking for business questions and I got a TON. Not all of them are applicable to profit margin, but I will try to answer them in future posts. Thank you for all your questions!!

“How do you go about deciding if a product is viable? The handmade/craft market seems to be saturated at times. How do you distinguish your product?”- Audrey

This is very hard. The handmade market is VERY over saturated in many areas. Thankfully for myself, I fell upon a product that was not really done much at all, and I knew this. But if you are creating something that may be done quite often by many different sellers, figuring out if it is a viable product for you is a difficult decision for you to make. In my opinion, it all comes to down to two things: profit margin/cost and amount of sales. If you are able to create a cost that people are willing to pay that has a healthy profit margin, which in turn equals a healthy amount of sales, then I would say you have a viable product. Even in an over saturated market. But the only way you can really figure that out is to find a profit margin/cost and then test the market.

“How do I know what to price my items? I do not feel like I make that money by the time I am done with my product, do I have it priced too low?” – Anoyn.

Well, this is exactly why you need to figure out your profit margin. The only way I know how to tell you to do this is by using Evy’s Tree as an example, so hopefully you don’t mind.

The first thing I feel every handmade business owner needs to do is figure out their Cost of Goods Sold {COGS}. This is the most valuable piece of information you could ever have. I have received a ton of questions regarding customs {which I will have to answer in another post, there are so many!!}, but I want to point out that if you don’t know your COGS you will never be able to do customs…as you won’t have any clue what things cost to price things correctly. Additionally, you won’t really even be able to operate a proper shop of any kind without knowing your COGS.

This is a mock COGS. If you click on the chart above, you will get a free download of this exact same excel spreadsheet {with numbers set at zero} for your personal use. Check your desktop, or wherever your downloads land, for the spreadsheet. The cells are tallied for you, so you don’t need to add or subtract anything, you just need to input your numbers and possibly change up some of the categories and it will get the totals for you at the end {HUGE shout out Brooke, my graphic designer for doing this for us! :)}.

If you notice, the first tallied total includes hoodie, material, tag, thread, buttons and labor. That is EVERYTHING that goes into a hoodie. For your product, make sure you consider all the items needed to make your product. Please note: do not include things you need to make the product but will not be sold with the product, such as needles, scissors, etc. I suggest making a list of each and everything that you need and then break down how much of that item you need per product. Use hot glue sticks? How many sticks does it take to make one product and then how much is each stick? Plug those numbers in. That will get you the first line of COGS {$16.90}.

The second section under the first COGS {$16.90} is what I call my excess costs. These flexuate. They are not always included in/on/with the hoodie with every sale. If I am selling hoodies in person, I do not package my items therefore these costs will not be there, so I can sell my item for a little cheaper price. These excess costs for me include: cello wrap, ribbon tie, business cards, sachet hang tag, size sticker, Evy’s Tree brochure. Basically everything that I need to ship my item out. That would be your second section, which in my mock up totals $1.07 {FYI, these are most definitely NOT my prices, haha. wow, $1.07 would be Heaven! :)}

Total the COGS and the Excess Costs and you will have your TOTAL COGS, or Estimated Direct Costs {$17.97}. Once you have this, you can move onto profit margin and considering a cost for your item.

“How to calculate your time spent on creating your items? Sometimes the actual product may not seem to be worth as much money as you are charging and people don’t realize the hours that go into it.”- Kayme

Basically, what Kayme is asking is how to adequately charge your item. We will get into figuring out your time next week and today we’ll focus on just figuring out the final cost. This is where it gets tricky and where you will need to use trial and error and most definitely understand your profit margin. From what I understand to wholesale{which is a WHOLE ‘nother subject that I would not be an authority on}, your goal is to have a 100% markup, giving you 50% mark up and the retailer 50% markup. Using my mock up for this formula: my cost would $17.97, I would wholesale at $35.94 and it would resale at $71.88. However, from what I have found, most handmade, non mass produced items are not able to meet this this high of a markup.

For those of us who are just trying to make ends meet in our own shops, I would shoot for at least a 50% mark up, with 60% or even 80% being prime, if you can swing it. How do you figure this out? Easy! You already have most of the equation with your total COGS. To figure it out, you can use this simple math equation….

Or, if you are lucky, you can find one of these profit meters like my Gramps had, which somehow got passed on to me. :) But for the sake of time and lack of profitmeters in the world {ha} use the equation. Going off our mock up, the equation would look like this:

$35.00-$17.97 / $35.00 = .49 or 49% profit margin

If you are not happy with that profit margin, keep adjusting your retail cost until you get to a margin you are happy with and then stick with that final retail price. Just a thought…oftentimes the lower the cost, the more you sell of a product. If you are ok with a lower profit margin because it will sell more in the end, GO FOR IT. The goal is to make money, not be a stickler about profit margins. This is only a litmus test to help you, not destroy and/or frustrate you. Do what makes money in the end, just don’t sell yourself short!!

“How do I calculate shipping? Do I pay for shipping? Should I have a flat rate or a flexible rate?” Anoyn.

Shipping an item, I have found, is handled differently with every seller. You could either absorb the cost of the shipping into the cost of your item and give free shipping, or you could charge accordingly for shipping with a shipping fee. Also, many ecommerce sites will calculate the shipping for you according to the zip code that it will shipped to. I have chosen to charge an extra fee for shipping, simply because my profit margin just does not have the luxury of paying for the shipping itself. Unfortunately. :(

When considering a shipping fee, you want to take a look at all your shipping supplies. I include in my supply list the shipping bag, tape and labels only, as the rest of the excess cost is included in my profit margin. Side note: the USPS has many priority shipping items available to us for FREE. Make sure you check them out first before you buy shipping supplies. Also, I use their website to figure shipping out as well. :)

I included a mock up of the shipping costs in the COGS download. Basically, you want to get yourself a good scale and weigh your heaviest item. Then you want to take your highest shipping cost for that weight {I always use Texas and Maine, as they are the most expensive to ship to from where I live} and put that in the first section. Then put your highest shipping SUPPLIES cost {just realized I left that out on the sheet sorry} in the second row, and then figure how much time it takes you to do one item and put that in the second, as remember, you don’t want to do anything for free. Shipping takes a long time!!! Also if you ever hire anyone to do your shipping, their wages will be covered in the shipping fee. If you follow this, you should figure out a good shipping fee that will make sure you are not paying your customer to send the item to them. :)

In closing, I just want to say, if you own a business and don’t figure profit margin this way, please don’t panic. Obviously what you are doing is working for you!! And if you are a trained professional and don’t agree with me, please don’t attack me! ha. Remember, I am not trained in business, this is just what I have found to work for me over the last two and a half years. I say it all the time, Evy’s Tree may fail someday, but if it does, it won’t be over profit margin! :) I hope all this information is helpful to you. If you have any questions, feel free to ask them in the comments and instead of responding to your comments via email, I will comment below so you can see my answer.

Thank you for listening everyone! Big hugs to you all and I will be praying for business endeavors! xoxo

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