Handmade Business 101: Revenue or Profit?

Posted Sunday, March 18, 2012

Business 101 is a new monthly series from Sarah of CuriousWorkmanship designed to help you improve the success of your handmade home business.  

We crafters are so creative, we often spend more time on the “craft” side of the craft business than the “business” side. With this series of monthly blog posts, I’ll introduce you to some of the business concepts that will help you make your business more profitable. Don’t worry—there’s no math more complicated than simple arithmetic!

Today’s topic is revenue and profit.

Revenue is the amount of money that comes into the business. Let’s make up an example to illustrate it. If I sell a baby dress for $35, my revenue is $35. But even though there’s now $35 in my pocket (or in my PayPal account), I don’t really have $35, because I have to figure that I spent money on materials and selling fees. Profit is what’s left over of the revenue after you subtract the costs you had to pay to sell the dress. To figure that, we need to make a list of the costs associated with this dress. Let’s say I spent $10 on materials for the dress, $1.43 in Etsy fees, $1.32 in PayPal fees. These costs total $12.75. So my profit, what’s left over of the $35 revenue after I subtract $12.75 in costs, is $22.25. That’s how much I’d be getting paid for my hour of work making the dress.

Suppose, though, that I discover that somebody else is selling a similar dress for only $15. I don’t want them to undercut my prices, so I am thinking of dropping my price to $15 also. What does that mean for my profit? Well, even without the labor costs, my materials and fees still come to $12.75. That would leave me just $2.25 to pay myself for an hour’s work! Is that really worth it for me? I would wonder if my competitor is doing the math on this, because her materials and fees must cost something like mine.

Why do we want to calculate profit? Because we’re usually in business to make money. Let’s say I’m earning money so I can take a $1000 trip. How many of those dresses will I have to sell in order to earn that much money? If I sell them at $35, I will have to sell 45 dresses to make $1000 profit. But if I sell them at $15, I will have to sell FOUR HUNDRED and forty-five dresses to make the same amount of money. As hard as it is to find buyers at the $35 price, it’ll surely be easier to find 45 buyers than 445 buyers. Plus it will be much less sewing for me.

Now let’s apply this to craft shows. Many people think they’ve had a good show if their revenue is bigger than their booth fee, but they’re often wrong. Let’s say my competitor sets up at a craft show where the booth fee is $100. If my competitor sells 10 dresses at $15 each, they have $150 in their pocket and they think they’ve done well. But have they? The cost of each dress is $10 for materials, and instead of Etsy and PayPal fees we have to add in the booth fee. So the cost of selling 10 dresses at $15 each is $100 for the materials ($10 times 10 dresses) and $100 for the booth fee. This show actually cost them $200, but they only brought in $150 in revenue. Not only did they not make any profit, they paid $50 for the privilege of being at that show! And that’s not even counting their time making dresses and displays, the gas they had to use to get to the show, etc. Don’t let the revenue fool you—a craft show can be unprofitable even if the revenue is more than the booth fee.

Next time we’ll look at how to find the right price for your items. Pricing your items higher and getting fewer sales may actually give you more profit.

4 comments:

Stephanie @ Toastie Studio said...

Really helpful! I have a craft fair in a couple of weeks, lucky for me I traded the fee for a space by doing some work on their website.

Miss Sarah said...

Thanks for the good reminder. It's hard to think this way sometimes, but we need to do it, don't we.

I'm looking forward to the rest of this series.

Joyfully Sewn Designs

Nanny Boutique said...

This is a very good reminder. I'm always amazed at the sellers who sell their items for less than the materials would cost! I'm still working on the whole pricing thing, but I've found a system that is starting to give results. I pay myself a set fee per hour to work (cutting, pattern prep, sewing, etc) and keep track of how long it takes to complete an item. Then I add the cost of the materials. I add something to that total, but that is still fairly random.

I've found that pricing my CUSTOM MADE items for LABOR only (plus any notions, I include such as thread or elastic) also works great! This way customers know upfront the LABOR cost and can adjust the total cost based on their fabric selection.

Thanks much!

Erin said...

Great post! By the way, I've been drooling over your pink cowboy boots and hockey skates for over a year now!

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