Seller Handbook

Advice and inspiration for successfully running your Etsy shop

Seller Handbook

Understanding Profit Margins

If your Etsy business is more than a hobby, make sure you treat it like one. Understanding how you'll make money is key to success.

By Amanda Steinberg May 7, 2010
Photo by donnaOdesigns

Put on your thick skin. It's time to get down to business.

As an entrepreneur, friends and family regularly approach me to share their business ideas.

Can I be honest? I'm not that interested in your ideas, or even how fabulous your products are. I mean, I am, but not nearly as much as other aspects of your business. What I care about more is how your products work in a business context (a.k.a. makes money). What can you explain to me about your bottom line?

Say, for example, that you love to knit slipper-socks. You’ve made a few pairs for your mother, your friends, even cousin Jane in Bozeman. Then, someone suggests that you turn your talent for knitting slipper-socks into a business.

You tell yourself that Slipper-Socks by Sonya has a nice ring to it. You get excited. You have visions of slipper-socks in festive colors and patterns selling for $25 apiece. You want to plunge right in, right now.

Don’t plunge. If you created your Etsy shop as a hobby, that's one thing; if you intend to support yourself and maybe your family with your craft, please, turn off Twitter and lean in closer. I have a few pointers to share with you.

You Have to Understand Your Business Model

“Business model” is just a starched-shirt term for how a company makes money. How will your slipper-sock-knitting business make money? If you're serious about creating a business that can supplement the household income, or even fully support you and your family, stop and answer these seven questions:

1. How much do you want to earn?

Don't run a business without earning targets — weekly, monthly and annually. If you don't create earning targets, you can't measure success, and you'll burn out faster than a wet match. Let's say you want to earn $500 per month, or per week. How many slipper-socks would you have to sell? There are a number of factors to consider.

2. How much will your product cost to make?

All products cost money: materials, labor, shipping, and some portion of your overhead (rent, utilities, taxes). Yes, organic, sustainably sourced yarns may be more deluxe than all-natural acrylic. A dedicated design studio adds prestige. But can you afford the expense? As production costs rise, your sales margins drop. So let's consider the price.

3. What price can you charge?

Price is a core issue, notes Megan Auman, CEO and founder of DesigningAnMBA.com, and the author of a new ebook, released last week. "A typical mistake people make when pricing products is their failure to grasp the difference between wholesale and retail price," she says.

Auman suggests following this basic rule of thumb:

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

"I find that many people account for two or three of these at the most, but rarely all four," Auman says.

Auman urges entrepreneurs to accurately estimate total production costs per item, including overhead and especially your time, labor and expertise.

And don't forget the mark-up for profit. "Profit helps you to grow because you can reinvest in the business," she says. "It also gives you a cushion for when times are tight."

As the manufacturer, you sell your product at the wholesale price to stores — but you have to set a retail price when you sell directly to consumers. Auman recommends that retail price should be at least double the wholesale price.

4. What are your margins?

The margin is the difference between your revenue per item and the cost. As you grow and your business becomes more efficient, your margin may increase. Many businesses earn three, five or even ten times what it costs them to make their product. Why shouldn't you?

5. How many can you make per month?

This is your output. If you need to earn $2,000 a month, and you have a margin of $20, you would need to sell 100 items to meet your earnings target. Is that a viable plan?

Auman advises makers to keep this bigger picture in mind: "It’s important to figure out how many products you are physically able to make and sell, and factor that into your pricing. I encounter a lot of makers who aren’t pricing work accurately and end up making product for 60 or 80 hours a week just to break even."

6. What does customer acquisition cost?

Last, calculate what it costs you to acquire each new customer, advises my friend, colleague and MBA David Ronick, founder of UpStartAdvisors.com. Whether you're selling a product or service, "Pick a time frame, like three months," he says, "then figure out how many new customers the company attracted during that time, and what were all the expenses involved in acquiring that customer?"

Your expenses divided by the number of customers yields the cost of acquiring one customer.

7. What is the margin generated by that customer?

Ronick says that the margin (what you pocket) should be about three times the acquisition cost. 


In our DIY culture, we often get so caught up in our craft that we lose sight of managing our businesses to the point where they can sustain us. If you really do want to develop a profitable business that can support a living wage and contribute to a cushiony nest egg, please attack these questions one by one. You're in charge here.

Author

Amanda Steinberg

Amanda Steinberg is the founder and CEO of DailyWorth, a community of women who talk money. They deliver practical tips and inspiring ideas to help women earn more, save more and spend smarter.

Comments

Continue reading in Pricing, taxes and finance