I had a conversation with a financial guy this afternoon - he looks after my pension matters. "It's all so irrational" he said, talking about the way currency is going up and down so wildly nowadays. He sounded tired and worried.
When things are chaotic and unpredictable, as they are right now, the important thing is to be able to change aspects of your business fast - not in a panicky way or daily, but at least with speed and decisiveness when it's needed. We set up our new online shop in Euros last year as we could see the need for basing our prices on Euro as it's more tied to the local currency. But we also knew that many of our customers like to shop in US dollars, so we also expanded our Etsy shop (it's USD) and installed an online currency converter right from day one of the new Baba Store. This last year, we have adjusted our pricing according to currency, bought silk in dollars when the dollar was way down, changed our non-US wholesaling prices to Euro-only when the Euro seemed the more stable currency. Almost every month, we did something to respond to the changes sweeping through the economy.
If we were a corporate, or even a large private business, can you imagine how many committee meetings and strategy documents and redeployment of staff moves like that would have taken? As a very small business, you have a huge advantage right now. Use it. Be swift.
A few months ago we sold some bags to a shop that hasn't dealt with us before. When they received their shipment I got a worrying email in which they said they were disappointed that our messengers show our online shop address. They wanted to sell our bags for more than we charge and felt that customers would be turned off if they found out the retail price we charge.
How did I write back? By explaining that we are not keen to sell non-branded pieces (we work hard to build our brand) but also that nowadays, whether or not you put a website address on a tag is largely irrelevant. People will find you by your brand name anyway - or more simply by googling some of your more distinctive features. We would love to go on working with this shop, and I hope they've thought about this and will order again.
I tested our what I said recently by guessing what a customer googling for us would be likely to do. Here's the result of "cats baroque prague" (our care and origin labels say that the bags are made in Prague, even if you ignore the Baba Studio brand).
If you are wholesaling to other shops you'll hit this pricing issue time and again. Because, as I explained to the shop owners, with or without a website address, customers will probably be able to find the designers of most products (provided they are pretty distinct) if they really want to. Things have changed totally - and now a large part of the world is well and truly networked. Nowhere to hide, even if you wanted to!
So what do you do? Do you charge your own price and let retailers set theirs - and risk annoying the retailer if you end up under-cutting them? Do you charge the retailers' retail price from your own shop - and risk scaring off customers because the price is too high?
Do you refuse to wholesale? (many now do) This certainly solves the problem but may be very limiting -and a bad business decision in a recession.
There is no definite answer. But if you hope ever to sell your pieces through shops you will need to begin with pricing levels that shops could live with. And be aware that customers will be able to make comparisons - whether you or the shops want them to or not.
(with a nod to John Berger for those who know the book)
Take a look at these figures for a product made for $9 and sold at retail for $60.
Profit using traditional distributors = $9 (see my post below).
Profit when you sell direct = approximately $40 (allowing for marketing costs, online shop costs and so on).
Which way would you rather go?
Of course, it's not as simple as that. You may well decide to go for a lower retail price when you sell direct - which has its own issues as I'll discuss in my next post.
But in any case the costs of direct sales tend to be high in the early days so when you start, these great-looking profit margins just won't apply. As one friend said to me, "But even the time and effort and expense to go to the post office wipes out all the profit on a 20 buck sale." Yes, and when you are selling two or three things a week, then the overheads - running a professional online shop, storing stock (or the supplies to make stock), doing PR and marketing and, indeed, running to the post office, will kill any profit. In fact, in the early days even the much lower profit from distributed and wholesaled sales may work out better.
But once you are selling, say, two to three things a day, it begins to change and the overhead costs per sale come right down.
It used to be that the only way you could ever really sell enough to make a design product business viable was to use distributors. That's changed. Now the best way is usually to combine direct retail sales, direct wholesale sales and - possibly - distributors too. But that does have its own challenges, particularly when it comes to pricing, branding and visibility. At what point are you competing with your own retail and distribution customers and how can you avoid that becoming a problem? Okay - that's in the next post!
I came across this post when I was looking for methods of making silk flowers over the weekend. The woman writing is outraged at the "profit" that is being made on flower pins. Of course, I respect the fact that she's explaining how to make them for a fraction of that. But is Nordstrom's price anything to be outraged about and is anyone really raking in huge profits? The norm in the retail industry is that retail price is between six and twelve (yes, twelve) times the price of manufacture. Here's why - sorry, it's long but it needs to be -
If you sell via a distributor (not just a wholesaler, but a distributor with a sales force who will actually sell your work into shops) then this is how it works. Let's take a retail price of $60 for an item.
Firstly, there is sales tax. Let's assume it's around 10%, it's far more in many places, so the 60% is actually about $54 plus sales tax (approximately - I'm rounding things up for clarity).
Wholesaler discount - between 45% and 55% (depends on quantity usually). At an average, $27 paid to the distributor. Many retailers demand a bigger discount.
Distributor cut - 15% of price paid. 15% of $27 is $4.20.
All in all, the payment to the maker is approximately $22.80.
Out of this, the maker has to pay -
- Shipping to the distributor/s - say $0.50 per item (varies a lot of course)
- Marketing - again, huge variations, but let's say it averages at 3% or so - i.e. a bit less than $2 per $60 item. I actually think this is on the low side when you take into account all the time as well as money that needs to go into effective PR and marketing.
- Losses and returns - this tends to take off 10% at least. Unfortunately a lot of stuff gets damaged with all this transit and storage between maker, distributor and wholesaler. It's normal to just hit the maker for this if it's damaged before it actually gets to the retailer.
So the maker gets around $18. That means that their cost, including their actual production costs, shipping and import duties if the goods come from abroad, their own salaries, rents etc, should not be more than $9 as you need to allow about a 100% mark-up on basic production cost. This is because generally the reality is that there will be losses like "seconds" - with factory goods you have to allow around 5% of these - and also things that simply don't sell or aren't popular, go out of fashion, have to be discounted etc.
In conclusion - on an item that sells for $60, the maker is lucky to make around $9 profit if their total manufacturing costs (including their own salaries, overheads etc, but not including marketing which I've costed separately) are $9. In other words, no outrageous profits are being made. Particularly if you consider that profits on some successful items have to cover losses on the things that just don't take off. In other words, the maker is very unlikely to get anything like all of that $9 as actual profit that they can put in their pocket - after tax.
If you are planning to make a living from design and production - of whatever - please be aware of these kinds of figures. Amazingly many people aren't and think that if they can make something for $10 and retail it for $20, that's great. Actually, it's not viable if you are working via conventional sales channels. I understand that at the outset it's virtually impossible to get costs low and keep quality high - even the most basic six to one production/retail ratio probably can' t be done until you are making thousands, not dozens, of items; and as we all know from some of the awful mass-production quality out there, it's not easy even when you are large.
So what do you do? Well, there are ways of managing all this nonetheless. I'll say more about them in the next post.