Once you have decided to get serious about producing a particular item, there are a few steps to go through to really get started.
Business plan
This is not as hard and scary as it sounds. You do not need a template or a 5 year plan. The only person who ever needs to see it is you, so you can write it in crayon on the back of the shopping list if that’s what you need to do! Since you have already read our first post in this series on how to decide whether you want to be an artisan or not, you should already have an idea of whether there is demand for the product you intend to produce, as well as what your competition is. Now go ahead and make a list. Don’t leave anything out! Find out as much as you can about the demographics of your target audience and what your competition is doing. Find out every way possible for your potential clients to get that itch scratched somewhere else and decide if it will conflict with what you want to offer. Before you start planning, you probably had a rough idea of how much it would cost to go into business, now is the time for writing out a detailed start up budget. Go ahead and call the IRS and get your Employer Identification Number (EIN). Even if you don’t intend to have employees, you need this step to show potential landlords, insurance agencies, banks and suppliers that you are taking this seriously as a business. It takes 5 minutes of time and is free, and protects your social security number should someone you work with require a W-9 form from you. When setting your start up budget, There are many things to consider and it is easy to leave things out. The following is an outline of the typical expenses I have encountered. The inent is not to scare you off, but rather to empower you to set up a sustainable business model right from the start with a slightly more gentle learning curve than some of us have experienced!
The cost of business; establishing wholesale cost
Pricing a product is possibly the most difficult part of becoming an artisan. It seems so easy at first, because we rarely see all the costs involved in creating a product before we start. Even if you have been creating similar items for years, have you taken all of your expenses into account? Let’s start with the easily visible ones:
Material supply.
You need to know how much material you need for each piece down to the smallest measure for efficiencey. You need to know the standard price of your materials, even if you regularly find good deals and sales. Items should be priced with the replacement cost in mind, not necessarily the cost you actually paid for a particular run. Remember to add in a margin for occasional mistakes, or material flaws, etc.
Wear and tear and machine replacement cost.
It is all too esay to forget about this aspect, especially if you had equipment in use before considering a business venture. “I had it already” is not a good reason for leaving this out of your budgeting process! Put a monetary value on your existing equipment and record it as an investment. Determine your replacement cost and how many items or years of use will get you to replacement time, then remember to actually set aside a portion of each sale towards that future replacement cost. Factor in periodic maintenance costs as well, from regular tune ups to parts replacements.
Licensing and insurance.
Becoming a licensed and insured business owner has real value in protecting both you and your clients and is absolutely not a government scheme for extorting money out of small businesses. Business licensing, trade licensing and insurance are all set in place not simply to help by the government or some insurance company make money, it is a show of good faith that you are attempting to comply with current standards of safety and fair business practices. The state can deny a license to businesses with unethical practices, and hefty fines can be issued for non-compliance, which are policies put in place to help protect consumers. Insurance helps protect you from lawsuits should someone suffer some kind of injury while interacting with your company and your product. It is essential to take care of both of these safety nets before going into business. You may also want to look at riders on your current home policy to cover business equipment and material loss in the event of an accident or emergency.
Research and Development
You spent hundreds if not thousands of hours learning your craft, including making student quality items and at least a few complete flops. It’s okay to admit that, it’s part of the learning process. Should you encorporate that learning expense into your production price? On a basic level, you can say yes, customers are paying for your experience in knowing your craft well enough to make a high quality product, but even if you decide not to factor past expenses in, there is something important to consider. You aren’t done learning yet. The market is changing every day. Every day there are new materials becoming available, new design trends to keep up with, new regulations to follow and a creative enterprise needs to keep growing and adapting. You will also continue to flop on occasion. Producing items to sell carries an inherent risk that people won’t like a particular item enough to buy it. Sometimes what we may consider our best work will never, ever sell. We hope that what does sell vastly outnumbers what doesn’t, but the brutal truth is that you will continue to fail with some of your creations, and you need to budget that failure into your overall business plan. Wild and crazy experimentation is a good thing if you want your business to grow, so allow room for it in both time and cash flow considerations.
Packaging and labeling
There is enough on this topic to write several more chapters, but for now I’ll just remind you that your product needs to look good, communicate proper use clearly and comply with federal labeling regulations. Besides the expense of the labels and packaging itself, you may also want to work with a graphic designer or marketing specialist of some kind, tho that is not strictly necessary.
Work space
This is another area where it is all too easy to say “I had it anyway” and skip budgeting for this. What happens when you outgrow your space and need to start renting a studio, or you need to move and want to make sure you have a work space in your new home? What else could you be using that space for? You are paying for that space in rent/mortgage, taxes, utilities, you might as well charge your business for it to help cover those costs.
Professional services
No one can do everything. We just can’t. We can certainly try to do the more expensive things ourselves if we have any aptitude in the area at all, but chances are you will need help with accounting or drawing up legal contracts or designing a logo, etc. It’s okay, you don’t have to do everything on your own, other people actually like doing these things and they are trained to do them well! Get a couple estimates and put this in your budget too.
Taxes
This will vary regionally, so make sure you check with city, county/borough and state tax codes in addition o federal codes. You’re on your own, now, which means you get the full burden of paying Medicaid/Medicare, social security and FUTA. These aren’t taken out until later, but you will pay for theme eventually, so again, I encourage you to budget for this and set aside money from each sale to cover this expense.
Now pay yourself!
You get to set your own wages, so consider carefully whether you want to undercut minimum wage to make $2 an hour or $20 an hour or something in between. What is your actual production time worth to you? How much design time goes into each product when you do a bulk run vs. a single custom order? What about the time you will spend getting your product to clients and providing basic information about your product? We will get into marketing and delivery expenses in a moment, but whether you plan on going through a retailer or doing direct sales, you need to spend a little production time defining your product and physically getting it out of your house or shop.
Congratulations! Add all these expenses and divide by your expected output and you have established your wholesale price! You aren’t done yet.
Retail pricing
Why should a small artisan charge double her basic expenses to maintain retail pricing? We could go into showing respect for your craft and for you fellow artisans who are actually trying to make a living at this, but really its about respecting youself and making sure you dont burn out. At this point, you’ve figured out production costs and are making a little pocket money, but are you really being compensated for your time at work? Producing artisan crafts can be a joy in and of itself, but time and again I have seen artisans burn out because they do not consider the time and energy involved in marketing and delivery. There is a very real opportunity cost, and only you can decide if you want to spend time in these activities, or if you want to allow someone else represent your work. If you are representing your own work by yourself, you are effectively a retailer with all the time and effort and expenses that carries.
Marketing cost.
Putting up and maintaining a website or an etsy account is an easy first step. Keep In mind that if you are paying yourself by the hour (in opportunity cost or cold hard cash) you are probably not saving money over hiring a designer, so what you do here will depend on whether you have more time or more money at your disposal. A website is not strictly necessary, but it does help establish your business presence and make you findable. The real work comes in convincing people to come look for you. Being a retailer means spending hours researching effective advertising methods for your target market, answering questions from prospective clients, explaining your product’s advantages over and over, listening to clients and establishing long term relationships which you hope will turn into repeat customers and long term sales. It also means hours of turning down advertising opportunities which you don’t think are worthwhile and telling potential customers no, I don’t think this is the right product for you. The absolute, hands down best form of advertising is word of mouth social networking based on a solid reputation for quality and service, and this is honestly the most challenging thing to maintain. It is a real job and not everyone is skilled at or of a temperament to deal with constant customer interaction. Some artists just want to create and leave the marketing to the retailers. If you decide you want complete control and like that interaction, pay yourself for the real job you are doing by charging retail rates.
Delivery of product.
For some this means standing at a booth every weekend or working in a store front every day, combining the tasks of marketing and delivery. It can also mean fulfilling web orders and correctly calculating shipping and getting things either to the post or scheduled for pick up.
More insurance, rent, payroll and more taxes.
If you have a retail front, either as a store owner or at a booth, you need general liability insurance in case someone slips on your doorstep and sues you for a broken ankle. You will also be paying for the space you occupy, both for storing product and display equipment and display space. Either in a physical store front, on a table at a craft fair or online on your website, your product needs to pay for renting that place on the display shelf until it sells. How much the venue costs and what the average turn around time for a product is will determine what that rent needs to be. If you grow to the point you need assistance, you get to deal with payroll and payroll taxes too. This is a relatively short list, but it is where the bulk of overhead comes from for most small businesses.
If, unlike me, you are not obsessed with putting that all into a spread sheet when you first get started, doubling wholesale price (100% markup) is usually a good rule of thumb. Some specialty items which do not tend to sell as quickly may be marked up as much as 400% to cover that “shelf rental” expense, while some quick selling items can afford a lower margin, so do keep an eye on actual expenses as time goes on.
Perceived value.
One last thing to consider before pricing, or even going into production, is what the perceived worth of an item is. You will never be able to compete as an artisan with a factory produced tee shirt, even if you are putting more effort and time into it, because the public has a very low perceived value of that product. As a friend, Shira once put it, you can spend hours collecting recycled lint from flannel to sell on etsy, but it’s no one is obligated to pay for that. Your product is only worth what people are willing to pay for. On the other hand, for a well presented, quality product, price can be a signal to clients of worth as well. Pricing brackets generally help set public perceptions of quality and worth, so pricing your items in a higher bracket can indicate to a consumer that your product stands out in some way, so as to be worth that price. I have seen many instances where raising prices to an appropriate level increased sales along with consumer confidence. It is, of course, your job to make sure your product is actually worth any added expense. Remember word of mouth is essential for sustainable growth, so artificially inflated prices will backfire, but accurate pricing will help you succeed. To maintain the perceived value of your product, it is important to maintain consistent pricing. Don’t ask your retail representative to sell at retail and then routinely undercut your own product. If you have a sale on the same product every week, the sale price becomes the perceived value of the product instead of the crazy good deal you are trying to promote.
A final note on choosing a retail partner.
If you choose to have someone represent your product, consider with care how it will be represented. Some retailers will simply put your product on the shelf and expect it to sell itself. These are usually larger stores, and there is the benefit of simply being in a large, well known store, but you will likely have to do more work establishing and marketing your brand yourself. In a smaller store, look for a partner who will make sure everyone on staff knows the ins and outs of your product, so they can direct clients appropriately to your product. Find someone who is excited about your product. No matter who you choose to work with, remember they are representing your brand and the service customers receive will be associated with your brand as well. The same goes for web sites as well many people sell successfully on eBay, for example, but is that the right image for your business? Maybe, maybe not, and it is fine to experiment, but at the very least you should be thinking about your overall presentation.
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