Tuesday, February 9, 2010

Technical Tuesday! The Dilemma of Wholesale

There are a lot of discussions in the forums about wholesale.  A lot of questions, and as many answers as there are people to give them.  So while this isn't an in depth detail laden post, I'm going to venture to give my opinions on how I do wholesale and some generalized "rules" for wholesaling in general.

Rule #1: Don't Put the cart before the horse.

If you haven't done a thorough accounting of where and how you spend your money, what your supply costs are, what your overhead costs are and what your minimum profit margin is; do yourself a favor, and don't fret about doing wholesale.  While wholesaling is a great way to get large sales all in one shot, and it can be a *great* way to get your business name out there, you're going to have a really hard time making a profit when the industry standard is a 50% discount off the MSRP.

Rule #2: Do the math.

In direct relation to Rule #1, as much as just about *everyone* hates spreadsheets (except  possibly me because I'm a dork that way, and working on spreadsheets and symbolic logic problems are fun for me), they are indispensable for calculating your costs to the penny.  They can be as simple or as complicated as you need them to be, but what it needs to track are:

Materials cost - each and every material you use.  If you sew sock monkeys and each monkey requires 2 socks 1/2 spool of thread, 2 feet of sewing floss, 2 buttons and 8oz of stuffing (yes, i'm pulling these numbers out of thin air - I have no idea how to make a sock monkey)... then you need to account for all of those supplies.  And don't forget the little stuff!  Do you put a hang tag on your monkey? Do you print his name on it? Do you print it on a computer or do you print it by hand?  Add in the cost of that tag, a couple cents for the ink.  Do you sew a tag into your monkey with your brand/logo on it? Don't forget that too!

Fees and Advertising costs - are you selling retail on Etsy?  If so, do you renew?  Are you accepting payments via paypal? Propay? Odds are good you've got fees to pay for them.  You need to build those fees into the final cost of your items.  Do you advertise? How much, where? Is it free? Does it take time? Do you have to pay for your advertisement?  Do you give out business cards? Do you give out samples? These are your advertising costs!  Include them.

Salary -  A touchy subject to be sure, but even if you're just doing this for fun, you should probably get at least a nominal sum for your hours.  If you don't want to get paid for your work... my recommendation would be "Don't do wholesale".  The reasoning is simple enough.  Sooner or later you will resent working for nothing and if you started crafting because you loved it there is nothing worse than growing to hate it because everyone expects you to work your fingers to the bone for free!

Now... to give you an example so you can see how this works... (I am giving you numbers based on buying items from a local craft shop or random figures pulled out of thin air...this is just an example!)

Lets say you want to sell soap.

2lbs of soap base costs approximately $5
1 pack of 3 soap colors costs about $3
1 2oz bottle of mid-grade fragrance oil costs  $6 - you'd use about .25oz to do 4 bars of soap... so $1.50
1 soap mold sheet to make 4 bars of soap will cost you about $9 - you can probably make 100 bars of soap before you break it... so about $.09
Shipping to have all of those items delivered to you costs $10 by UPS (yes, even excluding the soap mold)


So now you have everything you need to make 4 bars of soap.

so... add it all up...  $2.5+$3+$1.50+.09 = $7.09
divided by 4 bars of soap  = $1.78 per bar

Now... here's the kicker with soap, and I'd imagine with anything else - you want to stay competitive with your fellow sellers... so the market sets the price range.  On soap the average is about $5 a bar.

So. Let's say we sell that soap at $5 a bar.  We're making $3.22 per bar!   (insert chorus of "i'm going to make soap because it sells so well and I can make loads of money!" here).

But wait! There's more! (Isn't there always?)

Now.  You have to pay for packaging and labels.  about .02 each (.02 for the packaging and .02 for the label)...  You have to list it to sell it.  .20  There are 76,000 listings in the bath and body category, so being new you have to renew your items about 4 times each on average to get them seen often enough to sell them at a fairly good clip.  .80 cents there.

So.
$3.22 (after materials)
-.20 (listing)
-.80 (renewing)
-.04 (packaging and labeling)

= 2.18

then... finally! someone buys a bar of soap! yay! Now you have to pay 3.5% of that $5 to Etsy. Say goodbye to another .18 cents.  And now we're down to $2.00 profit.

But wait, they're paying by Paypal! .30 is gone for the transaction fee and they take 2.9% of the $5  .15 ....

$2.00
-.30 (*transaction fee paypal)
-.15 (paypal %)

= $1.55 per bar.

So lets say you sell 8 bars of soap and you're making $1.55 per bar.  You've made $12.40. Right?

But what about the electricity for the stove/microwave to melt the soap, the pipette you used to add the scent to the soap, the measuring cup you melted it in, the water and soap you used to wash it out afterward, the rubbing alcohol you used to get rid of the bubbles or sterilize the bowls and cups before use...

The fact that it takes about an hour to make those 8 bars of soap (including all time from beginning to packing it for shipment).

Oh wait! Shipping!  You have to buy an envelope to ship it in, you have to buy business cards to put in there with it!  You should probably have a thank you card of some type.  You should possibly be printing off copies of the receipts, or including a handwritten copy from a receipt book.  and and and and... all the little nit picky details come in...

But if you're wholesaling you don't have to do all of that right? So you save all of that money.

But you are selling for 50% of your retail.  Because this is wholesale, and they expect you to sell them the soaps at $2.50 a bar!

So you don't have $12.40.  You have $6.20 for 8 bars of soap and about 1 hour of your time... to say nothing of the time you spent promoting, and seeking out the wholesale account, developing your recipe, your design. 

Now, I'm not trying to discourage anyone... but this is intended to show you that before you start worrying about doing wholesale... you really need to be in a place to buy your materials in large bulk amounts.  You need to be at a point where you can make huge volumes to satisfy demand.  And you need to be able to pay all the bills.

And if you're not there yet, don't worry.  Telling someone who enquires that you are not able to do wholesaling right now, but you are grateful for their interest and hope that they will keep you in mind in 6-12 months (insert figure of how long it will be before you can wholesale if this is your goal).  It's not a bad thing to not be able to wholesale.  It's just not for everyone.

Next week I'll delve more into spreadsheets and how to determine what you should really be selling your items at if you're looking to make your craft into something you can earn a living with.

~Amy

6 comments:

Laura said...

Price point has always been something I've worried about- not because materials, etc cost what they do, but because TIME (i.e. The time invollved w/my crafts, which are NOT soap, heh) is such a huge factor for me. One reason I haven't started selling anything yet.

I eagerly await next week's post!

Sugar Plum Ferret Knitting Chaos said...

Great post! I've thought about wholesale, but sometimes my materials are expensive and time... well time for hand knitting. I've been advised to charge $25 dollars an hour,but do you know anyone who wants to buy a $1000 dollar hand knit cardigan in this economy?

Amy said...

@Laura,

I'm going to try to cover retail pricing as well. Granted, how I do it will not work for everyone, mostly because I don't factor time into my calculations.

I use a dreaded formula - and I say dreaded somewhat tongue in cheek because that's an entirely different argument in the forums. Should you or should you not use one, and how accurate they are.

@Sugar Plum.. Honestly, I think $25 an hour is fine - on some things. I don't believe people should underpay themselves..but I do believe that each of us has to find a reasonable balance between how much we get paid for our time and how much we can charge and still have buyers.

I know nothing of knitting, so think about it this way... Say you want to get paid $25 an hour for your time.

If you can knit the body of the cardigan while you're watching TV... you're doing 2 things at once, and this is assuming that you can knit while distracted... So while you're doing the body of the item in question, charge $10 an hour, after all, its only got part of your attention.

For the detail work, like, say, sleeves, or putting it all together, when it has your full attention... Charge $25 an hour for that part.

Balance it out. Because yeah, even with yet another 3 inches of snow on the ground, and I'd love a nice warm hand knit sweater to wrap myself up in right now... I couldn't afford $1000. ;-)

ArtTales said...

Great post.. can be applied to all types of wholesale!

Sandra Rosa said...

How interesting. I spent almost all day to count the costs of materials, items and hours of work. Trying to get a fair price. My head is about to explode and have not come to lower prices, only if I work for free.

LoveErica said...

Well done;
definitely got the point across.


Sometimes we just worry about 'getting a sale' and we don't think of everything we put into it!