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Many professional crafters started as hobbyists then decided to turn their passion into profits. Being a hobbyist is okay. It’s fun to do things that we like. However, when making a living is our primary motive, we have to switch our mental gears and become serious about being a professional. In the craft business, we sell the things that we create for more than it cost to produce them. That’s how we generate a profit. That’s how we make a living. That’s why we call it a business.
Margin, a.k.a. Gross Margin, is a simple business concept. It’s the difference between the selling price and the direct costs of making a product. Direct costs generally include materials and supplies that were directly used in making the product. The other costs of doing business such as tools, rents, utilities, insurance, and licenses; are classed as indirect costs. I’ll discuss those in another article. For this blog, I’ll focus on why knowing and controlling your margin is the first step in making a profit.
I’m currently working on a line of rustic garden benches that will sell in a range of prices from $500 to $1,500 retail or from $250 to $750 wholesale. My cost of materials for the low-end benches is about $50 and for the high-end benches it’s about $150. Therefore, my margins on these benches will be $450 to $1,350 retail or $200 to $600 wholesale. Note that my direct costs remain at 10% of the retail price or 20% of the wholesale price for both the low and high priced benches.
Obviously I haven’t accounted for my time or any impact from overhead costs. However, I estimate that the high-priced benches will take about twice as much time to make then the low-end benches. Therefore, by doubling my time, I can triple the amount of gross margin that I produce. So far that sounds good to me.
Of course, the real world of business isn’t that simple. Questions remain about how many of each model bench I will sell. Will my intended market accept my designs? Will I have to shift my focus to meet the demands of the higher end market? How fast and how many of each model will I sell? Will I need to adjust my prices to meet my customers’ expectations? How can I improve my margins?
Running a successful craft business involves more than just making a nice margin. However, generating an adequate margin is a good place to start.
