Living On A Dime

Pay for the product, pay for your time. Your time is probably the most costly aspect of making your product.

If your product takes fifteen hours to make, such as a quilt, first pay yourself an hourly wage, such as $30/hour...

Hang on there, cowboy. Remember, when you work for yourself, you'll be paying your own taxes, your own health insurance, your own shipping supplies and costs. $30 an hour often translates to $15 an hour take-home pay.

For the record, you can double your hourly wage and add three zeroes to get your approximate before-taxes yearly income, so working 40 hours a week at $30/hour is approximately $60,000 a year. Factor in the cost of materials, advertising, packaging, shipping, and then price your product accordingly.

This exercise separates the wheat from the chaff. If you can find someone to pay $500 for your quilt, then perhaps you can make money. On the other hand, if it takes you eighty hours to make a quilt, your market will be thinner as most people won't want to pay $2500 unless it's a darn nice quilt.

So remember, your time is the key factor in making the product. I cannot count the number of people who, over the years, have asked if we can make them a custom tankard.

"Oh, we'll supply the wood," they tell us. "Then the tankard would cost – what – five dollars, maybe?" Honestly, that's what people have asked us.

"No, the tankard won't cost five dollars," we reply. "The cost of wood in each tankard is negligible. The largest part of the price is paying for our time."

The number of people who walk away insulted at this idea – that we need to pay us, that we deserve to earn some money for our time – is startling. These people have no idea how to conduct a business.

There is also a psychology to pricing. If we sold our tankards for $5, we might indeed sell more tankards. However, the unspoken question in customer's minds would be, "If the product is so good, why is it so cheap?" High-quality needs a price to match. It goes without saying, of course, that the quality of the product must be worth the price.

As our own rule of thumb, we price our items at five times the materials cost for wholesale sales, and ten times the materials cost for retail sales.

This rule of thumb changes for more expensive items. A cabinet-maker might be able to price his product at twice the materials cost and still make a profit.

But if you are making bead necklaces and your materials cost $2 (costs might include beads, needles, clasps, thread, shipping, etc.), then you can reasonably charge $10 per item for wholesale, and $20 per item selling retail.

How long does it take you to make ONE of your product? How long does it take to make one hundred? Can you make your product assembly-line fashion? If so, you're a prime candidate for selling wholesale. Henry Ford's revolutionary use of the assembly line to make automobiles made him rich. It's just about the only way to make a living – and support a family - in the craft business as well.

If your items can only be made one at a time, it will be extremely difficult to sell wholesale. This may prevent you from placing your products in retail stores, catalogs, or with buy-and-sell merchants. You will also need to price your product accordingly. You will have to do direct marketing, whether selling through eBay or a website, or going to shows and selling directly to the customer.

Custom work is a waste of time for us. Production costs are higher because we're making only one or two items rather than a batch of one hundred. Plus…well, the finished product just isn't quiiiiiite what the customer had in mind, and they decide they don't want it after all. (Aaarrghh!) Also, as mentioned before, customers also don't understand why a custom item is expensive even if they offer to supply the raw material, because they don't understand that they're paying you for your time.

Avoid consignment if at all possible. Many crafters, desperate for sales, use consignment establishments to sell their products. Putting aside the few but authentic unscrupulous individuals who actually steal your products or who put no effort into selling the product, consignment situations are just chock-full of pitfalls.

When will the consignment establishment pay you? How much? How often? How many customers walk in the doors? How long will it take an item to sell? Will you sell one item a day, a week, a month?

That said, we have several consignment arrangements with some of our trusted customers. If you have stock sitting on a shelf and nowhere to market it, you might as well do something with it. However, if you think you'll get rich doing consignments, think again.

Be professional. Pay your bills. Keep your promises. Don't miss deadlines, don't expect concessions or special treatment, don't blow off customers or events with inadequate notice. Don't make it difficult for people to do business with you.

Get business cards. Keep the lines simple and clean. A sketch or drawing on the card is helpful as it reminds the customer what you make. Especially for "women's crafts," avoid making the cards too cutesy or frou-frou or pastel. (The same might be argued for websites.)

It goes without saying that retail customers pay up front. But for wholesale customers, you may have the option of billing them on a net-30. My recommendation is that you have your wholesale customer pay up front for the first (two, three, whatever) orders, then afterwards they have the option of a net-30. This establishes a history with the customer and reduces the likelihood that they'll screw you out of payment.

That said, we've been screwed juuuuust enough times that we no longer do net-30's at all, even for established customers.

You may not have the luxury of payment in advance, so make sure you and your customer have a complete (and written) understanding of how the payment will take place prior to your product changing hands.

Some establishments have unusual and, I think, offensive payment methods. For example, Don and I were very excited one time to receive an order from a catalog company that features high-quality products all made in the state of Oregon. We worked hard to make our tankards as beautiful as possible, and with pride sent the shipment in. It was only afterwards that we learned that the catalog's payment system was net-60, a tremendous hardship in our cash-strapped finances. If we wanted net-30, we would be required to reduce the invoice by 5%. There was no payment-upon-delivery option. As far as we were concerned, this was absurd, and we never did business with the company again.

What happens when a customer doesn't pay? Just swallow hard. It happens. Even established customers have their bad days when checks bounce. Generally they appreciate the opportunity to make good their commitments. A polite phone call or email will usually suffice.

But occasionally you get someone who has no intention of paying you. Phone calls or emails are not answered. You can either (a) write the customer off as the cost of doing business (and naturally, never do business with him again); or (b) pursue him with a collection agency if the amount is large enough. Collection services usually get half the money they collect, and you can't charge the customer for the cost of such services (unless this is specified on your invoices). So even if the collection agency is successful, you'll still lose money. However, you have some gratification of knowing that the customer now has a stain on his credit record.

Realize that the further away the customer, the less likely it is you'll get anything back. We had a customer in Illinois who has owed us $500 for nine years now. Obviously we're helpless to do anything about it.

For years we didn't accept credit cards because we felt we were too small a business. This isn't true - many banks are happy to set up a merchant service account with small business. By establishing a merchant services account, we have dramatically increased our business. Both our wholesalers and our retailers can use this payment option.

If you choose to accept credit cards, go with a reputable bank or financial institution. Several times at shows, before we had a merchant services account, we were approached by people "fishing" for crafters to give merchant services applications to.

I remember a huge holiday craft show I did in Portland, when our business was about two years old. Sales were slow. A man came into my booth and looked around with apparent interest. Then he asked if we accepted credit cards.

"Well, I'm here to tell you you're not!" he exclaimed. He whipped out some brochures and business cards. "Slick Willy here, and I can offer you excellent terms to set up a merchant services account..."

It was all I could to keep from throwing up my arms in defense and yelling "Aiiiieeee!" I pushed Slick Willy out of the booth as quick as I could. I would no more accept a merchant services account from him than I would accept a dinner invitation from Hannibal Lector.

I suspect these types of sales people are operating under the impression that small crafters feel too intimidated to approach a larger financial institution, so they step in to fill this void. I'm not saying they're necessarily disreputable, but I wouldn't do it. Go to a bank.

That said, you may have to wait a couple of years until you have a solid business history (and assuming you have a good financial record yourself) before a bank will look at you. It's worth the wait.

Realize that you must generally pay about 3% of your credit card sales as fees for the merchant services account. This can be a bit of a shock during a busy season ("What! The bank charged us $350 in sales fees???") You may also have to rent a credit card machine, either a manual "chunk-chunk" type or an electronic one.

First rule: be scrupulously honest. No cheating here. You don't want to jeopardize your home business – or your home - over a few bucks you owe the IRS.

Because I'm the more organized of our team, taxes fall on me to do, darn it. For the first few years, I used one of those bookkeeping record books you can find in any office supply store. It was laborious and I'd sometimes pull my hair out in frustration, but we didn't have a computer, so I had little choice. In March, I'd hand the book to our tax preparer and cross my fingers.

Then we got a computer and QuickBooks. If I thought this was going to simplify my life, I was gravely mistaken. For two years I attempted to fit our business into the little slots that QuickBooks allowed, and I was constantly frustrated and constantly pulling my hair out in frustration. I'm not a computer person at the best of times, and this was the worst of times.

So late one night, trying to work on QuickBooks, I uttered several nasty four-letter words, turned off the computer, and yanked out some sheets of paper. I proceeded to tally all our expenses (in great detail) by hand on paper. Literally. To my surprise, this process took a fraction of the time that QuickBooks took, and I lost no hair whatever. I've done our taxes by hand ever since.

Now now, I know there are millions of happy customers of QuickBooks. It just didn't work for us, so don't write me nasty-grams about it.

I keep every receipt possible and document everything in our business – all income, all expenses, everything. During tax season, I tally everything and group it by month. Then I bring a one- or two-page summary to our tax preparer.

One time I expressed my concern about being audited to Jenny, our tax preparer. It was my concern that anyone with a home business and a homestead might be waving huge red flags at the IRS, begging for an audit. Jenny looked at the pile of supporting documentation I had on my lap and started to laugh. "Let them audit you," she said. "I'd love for them to see how you do your taxes. You're so well-documented that you have nothing to worry about." It came out that she had seldom seen anyone document a business so thoroughly.

So be honest. Be thorough. Be scrupulous. It adds greatly to one's peace of mind.

Are you ready to work for yourself in a home craft business? Answer the following questions with brutal honesty.

List every single bit of raw materials (including tools), no matter how small, that you need to MAKE your product from start to finish. (For instance, our list might include wood, glue, sanding belts, band saw blades, all the tools in our shop, rubber bands, surgical tubing, etc.)
List every single expense you'll have to MARKET your product. (Our list includes shipping boxes, bubble wrap, website costs, shipping costs, etc.)
Based on the above two questions, estimate how much it costs to make ONE unit of your product just in materials cost (not including paying yourself). Be conservative and realistic. It's better to over-estimate than under-estimate costs.
How long does it take to make your product from start to finish? (For instance, we note how long it takes us to make 100 tankards, than divide 100 into that amount of time to figure out how long it takes us to make ONE tankard.)
Can you make your product assembly-line fashion, or must each item be made singly from start to finish?
How much would you like to pay yourself per hour to make your product? Be realistic. $100/hour would be nice, but will your customers agree (since you'll be passing off the costs to them)? $4.50/hour is modest, but can you making a living on that? You'll need to look at your overall living expenses to answer this properly.
What do you honestly think your customers will pay (retail) for your product? $5 per unit? $50 per unit?
How will you market your product?
- Will you attend shows? How many per month or year? How far are you willing to travel? How much in booth fees will you be willing to pay?
- Are you computer savvy? Can you set up a web page or eBay account and sell your product on-line?
- Can you make your product cheaply enough to sell wholesale? Would your product appeal to retail stores? Is it of high enough quality?
- Can your product be sold through catalogs, or is each item too unique?

Don't expect instant success. A profitable craft business can take years to build up. Be patient, be professional, work hard, know your market, and chances are excellent that you'll succeed.

The ultimate symbol of success? We live and work at home on our farm. Who can ask for more than that?

Patrice Lewis is co-founder of Don Lewis Designs (http://donlewisdesigns.com). She and her husband have been in business for fourteen years. The Lewis's live on forty acres in north Idaho with their two homeschooled children, assorted livestock, and a shop which overflows into the house with depressing regularity. See Patrice's website at http://patricelewis.com.

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