Part of creating a culture of profit means letting go of some of the myths we’ve been carrying around about our businesses and when and how they should make money. Today I want to look at 5 profit theories I often hear, and why they aren’t (usually) true.
Myth #1: You shouldn’t take any money out of the business for yourself.
When we’re in the early stages of running our businesses, especially when we’re running our business along with another job, we tend to think that we have to put all of our money back into the business and never pay ourselves. But you work hard running your business? Shouldn’t you see something in return?
This is totally something I struggle with. In 2008, my business was nice and profitable. Sure, there were months when things were tight. But there were also months where I paid the majority of our household bills with the profits from my business. I had even set up my business bank account to auto-transfer money into my personal bank account so that I was paying myself a regular, monthly salary. Then, in 2009, things went a little downhill. My business wasn’t making money, so I relied on my part-time teaching job (and my husband) to pay the personal bills so I could keep all the money in the business. Even though my business is profitable again, I’m still struggling with the guilt of taking money out of my business for myself.
But I think it’s important that we treat ourselves well as business owners. If you always work long hours for your business, but never take any money for yourself, it can get extremely discouraging. (I was happy to hear this same sentiment expressed in yesterday’s Biz Ladies post on Design*Sponge, where Amy Rutherford shared that one of her 10 mistakes as a business owner was not paying herself a salary as the owner.)
Even if you can’t afford to draw a large income from your business at first, I think it’s still important to pay yourself a little something each month. Even if it’s just a little bit at first to treat yourself (or shop indie), giving yourself some positive reinforcement in the form of the paycheck can go a great way towards boosting employee morale. (After all, shouldn’t we treat ourselves like the fantastic employees that we are?)
Myth #2: Businesses aren’t supposed to profitable for the first (insert # here) years.
It is true that many businesses don’t make a profit in the early years. (But there are many that do.) The reason for this is that businesses have start-up costs. These are typically one-time expenses that you’ll only pay as you’re starting your businesses. Expenses like registering your company as an LLC, filing for a trademark, or buying major equipment for your studio, like a kiln, would all fall under the category of start-up costs.
If you weren’t profitable in your first year (or years), what you need to find out is if this lack of profit is the result of your start-up costs, or if they reveal a deeper issue. (For example, not charging enough for your products, or over-purchasing and carrying too much inventory.) If your business hasn’t made a profit yet (or only made a small profit), take some time to work back through your expenses. Pull out all those one-time start up costs and see what kind of profit you’d make without them there. If you aren’t spending money on start-up costs (or funding a major business expansion) it’s time to stop telling yourself it’s ok for your business not to make money, and figure out the real reasons your business isn’t profitable.
Myth #3: Profit is the only measure of success.
Profit is important, true. But you also need to be mindful of cash flow. There are lots of business that were profitable on paper that closed simply because they ran out of money to run the business. (Of course, Cash Flow Week doesn’t have the same ring to it as Profit Week.)
But this doesn’t mean that you can ignore keeping track of your financials and just look at the number in the bank. Instead, you need to become comfortable with anticipating when money moves in and out of your businesses to ensure you always have working capital. This could mean planning to spend more money in the fall stocking up on product for holiday shows knowing that you won’t see a return on that cash for a few moths. Or figuring out how to pay for all the materials to pay a big wholesale order that you’ve offered Net 30 terms to. Planning for profit and planning for cash flow need to go hand in hand.
Myth #4: You should lower your prices to get more sales to make more profit.
If I had to pick my biggest pet peeve in the crafting community, it would be the belief that the fastest route to growing your business is by lowering your prices to get more sales. Repeat after me: “More sales do not equal more profits.” You can have all the sales in the world, but if the price of your products isn’t high enough to cover the costs of making the product and running your business, you will never make a profit.
So, STOP. Just stop blindly lowering your prices. Stop lowering your prices without knowing the full costs of making them (and running your business.) And stop worrying about the number of sales other sellers have on Etsy. In order for us to embrace a culture of profit, we need to stop focusing on number of sales and focus on overall profit.
Myth #5: You should raise your prices to make more profit.
Ok, so then why isn’t this one true either? Well, for every product, there’s a sweet spot – an ideal price where the trade-off between profit on the product and quantity sold results in maximum profit for your business. For some of your products, this sweet spot may mean raising the price. For others, it could mean lowering the price. So how do you figure this out?
First, you need to understand how much a product costs you to make. From there, it’s all about testing, testing, testing. Experiment with raising and lowering prices to see how that affects your sales. The best price is the one where multiplying total sales by profit per piece yields the maximum profit for your business.
And what if your best selling price is one where you make little or no profit? Then it’s time to figure out how to reduce your costs to maximize you profits.
While it’s not always obvious at first glance whether raising or lowering your prices will have the biggest impact on your profit, there is one truth in all these myths – pricing your products correctly can have a huge impact on how profitable your business is.
I’m repeating it:
“More sales do not equal more profits.” Thank you, Megan for putting this in bold!
Because hello! if your prices aren’t high enough to recover your costs, you will actually lose money each time you make a sale.
Re: #3, a lot of small companies ignore the marketing costs associated with starting a new business. They penny pinch on advertising, don’t invest the time they need to invest in PR and SEO and won’t hire help, they either don’t have a newsletter at all or don’t do what’s needed to get subscribers. They won’t spend what they should do have a proper website that impresses customers. They plod along with 3 sales a week and wonder why they can’t grow. Most of the time it has a lot to do with their marketing efforts or lack there of.
Great article! Thanks for sharing!
You said what I have been telling my customers for years, but said it so much better!
I work at a jeweler supply company in Atlanta and we are constantly telling our customers to CHARGE more to make up for the rising costs of materials (silver & gold). And the worst is that you could lower your prices so much that your customer will be turned off and wonder “what’s wrong with it? why is it so cheap?”
But the other like you said is true, in my own business, I find sometimes the mathematical “retail” price is just too high so I will adjust things in my production even down to the packaging to make that item in the proper price point.
So this is my long winded thank you!
The one myth that has always bugged me is the “what the market will bear” myth. This myth, which is seen often in business advice books, implies that a downward spiral in price is perfectly acceptable and that we all need to go with the flow, lowering prices and wages.
My question is, what is the bottom point, doing things for free? This is the myth that has sustained the big box retailers and has unfortunately partially permeated the crafting community, which is slowly resembling mini- Wal-Marts as sellers are desperate to sell at any price. The sellers that stick to a sustainability model struggle against pressures to lower prices.
Faith –
This has become my personal crusade!. I’m so tired of seeing prices in the crafts community get lower and lower and lower. I think that’s why it’s incredibly important for us to present a united front when it comes to higher prices. It’s time to stop the downward spiral!
A concern of mine that fits into the profit issue is the cost of shipping. I wonder if many sellers take into account their packaging costs, time and the time it takes to get their packages to the post? Shipping cost isn’t just postage.
I think many sellers don’t take shipping and packaging into account. But there is a double edged sword here. Buyers don’t want to pay a lot for shipping, and they feel ripped off when the shipping price is higher than the price of postage. (When you ship USPS, the cost is right on the package.) That’s why it’s so important for us to factor the cost of packaging into the price of our products itself.
I had to de-lurk to comment on this one–EXCELLENT post, Megan! These points all resonate with me in a big way. EXCELLENT post. Thank you.
Thanks Tamra!
I agree big time about shipping- I was just at the post office today and Priority Mail for a smallish box was almost eleven dollars. It isn’t much more than the regular rates, so that isn’t much of a savings either. Careful packing and the extra care that crafters provide has to be taken into consideration.
When we start to think about profit, we begin to realize that by the time everything is subtracted, we are usually not making what we think we are making. I learned this when I used to sell a few years ago on eBay- yes it was exciting to have lots of bids and business, but looking back it was because I had drastically undervalued pricing on my work!
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I think every entrepreneur should be required to take an economics class. Great point about sales and profits.
There’s a few things to consider here. The first being, as you pointed out, whether the price you’re charging is covering your marginal costs. This is not to say though you should NEVER sell below marginal cost. You could, for example, look at it as an investment in a customer who will over the course of your relationship, provide additional revenue.
Every blogger who doesn’t charge people to read their blog is selling at a loss.
But we see this as an investment in a relationship which will hopefully be profitable in the future. So it’s okay to charge less than production costs as long as you understand you’re doing it and why.
The second point is price elasticity. This just examines the question, as you lower prices, does the increased number of customers make up for the lost profit? And likewise, if you raise prices does the increased profit make up for the loss of customers?
Fortunately, the online marketplace is the perfect venue to explore these questions since it’s so easy to open additional storefronts. eBay, Amazon, Etsy all offer venues for selling your products with low overhead.
Set up a few stores and use slightly different price points in each. Then you can see the price elasticity and know when you’re better off raising or lowering prices.
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