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Business 101: Maille
Article © MAIL User: Blaise
The Basics:
Any business uses the same formula to calculate prices:
P = C * (1 + M)
Where:
P = Price charged per piece
C = Cost per piece
M = Profit Margin
The Costs:
The prospective seller must evaluate the costs associated with producing his work completely, before making any estimates. Those costs can be broken down into three broad categories; Wage cost (aka opportunity cost), Material cost, and Overhead (aka selling cost):
C = W + m + O
WAGE:
Many people misunderstand the Wage portion of this formula, confusing it with profit. In this case, the wage is not a profit one generates, but rather a cost one incurs by losing the opportunity to make that wage elsewhere. Let's say you work 5 hours a week at a part time job. The money you make at that job is a profit. If you stop working at that job to spend the same 5 hours making maille (or any other hobby), you have lost that profit. Your hobby has cost you what you COULD have earned doing something else, even if you didn't have that hypothetical job before you started.
So the Wage portion of the formula is an opportunity cost, equal to the wage you could have earned in the time you were mailling. Be careful how you evaluate this number however. Bagging groceries at a supermarket is probably harder work than mailling on a couch with the TV on and a beer close at hand, so you probably can't expect the same wage for both. On the other hand, if you do your mailling in a workshop, with no distractions, and with a professional attitude (and, one can assume, a correspondingly higher rate of production), you could certainly expect to make the same wage as a supermarket bagger or an assembly line worker. Additionally, as your skill and experience increase, your work ought to be valued more. A trained machine operator makes more money than an assembly line worker.
We can calculate Wage with the following formula: W = H * w , where H = hours worked per piece, and w = equivalent hourly wage.
MATERIAL:
This needs no formula, being the cost of the materials used to make the piece.
OVERHEAD:
This is the slippery part of your costs. Overhead deals with the cost of selling a piece. If you sell your piece on an auction site that charges $3 for an auction, your overhead will include that charge. Advertising is another selling cost, an even harder one to calculate, since most times an artist will advertise all, or some fairly large set, of their wares at once, and the cost must be estimated by how many pieces are expected to be sold by the advertising campaign. Cost of entry to a fair or flea market is also a common cost, which again must be estimated per the number of pieces expected to be sold. Additionally, the time you spend selling has an opportunity cost associated with it (see WAGE above), which must be estimated out on a per piece basis.
The Margin:
The margin is your actual profit in the transaction. If you leave this out, you are selling at cost, and may as well be off doing something else. Of course, the joy you get from practicing your art may be all the profit you need, but most people like to pocket some coin along the way...
This margin is completely subjective, and will depend both on your own skill level and the market you are selling to. A good place to start is 20% (0.20)for a mailler of medium skill. You will only know what is right for your market after you test the waters with an attempted sale.
Note that sales "On Consignment" always involve a percentage to the shop doing the selling, and this percentage is coming out of your margin. On the other hand, your cost to sell is reduced to almost nothing, since the shop does all the work, so only the formula will tell you how your prices will be affected.
The Formula:
Given the cost components above, our formula now looks like this:
P = C * (1 + M) = (W + m + O) * (1 + M)
or
P = ((H * w) + m + O) * (1 + M)
Where:
P = Price
H = Hours worked
w = hourly Wage
m = Material cost
O = Overhead cost
M = profit Margin
Example:
A high school student has decided to sell wallet chains to his classmates. He times himself at 1.5 hours per chain, and estimates a hypothetical grocery bagging wage of $5.00 per hour. His cost, in stainless steel, is $2.00 per chain. He intends no advertising, and will do his selling during classes, so as to not lose any wage opportunity, effectively getting an overhead of $0 per chain.
Our student mailler has a cost: C = (1.5 * 5) + 2 + 0 = $9.50 per chain
Applying a 20% profit margin, he calculates a selling price of: P = C * (1 + M) = 9.5 * 1.2 = $11.40
He rounds his price up to $12 for simplicity's sake, and goes to town.
The Hard Truth:
Unfortunately, not every business can be a success. Here is where the formula can be really helpful. Often, you will find that in order to price a piece at a level that the market you are selling to will pay, you need to have a negative profit margin. This is not a flaw in the formula, but rather an indication that you need to re-evaluate your business plan. You have three options; 1) Reduce your costs, 2) Find a new market, or 3) Give up the venture.
If you've accurately calculated your wage, it cannot be reduced, so any cost reductions must come from either material costs or overhead. Be creative! Maybe silver is the wrong choice, and you should switch to stainless steel or bright aluminum. Maybe you can advertise by mouth instead of with fliers. There are many possibilities.
If high school students won't pay what your work is worth, try the ladies at a neighborhood beauty parlor (DO ask permission first!). If your co-workers aren't buying, try selling on consignment at a local metaphysical or gaming shop. Markets are everywhere, it's just a question of how much time and advertising you want to sink into them.
Remember that this is a hobby, and you should enjoy it. If you have to struggle to make a profit at it, it will cease to be a source of enjoyment, and you'll eventually give it up anyway. Sometimes, the hardest part about running a business is knowing when to move on to something else...
Original URL: http://www.mailleartisans.org/articles/articledisplay.php?key=204