The P Word....and the C Word: Profit and Change

This is a long one folks….

This article, while largely aimed at those of you who sell merchandise, can also help those of you who sell intangibles (such as face and body art services).

Anyone who knows me well, knows that I hate change…probably more than most people.  But I consider myself a sane business person, and any sane business person who finds themselves getting poor results while doing things a certain way, must change the way they do things.  (This applies to life in general, not just business.)

Before delving into profit margins, I need to be sure that you understand what profit really is.  As a corporation, you receive a salary (as do any of your employees) and any money left over after salaries is your company’s profit.  That’s fairly straightforward for those of you who have incorporated your businesses. 

However, as a sole proprietor, all of the money left after expenses becomes your income.  This income represents your salary plus company profit.  A lot of people throw around big numbers that sound great, but aren't a true reflection of the profitability of your business.  If you are a sole proprietor, with gross sales of $100,000 you DID NOT “make” $100,000. And if your gross sales were $100,000 and your expenses were $50,000, your company profit IS NOT $50,000…unless you work for free.  With gross sales of $100,000 and expenses of $50,000, your profit is $50,000 minus whatever you would have paid someone else to do this job.  So if you determine that $48,000 is a fair salary, then you made $48,000 and the business profited $2,000. 

Why is this important?  Because a record of business profit is necessary if you wish to sell your business, if you plan to use it as leverage for a loan, or if you want it to continue to have value after you retire.  As a self-employed business person, you have two ways of providing for yourself once you retire.  You must either have funded a retirement account while you were working or your business must be able to continue to provide profit for you when you no longer wish to do the daily work and must pay someone to do what you have been doing.  You spent years building up your business, and it doesn't make sense for it to simply cease to exist when you are no longer willing or able to work.

Too many businesses don’t take the time to do the math to determine whether or not their business is actually profitable.  They look at gross sales as an indicator of business health and when their profit isn’t as high as they’d like, they think the solution is higher sales.  Well if your profit margin is too low (sales vs. expenses), higher sales might not translate into higher profit…In fact, it could even be driving you further in the hole.  I ran the numbers on a few of my Amazon products and determined that I was actually losing money every time I sold one of those items.  How could that be?

Item X – Retail price $10

Raw material cost - $2.50

Labor cost to package item and to package/ship item - $1.75

Amazon fees - $1.90 (this includes a portion of the monthly amazon store fee as well as “Referral” fees)

Shipping materials – (labels, ink, boxes, bubble wrap…this stuff isn’t free) - $1.30

Shipping losses (undercharging) and product loss (spills/ expiration) - $1

Overhead costs – (Boy, can this be an eye-opener) - $1.60

With this math, I’m losing $0.05 on each sale.  I can spend more money on advertising to increase my sales, but no matter how many nickels I lose, you can see that it will never be a profitable product if I continue to use the same formula to sell it.

So how do I change the formula? 

I look for less expensive raw product, either by switching suppliers or by negotiating a lower cost by purchasing in higher volume. 

I look for less expensive packaging.  Sometimes we choose packaging based on appearance, rather than functionality.

I decrease labor costs by producing/ assembling more product at a time, instead of producing one or two items at a time.

I look for less expensive shipping and packing materials.  I recycle/ reuse as much as possible and look for free packing materials from friends or on craigslist.

I try to more accurately estimate shipping charges, and offer more shipping options. 

I revise my production schedule and product rotation process to avoid expiration issues.

I look for more effective and less expensive advertising opportunities, such as affiliate programs, YouTube videos, and workshops.

I decrease overhead costs when possible.  I realized that I spend $35 per month to maintain my newsletter subscriber list through Constant Contact, when I can do it for free through Blogger. 

As a last resort, and only when the market can handle it, I raise the product price.

And if none of this results in an acceptable profit margin, I stop selling the product and look for a different, more profitable product to sell.

I’d like to take a moment to discuss overhead costs, because I find that this is the cost that so many small businesses fail to calculate in their product costs, even me.  When first starting out, this is going to be a difficult number to calculate.  But if you've been in business for at least a few months, you can get a decent approximation of your overhead costs per dollar of sales.

Your overhead costs include: Rent (buildings, storage, vehicles), advertising, office supplies, website, advertising, taxes, licenses, inspections, professional dues, education, transportation, costumes/ uniforms, utilities, repairs, equipment purchases, insurance, etc….

Add up your overhead costs for the month.  Sometimes your costs might have to be an average.  Take advertising costs as an example: Over the course of a year, you spend $4000 on tradeshow fees, $100 on Facebook advertising fees, $300 on business cards, $600 on banners, and $1000 on a website.  Your annual advertising cost is $6000, so your monthly advertising cost would be $50. 

Divide your overhead costs by your sales.  So if your overhead costs are $10,000 for the year (or whatever period you are calculating) and your sales are $100,000, your overhead costs (not including production or labor costs) are 10% or $0.10 per $1 of sales.

There are other costs which you may be overlooking or underestimating, such as bank or Paypal fees, wear and tear on your vehicle, printer ink, repairs, tax preparation, credit card interest, etc….I was shocked to see that I spend $15 each week (around $800 annually) just on packing tape.  One set of cartridges for my laser printer costs $400 and I have to replace them two or three times per year.  When you start wondering if you’re charging too much and you consider lowering your fees in order to undercut the competition, you need to be very certain of what your real business costs are.

Since 2004, I’ve seen my annual gross sales either increase or stay the same, but never decrease.  However, my salary and business profit has decreased dramatically over the past two years.  Initially, I thought it was just a matter of increased competition, but I've had to concede that there are other factors that have contributed to the effect. 

Without consideration of product/ service trends, I've continued to heavily invest in products which don’t sell very quickly.  I've neglected to introduce new products or to adapt my current products to changing trends.  I allowed my website and advertising efforts to become stagnant.  While all of my overhead expenses have increased, I've failed to increase product prices or to lower costs to compensate.  Basically, I distanced myself from my business’ needs and my customers’ needs and desires.  I've been sitting here singing with my fingers in my ears and my eyes closed, hoping that things would just change with time.

Since that hasn't really been working out for me, I’m going to have to put on my big girl panties and make some necessary changes to the business.  For every change that I make, I will do everything within my power to be sure that I don’t take anything away from my customers without offering some benefit in return.  That won’t always be possible, but I promise to do my best to offer greater value without increasing prices on my products. 

Over the next several months, you can anticipate seeing changes to products, such as different kits with better price points and different packaging that will allow me to either lower or maintain pricing.  For example, we are changing our standard Liquid Bling packaging.  Liquid Bling is currently packaged in a bottle with a wide nib/plug onto which you must attach a metal tip in order to achieve a fine line.  Our new nib/plug is much finer and that means you no longer need to add a metal tip to the product.  The new retail price for Liquid Bling with the smaller plug and no metal tip will be $4.99 ($1 lower than current pricing).  And for those of you who prefer it with the old packaging system, this will still be available at the old price.  This new price will become effective as soon as we can get stocked up on product…approximately mid-February.

Regrettably, there is one negative change that I must make.  As of March 1^st, I can no longer offer a 60% distributor discount.  My business model and profit margin simply cannot support this level of discount.  Any of you who have been taking advantage of this wonderful discount over the past 8 months can still receive a 60% discount off orders of $2500 or more during the month of February. 

On the bright side, I will be adding new products such as more glitter/ mica colors and improving the website.  I am starting loyalty programs, such as our Stencil Loyalty Program.  Once you have purchased 500 stencils, the website (if you are a registered user) will inform you that you qualify for a free gift.  Sorry, this is not retroactive, it starts now.  And I have added shipping options that will allow you to save money on shipping costs when time is not as important as money. 

I am also investigating special programs that will allow instructors and advertising affiliates to earn money for helping to promote Amerikan Body Art products.

During the month of January, we moved the business to a new location. So February is the start of a whole new existence for us.  And since February is also the month in which my birthday falls, I am making it a month of free gifts.

For all orders of at least $25 during the month of February, receive a free bottle of Liquid Bling in our new packaging.  I’m going to make a special Limited Edition Valentine’s color. ($4.99 retail value)

For all orders of at least $60, also receive a free Basic Henna Kit. ($9.99 retail value)

For all orders of at least $100, also receive a free Mica-Tats Kit ($24.99 retail value)

That’s $40 worth of free gifts with your $100 order.  Limit of 1 of each free gift per customer. 

Thank you so much to all of you beautiful people who have shared and grown with me through the years.  I’m looking forward to a wonderfully prosperous 2014 for all of us.

Love,

Erika  

Visit our Shop at www.AmerikanBodyArt.com