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

Tips for Blogger Reviewers

I would love to offer bloggers the opportunity to review some of our products, but I'm looking for a certain level of journalistic professionalism and targeted marketing. We often get requests for free products to review. Some are so compelling that I happily send stuff off right away. Others...don't quite hit the mark. I typically look at your email to me, then your facebook, blogs and Youtube channels to determine several things before sending product to review.

1. Did you just send me a form letter that doesn't even mention my company or what sort of products you want to try out? C'mon, put in a little effort. I want to know that you didn't just CC me a mass email that you sent out to hundreds of companies, hoping that a few will bite. And while we love to hear, "I just love your company and would like to share my love with my followers..." I would prefer to hear, "I am putting together an article on XYZ products or techniques and your (specific product) is relevant to this article because...."

2. Are you in the face and body art industry (or salon/spa/ gift retail, etc...)? I am honored that you want to try out our products, but our products are mostly geared towards a very specific market segment. If your blogs/videos are about hunting and fishing, or just everything in the world that you love, there is a very slim chance that any of your followers are the type of customer that we try to target. Tell me about the focus of your blog and what kind of people follow you.

3. How many followers do you have? I'm not saying that I wouldn't send a newbie blogger something to try out and review, but you do need to have a certain amount of good content and peer interaction on your blog or facebook for me to believe that you're not just fishing for free product.

4. How will it benefit me? I get a lot of, "My followers would really love it if..." I know they would love it. We have great products, lol. When you're trying to pitch your services, you have to remember that although I want this to benefit you and add valuable content for your readers, winning me over is not about how it will benefit you (or your followers). It's about making me understand how it will be good for me to invest in you. This is important to understand when marketing any product or service to any potential customer. Hint: good photos, good editorial, and several links to my website or specific product pages are what I'm hoping to see when I've sent you free products to review.

5. I don't always have time to follow up on the websites who have reviews of my products. It would be really great to hear some feedback on what your followers had to say about your review. I don't expect all reviews to be 100% positive, and we need to know if any problems exist that can be fixed. We like to hear the praises too. Sending us a follow-up is a good way to ensure that I remember you and would consider sending you other products to review.

Here's an article that gives some great advice for writing product reviews.

Better Product Reviews

http://basicblogtips.com/better-product-reviews.html

Where has all the customer service gone?

This past weekend I gave two separate Publix bakeries the opportunity to be my hero. And to my dismay, both stores failed to rise to the occasion. I had overlooked ordering the right kind of cake for my son’s birthday, assuming that I’d be able to find something at the store without too much trouble. After all, I only needed a quarter sheet cake with a flat top where I could place a photo frosting sheet that I had purchased online, to go with my son’s Anime themed party. I figured they’d have an undecorated cake in the freezer or something. Unfortunately, every single cake was covered in sickeningly sweet roses and distorted blobs that were probably meant to represent balloons, but were applied by someone who was likely stocking shelves last week and figured cake decorating would be, (forgive me) “a piece of cake.” I had seen a Publix commercial where a woman was in the midst of some sort of cake emergency and a delightful Publix baker saved the day. Surely, it wouldn't be that big of a deal to scrape off a few roses and smooth out the icing? Apparently I was wrong. Staff at both bakeries told me that they could not (would not) do that for me. Their attitude was, “Here’s what we have. Take it or leave it.”

I understand that sometimes you can’t help a customer. Part of the reason I was not on the ball with the cake ordering thing was the fact that Publix would not do a cartoon character photo topper due to copyright issues. So I had to order it online and pay an extra $17 for overnight shipping. But I completely understand this instance of not being able to serve a customer. It breaks Publix’ rules, which are set in place to keep them from being sued. I get it and respect it and didn't push the matter. But as far as my problem with the cake itself, I was able to take a cake home, scoop off the flowers and do an adequate job of smoothing out the top myself, in a matter of minutes. Publix, with their better tools and infinite quantities of icing, could have fixed the cake in the bakery and made it look much better than I did.

I’m not sure if it was laziness or lack of training that led to my disappointment (in two different stores), but what really got me was the sense of apathy. Let’s say that there was a lack of training and that the bakery worker didn't know how to fix the cake. Or maybe bakery workers can’t do anything that’s out of the norm…think about restaurants who refuse to alter a menu item for a customer because they can’t figure out how to put it into the computer. No matter what the reason was for these bakers to not be able to help me, there should have been some expression of empathy and remorse that they couldn't do better. It would have only taken a moment for one of them to come from behind the bakery case to say, “I know how you feel, let’s see if we can come up with some ideas based on what’s here in the case.” That’s all I would have needed for me to walk away from there without spending much more time thinking about it. Instead, I started thinking about every disappointing Publix bakery experience I’d ever had…like when they stopped making my favorite lemon cupcakes, or the fact that I can never get chocolate cake at the Publix nearest my house, and that every decorated birthday cake that we order has clearly been decorated by an amateur and never looks like the photo in the catalog. I’m ready to give up on Publix bakeries now.

I was chatting with my girlfriend, Vashti, at the party about my poor customer service experience at Publix and she countered with some of her own stories of recent customer dis-service. Vashti’s in the middle of renovating a new house, and is therefore ready and willing to spend thousands of dollars on home improvement supplies. She’s been at Home Depot nearly every day for a couple of weeks. You’d think she’d be on a first name basis with most of the employees there. Instead, she had to chase down employees to try to get them to help her, and had them literally tell her that they wouldn't help her. Now we’re not talking about them saying, “No we don’t have that item in stock, but perhaps I have something else that will work,” or, “No, that’s not the right product for the job, but here’s what you should use.” In one trip, she was looking at lighting and wanted someone to check on pricing for an item that was on a high shelf. Several people told her, “I don’t work in this department,” or, “I can’t help you.” She was finally able to locate an employee who cared enough about the business and its customers to climb up on a ladder and get the item down for her. 

On another trip, Vashti wanted information on counter-tops. The employee in the kitchen department told her, “Oh it’s going to be a lot of trouble. We’ll have to send someone out to measure, etc…” But when Vashti tried to make an appointment to get someone out there to measure for her counter-tops, she was blown off. Maybe the Home Depot employee thought the job was too small. It’s the only reason I can think of that would someone would refuse to make an appointment in that situation. But what they neglected to consider was that even though the counter-top job was relatively small, this woman was renovating an entire house by herself and had she been treated like an important customer (as all customers should be) she would have continued to patronize this store. Instead, not only did they lose her business for the counter-top job, she is unlikely to do any more shopping at that store when there is a Lowes and an Ace Hardware right down the street.

In an economy where people are desperate for work, I can’t understand why people who are fortunate enough to have a job, don’t do everything they can to be the absolute best at their job. In most instances, I feel that it’s the fault of the company that employs these people. There is obviously inadequate training and a lack of accountability on the parts of both the employees and the managers. No employee will ever care as much about a company as the company owners do. Employees are usually paid, whether or not the customer is happy. A business that is large enough to have employees needs to establish a thorough training program with emphasis on customer service above all else. It’s not enough to just get through your day and to do the tasks that you’re assigned. Sometimes my teen-aged son will mop the floor, but there is still crud left on the floor. And I have to explain to him that the act of passing the mop over the floor is not what I’m asking him to do. I’m asking him to use the mop as a tool to create a clean floor. And even if the mop has touched every part of the floor, that doesn't necessarily mean the job is done. Employees’ interactions with customers are the greatest factor in whether or not a company retains a customer’s business. They need to be taught that their job is not simply to accomplish tasks of stocking shelves or babysitting a cash register. Their job is to be a part of the customer experience, to help solve the problem of every customer who walks through the door, and to help build the reputation of the business that will promote longevity and success for that business.

As a small business owner, you may be your only employee. Which means you are the only person who can create that ideal customer experience. In a party situation, you sort of take the roll of an employee who is tasked with making the party host look good so that everyone talks about how awesome the party was. So ask yourself, “When I go do a gig, am I simply doing the work (face painting, henna, tattoos, etc…) or am I helping to create an experience that will make these party guests think that the party host is the best party host ever?” 

In Japan, it is considered rude to tell someone, “No.” The word is practically non-existent in their language. A business person will strive to come to some agreement or compromise that will allow the business relationship to continue. It is extremely rare when I have to tell a customer, “No, I can’t help you.” If a customer is asking for something that I can’t accommodate, usually an unwarranted discount because they’re “having a hard time and can really use a discount,” I will try to at least give them some ideas on how to get what they need. I understand and relate to having a hard time and needing a discount. But it wouldn't be fair to my retailers or my other customers if I just randomly gave out discounts. I find out what kind of budget the customer has and give them suggestions on how to get the most value for their money. Sometimes they just need someone with a little experience to help them think outside of the box. 

In our industry, the number one reason that causes us to disappoint a customer is probably related to scheduling. We simply can’t be in two places at once, and it seems that everyone wants their party to be held on the same day at the same time. When you start having that problem, it might be time to start considering hiring employees. I’ve had people call and ask for a henna artist or a face painter for a last minute event or because the person that they hired had cancelled, and even if I didn't have a henna artist or a face painter available, I can always find someone who can do glitter tattoos. Any one of my kids could do that for a party, and the client will remember my company for saving their day. When you do start hiring employees, just remember that training does not stop at teaching them how to provide face and body art services. The most important service that they will provide is customer service.