How Much Money Are You Really Making In a Year, Selling Online (You May Be Surprised!)

by G.B. Oliver

My last three blog posts have been case studies, based on real businesses, because I see the same problems cropping up over and over and I want to clarify for you, whether you should even be in the business you are in.  This post sums up the bottom line, based on the things I discussed in the last three posts, so you can really understand if your business is going to work.

How-to-price-your-products
$8.80 Necklace at Forever 21

This Jewelry Seller Cannot Compete on Price with Big Retailers

The other day I saw someone who was selling a handmade necklace for $11.50. It was quite a detailed design, like the one in the photo above. Obviously, she is trying to compete with big retailers like Forever 21 and H&M, who charge the same low price for necklaces such as these.

However, Forever 21 and H&M buy from wholesalers whose jewelry is made in factories with low wage workers, and due to the volume they create, these wholesalers can also get materials at ridiculously low prices.

Therefore, an indie designer will always have trouble competing in the low-priced market, if a lengthy amount of labor is involved in creating the product.

What Is The Absolute MAXIMUM She Will Make In a Year?

If this necklace takes her an hour to make, and I am sure it does, again, her hourly wage is now $11.50 less materials, less marketplace fees, less PayPal fees, less other business expenses and less other business tasks that take up her time (i.e. going to the post office to ship product, marketing her shop).

Therefore, if she ends up profiting $8 per hour, and works an 8 hour day and a 5 day work week, then she is making approximately $16,000 a year, and that is the maximum annual income she will ever make.

Why is this the maximum? Because she cannot physically make more than 8 necklaces a day.

If she want to make more than $16,000 a year, she must do one or all of the following:

  • Raise her price
  • Reduce the amount of time it takes to make a necklace
  • Source cheaper materials
  • Reduce other business expenditures

Now I ask you – what is the maximum annual income you will earn from your business, based on this formula? If it is not what you want to make, you have to rethink your business model.

Same Pricing Model, If You Sell Services

It is the same thing if you offer services. If you want to make $500 a day offering graphic design services, for example, then you have to charge an hourly rate based on $500/8 = $62.50 an hour.

So if a graphic design will take you 2 hours to make, you will charge at least $125 for the job (because we are not including other expenses at this point) in order to make your goal of $500 a day. And that is not including communication with the customer and the time that takes up, as well as other non-revenue generating business tasks.

Plus, you also have to try and get enough jobs for one day to make up all 8 hours. There will be days when you don’t fill up all 8 hours with design requests, so you may want to factor that into your price as well.

FINAL WORD: You have to make money! That is the whole point of being in business. You don’t want to find out at the end of the year, when you are doing your taxes, that your annual income did not justify the amount of time and effort you put into your business. Make sure your business model works!

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© 2013 G.B. Oliver. All rights reserved.

When Pricing Products Too Low Can Actually Prevent the Sale

by G.B. Oliver

I like to read forums  because it gives me perspective on what problems are facing small business owners. The most common one that tends to come up is how to price your products and services.

how-to-price-your-products

Pricing Mistake Made By This Small Business Owner

The other day I was reading how a small business owner was wondering if the price of her handmade dog leashes seemed reasonable. She was selling them for $7 and said that it takes  her one hour to make one leash. Right there, that sentence should have been enough to tell her “NO!”.  As I have stated many times on my blog, you have to factor in your hourly wage if you are producing your products, otherwise you are making no money.

If the dog leash takes her 1 hour to make, then she is paying herself $7 an hour less material costs, less PayPal fees, less the fees of her online marketplace, less other business expenses. I’m guessing, but I would think that leaves her making around $4.50 an hour. This is not even minimum wage. So, in other words, her pricing is way off the mark.

She is under the assumption that her product has to be cheap in order to sell, but that is not why people buy.

If you ask someone why they bought a dog leash, they will typically answer:

  • It was durable
  • It was long lasting
  • It was the right length
  • It could be easily retracted

In fact, Google search shows people are looking for a “dog leash  that”:

  • Stops pulling
  • Doesn’t tangle
  • Floats
  • Won’t break
  • Can’t be chewed through

By pricing the leash so cheaply, she is actually hurting the prospect of sales because potential customers probably looked at the price and thought a $7 leash would not last long. If she simply changed the price to $20, which is in line with most competitive products anyway, and instead touted the problem solving benefits of the leash, she would not only sell more, but she would actually make money. What a concept!

FINAL WORD: People don’t buy things because they are cheap, they buy things because they solve a problem. You have to price your products to make a profit, otherwise why be in business?

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© 2013 G.B. Oliver. All rights reserved.