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I have had a lot of very successful small businesses – who are technically having great success selling on online – come to me and ask for advice as to why that despite this success, they are still not making money.

Here is the conundrum. When you try to sell to the low-end market (which these businesses are), you have to be able to produce significant volume in order to make any money because your profit margins are so thin. To meet this significant volume means you have to hire additional labor, which again cuts into your profit margins.

Independent artisans will always have a tough time competing in the low-end market if their products are labor-intensive, simply because they cannot afford the economies of scale needed to produce large volumes at decent profit margins the way large manufacturers can.

Case Study: The Low Priced Artisan

Take, for example, the person selling trendy knitted gloves. These gloves are aimed at the low-end fashion market and were originally selling for $25 but became such a huge fashion hit that more competition came in and drove the prices down to $15. The maker is getting tons of orders, let’s say 250 orders a day at her online shop. On the surface, that looks great. But let’s break it down a bit more.

She is grossing $3,750 a day (250 x $15). But there is no way she can make 250 pairs of gloves a day all by herself. So she needs to hire people to meet this demand. If one person can make 10 pairs gloves a day, then she needs to hire 25 people. And this is not to mention who is going to be packaging up and shipping these 250 pairs of gloves every day.

So before she can pay herself, she has to pay her staff of 25. Let’s say she pays them each $125 a day, so that amounts to $3,125 ($125 x 25).

Then let’s say that her material costs per pair of gloves is $1, so take off another $250.

Then there are her packaging costs, which may be $.50 per pair of gloves, so take off another $125.

Then there are her selling fees, which can be around 3% to 5%, so take off another $112. Then her transaction fees (credit cards/PayPal) also 3% so take off another $112. That leaves her with an overall profit of just $26 per day (and not all business expenses have not been taken into account). Obviously, this is no longer a successful business model.

→Ironically, she actually makes more profit ($119) if she sells just 10 pairs of gloves a day.

Case Study: The High Priced Artisan

Take the artisan, for example, who is making high-end leather bags. She charges $800 for a purse. It takes her several hours to make the purse, so most of her day. Her material costs are roughly $100.

So if she sells one bag a day, she makes $800 less $100, less selling fees, packaging, etc., all pretty minimal. Therefore, she profits around $637 on the sale of one bag, in other words earning $637 for one day’s work. Not bad.

If she sells only sells one bag every other day she profits $9,555 a month or $114,600 a year. She has no problem meeting this quantity on her own and will never need to hire extra staff or take on more costs and she will still earn a great living and all she has to do is sell 15 bags a month.

Again, I am talking about labor-intensive products where you can only produce a few to several on your own a day.

I’m also not saying you have to go really high-priced, but you may want to consider the possibility of having two brands – a lower priced brand and a mid to higher priced brand, to tap into both markets and then decide which is more profitable for you.

Remember, you are in business to make money. If your business model isn’t working, you need to rethink it so that it does.  Otherwise you may find yourself working very hard to make little money.

Need More Advice for Running Your Small Business?

I offer a variety of affordable services especially for small businesses. Feel free to contact me about how I can help your small business, no obligation, at attentiongetting@gmail.com.

© 2012-2014 Gail Oliver.