One of the themes that has come up this week is that accelerated growth requires money. Whether it’s hiring a web designer, tackling a trade show, or simply buying materials for a new collection, everything has it’s cost. So how do you finance growth? Well, you could borrow money from friends and family, dip into your savings, or take out a line of credit from the bank. While these are great options for a quick influx of cash, in the long run, your business needs to generate the revenue to support new initiatives. You need to price your products for growth.
Hopefully you’re using a pricing formula that looks a little like this:
labor + materials + overhead + profit = wholesale price
wholesale price x 2 (at a minimum) = retail price
What I’ve found is that when most makers start pricing their products, they aren’t hitting all four of those areas that add up to wholesale price. Perhaps you’re undercharging for your labor. Or your price doesn’t reflect the true cost of overhead like rent and utilities. And more often than not, by the time you add up labor + materials + overhead, you forget to add that all important last element, profit. So let me share one more equation:
profit = growth
When your price doesn’t include profit, your business can’t expand. Even if you use one of those methods I mentioned previously to finance growth, at some point you’ll need to pay that money back. And if you aren’t making a profit, how can you?
Profit is different then the hourly rate you pay yourself. Your hourly rate is what funnels into your personal account to help you pay for things like food and your mortgage. But profit is money that gets invested directly back into the business.
If you’ve got another source of income, it’s tempting to not charge enough for labor and profits right now, because you can invest all the money you make back into the business. But if you ever want to make a full time living from your products, this strategy won’t work. You need to be able to pay yourself and invest money back in the business.
As you look at the growth of your business, it’s important to do a thorough and truthful analysis of your finances. The profit margins in your pricing structure should reflect the amount of profit you need to make to continue to grow your business. Do the math – if your materials costs and overhead are $20,000 a year, you want to make a salary of $25,000, and you want a profit of $15,000, how many products must you sell at your current price to meet those goals?
It’s important to look at your pricing structure, continually reevaluate your finances, and figure out if the prices you’re charging and the money you’re bringing in are truly enough to support the ways you’d like your company to grow.