Don't Price Yourself Out of Business

A conversation that comes up often in forums is on pricing....and underpricing. So let's talk about it, because there are some universal facts when pricing, but there is latitude in the amount as well, and dyers will have different approaches. 

It goes without saying (although that's questionable at times) that you need to at the very least cover your costs. I'll admit when I first started as a dyer I didn't really think that one through; I would always just look at at least covering the original cost of the yarn without taking other things into consideration. This made a (terrible) difference in my wholesale career, as in not making me any money...or even losing money. 

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For the basics on figuring out your retail prices, the Pricing, Profit, and Wholesale post is a good road map to start with. We covered adding in the costs of the dyes, acid, etc. Some dyers, however, who are more organized and better with numbers than I am, create spreadsheets. 

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One dyer has created a spreadsheet where she plugs in the original wholesale (to her) cost per skein, the shipping, supplies, to first find how much the finished yarn has cost her. From there, she determines her retail price and the profit she makes. Her retail price is around 3 times her cost. She also has her wholesale pricing and profit for each base, making this an incredibly comprehensive spreadsheet to work from. 

Edited to add: I need to make a clarification. The number labeled "profit" in the spread sheet is gross profit. Gross profit is revenue minus cost of goods. It doesn't take any other costs into account such as wages, utilities, and misc. supplies. 

The dyer's net profit is what she ends up with after deducting wages, utilities, supples, etc. The net profit amount per skein is not shown. That number will be much lower than gross profit. 

Other dyers were considerate enough to contribute information about how they price their yarn:

Another says "I calculate cost of base and supplies per skein, add a percentage for overhead and labor, and multiply by 4 for retail price. There are exceptions. Some more expensive bases I don't offer at wholesale, and these might be calculated as x 3 instead of x 4. And the percentage I add is variable, but currently usually at 25%.

Wholesale is 60/40 split if they order dyed to order, 70/30 if they buy from stock on hand. Right now, if they order more than $1000 dyed to order at the 60/40 price, they can get the additional discount to make it 50/50. That discount is going away at the end of the year. 

I expect my shops to sell at the same retail price that I do. Currently, I only wholesale to shops I can drive to and do in person trunk shows. If they were paying shipping, I'd be ok with them adding up to $1 more per skein. But, so far, there is never shipping. They always buy from stock on hand after a trunk show. Trunk show split is 70/30."

Another says: "Material costs x 4. I used to do a different way but this works and puts enough $ in my pocket at the end that I'm perfectly happy and am much more than breaking even. I also decided not to wholesale outside of one local shop so there's no complications or feeling like I'm not well compensated in that area either." 

Additionally, it's a good idea to look around and see what competitors are charging for similar bases. This actually works really well if they're not using custom milled yarn because often you'll know how much that base costs because you are also using that yarn! 

I tend to go more by that, although I should try to be more spread sheet about it. Me and numbers though....not a good combo. Although I will browse Etsy for prices, I don't actually use it much for reference though. I'll often look at dyers such as Hedgehog Fibers and Uncommon Yarns  and even Madelinetosh at times to see what they are pricing their yarns at, and use that information to make my prices. I look at dyers like them because I know their yarns sell, so obviously people are willing to pay the prices they charge. 

 

 

"Denim" mini skein set

"Denim" mini skein set

My mini-skein sets are some of the higher priced ones, at $30 for a total of 240 yards. I'll be raising prices in 2018 most likely, however, as the cost of supplies is always increasing. To figure out this price, I looked at the most expensive mini skeins I could find, which were Koigu's mini skeins for "embroidery" (but the same yarn as KPM). They were $3.75 for eleven yards. I then browsed Etsy, which was helpful in showing me just how many people were underpricing their sets. This was a couple of years ago, and it seems to have improved a little...but there are still some eyebrow raising listings. From there I sought a balance. $30 was the number I could sell and make enough profit. When it comes to mini-skein sets, the biggest factor is the time factor. Dyeing actually takes very little time. It's the breaking down of the skeins, twisting each individual one, then packaging them that is so time consuming. 

Occasionally I have a complaint that they are too expensive, and a couple snafus where the buyer didn't read yards but instead read grams (despite me being very clear about it), then was upset when they got the sets. One customer in particular was rather rude about it-- I believe their words were "very expensive....and very deceiving...". I got a little heated about it in my response, although I'm always pretty polite, pointing out that yards was put not only in the listing title, but in the description as well, exactly how many yards per skein there were, how many skeins to a set, and the total yardage, so how exactly was I deceiving her? 

Another issue that crops up a lot in discussions among dyers is about those that are vastly underpricing their yarn and having endless sales. I'll tackle the sales issue first. 

Don't have too many sales, free shipping offers, etc. Make it a rare occurrence. Otherwise, (and I know this unfortunately by experience) you end up with a situation where customers won't purchase from you unless it is on sale...because they know you have them all the time. It will seriously backfire on you. Unless I'm doing a major unload, like when I was moving, or discontinuing a yarn and just want to get rid of it, my highest discount will be 15%.  

Underpricing or undercutting? That's a good question. There is always a slew of dyers, often fairly new ones, who are underpricing their yarns to an eyebrow raising degree, having constant sales, and generally pissing off other dyers. If they continue down that path, they're not going to be in business very long. It can be hard to tell if it's just sheer ignorance or the idea that if their yarn is cheaper than others it'll sell better. 

My personal opinion on these types of dyers is....shrug. I honestly don't think they're worth getting upset about, and I honestly don't think they are doing much damage to other dyers. My immediate thought about this is: quality. The cream always rises to the top, and from my cursory look, these dyers tend, well, not to have their color and dye sense developed fully yet, to be polite. Our customers buy our yarns because they like the colors, and the majority of our customer base is accustomed to typical indie dyer prices. This wasn't always the case, so it's nice to have that be the current state of things. 

My other thought is that, if they are trying to undercut other dyers, it's going to backfire. I've talked about it before, but there really is a psychological component to the price someone pays for an item. We are pretty well programmed to think that the higher the cost, the better quality something is. Even if your yarn is beautiful, if it's priced way low, a lot of customers won't purchase it because they will unconsciously be convinced there's something wrong with it to be priced that low compared to other yarns. Many times someone will raise prices...and sales will increase. Another thing to consider is that people who buy such low priced yarns often won't want to pay more to begin with, so they probably weren't going to become customers with you anyways. Last, but not least, they're going to put themselves out of business at that pricing. 

I've never worried about those dyers personally, and I think that's probably the most practical thing to do. If you think it's someone who is genuinely clueless, then it's a nice gesture to give them some advice about pricing. If you think it's someone who's trying to undercut everyone else...pity them, because they're not going to last long. 

The spread sheet and the pricing information of other dyers were given to me with full consent and were fully aware that a post would be written using it. 

 

CALL FOR BLOGGERS: I would love to be able to offer some information on doing trunk shows, which seem to have become very popular. I don't have any experience myself with traveling trunk shows, and have done about three in person trunk shows in my entire career. If there is any dyer-- or dyers who would like to contribute a guest post about them, please let me know. It doesn't have to be elaborate; it could be about any aspect of it you want.  Pricing, labeling, contracts...whatever. It could be a good plug for your business, or at least I hope so! 

Guest Post: Bookkeeping for Indie Dyers

Hi! I’m Lauren, the dyer behind Old Rusted Chair. I’m taking over Krista’s blog to talk a little about a concept that scares most small business owners: Bookkeeping! I have a bachelor’s degree in accounting and more than 10 years worth of experience ranging from handling accounts payable at a grocery store to being controller at a tea company. In between I’ve done bookkeeping for my old LYS and helped a startup in the natural food industry build their accounting department.

Before we dive in, all of this is assuming your business is up and running within your state andcity guidelines. If you’re not sure, go to your state government website and find out what you need to do to operate a business there. States may have different requirements for different types of businesses. My business is a sole proprietorship, which means, in Tennessee, I had to register at my county clerk office. I also had to register with my state revenue department so I can pay forward any sales taxes I collect. Tennessee does not have a state income tax, but I do have to pay a business tax to the state and city.

On average, I spend about an hour a month on my bookkeeping work. I break down my tasks into weekly, monthly, and quarterly tasks to keep things manageable. First, you need to choose your preferred method of record keeping. I currently use QuickBooks Self-Employed (QB). It’s simple to set up and use, and makes it easy for people who aren’t accountants to keep track of their accounting. It can link to your bank, PayPal, Etsy, Stripe, and other accounts to keep track of all of your income streams. The ability to include all of these income sources made it very easy for me to transition from Etsy to Squarespace Commerce. It does have its downsides, but in my case the downsides aren’t worth the expense or effort of having a different software. For example, the expense accounts listed in QuickBooks are preset; you cannot change them or add new ones. I think this is a big misstep, because I’d love to have the flexibility to add a few new accounts so I can break out my expenses in more detail. Overall, for the price and convenience, I’m sticking with it for now. There are other options out there, such as Xero, Freshbooks, Excel, and even Google Sheets. Do some research and find out what works best for you.

Let’s move on to my workflow. Breaking tasks up makes it easy to fit them in my schedule, and sets good habits for staying on top of the work. I prefer to do my bookkeeping first thing in the morning with a fresh cup of a coffee. Then I can spend the rest of my week focusing on the creative part of my job and not have these small admin tasks lingering over my week.

Weekly: I categorize transactions in QB. This takes me about 10-15 minutes depending on how busy my week was. The majority of my transactions are sales and transaction fees, but I also purchase supplies and make donations. Recording and categorizing these weekly means everything is fresh in my mind (and easy to find in my email) so I can quickly move through transactions. It’s much easier to find what that $21 charge from Amazon was when the transaction was last week and not four months ago. Additionally, I add any mileage for trips to the post office or other business-related car trips. This is also a great time to place orders for any supplies you need.

Monthly: Pull sales numbers from Squarespace. I have a general idea of what colors and bases sell best, but I like seeing the numbers. I make a monthly donation to Planned Parenthood based on sales of one of my colorways, Rebel Girl, and this report lets me know how many skeins sold so I can make my donation accordingly. If you’re selling off of Squarespace you can find this information under Commerce > Orders > Export (in the upper right corner). Etsy users can find this under Shop Manager > Orders, then scroll to the bottom to download a CSV file. I also spend a few minutes looking through my supplies and seeing if I’m running low on any dyes or other materials that I don’t order as frequently. I also pull a profit and loss statement from Quickbooks.

Quarterly: Tax time! Most people I talk to wait until April to deal with this, which usually isn’t the best decision. You should be making quarterly tax payments if you expect to owe more than $1,000 for the year, according to the IRS . The IRS wants their money and could penalize you for not paying quarterly. Think back to the days when you received a paycheck from an employer. All of those tax deductions from your paycheck were forwarded by your employer to the IRS on your behalf. Now that you’re your own employer you are responsible for paying the IRS. There are a few ways to go about doing this. You can either pay directly to the IRS online or by sending a payment in the mail. It’s also worth checking to see if you can pay through your accounting software. Either way, you will need to register on the IRS website. QB estimates my quarterly taxes based on my net income (total sales minus total expenses) and my current tax bracket. I file a joint return with my husband, so I include his information for a more accurate number. After a quick set up I am now able to pay the IRS directly through Quickbooks by clicking a few buttons.

Another tax you need think about is sales tax. When I ship or sell to a direct customer in Tennessee I am required to collect 7% state sales tax. If my customer is in Davidson County I need to collect an additional 2.25%. Your sales platform should have the ability to enter in your state and city sales tax information so your customer will be charged automatically. If you are sending wholesale orders to a LYS in your state the rules are different. I drop off shipments to my LYS, but do not charge them sales tax. This is because they will be collecting sales tax from their customers and paying it to the state. If you’re selling to a LYS in your state you can ask them for a copy of their resale certificate (if applicable in your state). I forward sales tax payments to the state quarterly, using sales tax information from the monthly sales report mentioned above.

Finally, I need to pay business taxes to the state and city. I won’t go into details on this particular tax because your mileage will vary greatly based on what state you’re in. It’s best to check with your state revenue department to figure out what, if anything, you owe and when you owe it.

Bookkeeping doesn’t have to be scary or overwhelming. By breaking tasks down into workable pieces you’ll find a good rhythm quickly. If you’re starting from scratch I recommend that you stay current on your new transactions and spend an hour at a time working backwards. You don’t need to get the backlog of transactions done in one sitting. Breaking it up over a few days or weeks will help your sanity in the long run.

Thank you, Lauren, for this amazingly informative post! 

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Pricing, Profit, And Wholesale

To wholesale or not to wholesale? It's a question I see coming up again and again in forums. 

First, when it comes to wholesale pricing, it can vary. Typically it's been 50% of your retail price, but I'm happy to see that more and more dyers aren't doing that because of the already slim margins. 60/40-- where the store is getting 40% off the retail price seems to becoming more common, and I'm also seeing 70/30, which is what my terms are, and which I think is ideal for indie dyers. 

However, you need to know what your retail price is, what the profit is that you are making from that, and then you can calculate a hypothetical wholesale price and make an educated decision from that. Especially if you are hiring help...otherwise you can end up in the situation that I did at one time, where I was actually losing money with every wholesale order. That was a pretty big shock, although entirely my fault, since I hadn't run the numbers. 

Numbers and math are not my strong suit, to put it mildly, but luckily I have a partner who runs a successful company (Mil-Spec Monkey), one of the most logical and practical persons I've ever met, and helped me figure out calculations for this post. 

We're starting with a hypothetical order of 48 skeins of American Sock. First, we need to figure out the raw material costs. 48 skeins is the number I can get from 4 cones of Tahoe from Ashland Bay. 

I sell my yarn in skeins of 400 yards. Tahoe comes in 3 lb cones, 5040 yards/cone, so I can get about 12 skeins from one cone, and 4 cones is what I need to purchase to get the lowest price per cone.

Price per cone: $69
4 cones: $276
Shipping costs (don't forget this!): $18.62

More than yarn goes into dyeing, though, so we also need to calculate the cost of dye and citric acid and labeling. I use a lot of different dyes, but I decided to use a packet of Cushing's Dyes as a measurement to make things easier. 3 packets of Cushing's Dyes (1/3 oz per packet) will dye a 3  lb cone. 

3 packets plus an estimated $3 shipping: $12.75/cone.
4 cones: $51

I use citric acid, which I buy in bulk of 50 lb bags (I bought my most recent stock from soap goods.com). 
50 lb bag: $64
Shipping: $45.48
Total: $109.48

I estimate that I use about a cup of citric acid for 6 skeins the way I dye, so for a 48 skein order I would use 8 cups, which we'll round to about 8 oz to be on the safe side. 
800 oz (the total bag) divided by 8 oz: 100 cups
This breaks down to $1.10/cup
8 cups at $1.10/cup= $8.80

Labels (I use tags): For 1000 tags I paid, with shipping, $115.75.
$.12/tag is what it breaks down to, so
48 tags: $5.76

So for raw materials cost for a 48 skein order we have:
Yarn: $294.62
Dye: $51
Citric Acid: $8.80
Tags: $5.76
Total raw materials cost: $360.18

Now, let's figure out the time I spend on that order. I'm being a little optimistic here on time, as I'm not including the drying time and time taken to let yarn cool before being rinsed off, and general faffing about time that inevitably we all do a little! That would be something to keep in mind. 

Since I buy my yarn on cones, I need to break those cones down into 400 yard skeins before I can start the order. My skein winder does 3 skeins at a time, and I'm estimating it takes 5 minutes for 3 skeins in that case. 
48 skeins at 5 minute/3 skein set: 80 minutes.

The way I dye multicolor yarn, I can do 8 at a a time, and it takes me about an hour and a half per batch for the actual dyeing. 
48 skeins: 9 hrs total

I used to re-skein, but I'm starting not to, and I know a lot of people don't, so I'm not including that time. If I was to re-skein, I would of course have to add in those costs.

Twisting and labeling  for 48 skeins: 1 hr

Total hours: 11.4, rounding up to 11.5 hours. 

Now, I need to figure out how much I want to pay myself. I want to pay myself $25/hr.
$25 times 11.5 hrs: $287.50

So, adding the raw materials cost, $360.18 with my time, $287.50, gives me a total of
$647.68 for how much a 48 skein order costs me. 

I charge $26 per skein retail, so
$26 times 48= $1248

So, I'll take that number, $1248, subtract how much the order has cost me to make, so
$1248-$647.68= $600.32 profit
$12.50 profit per skein

Not too shabby. However, what if I want to do wholesale, and at what percentage? 

If I did 50% off, the wholesale price per skein would be $13, so for a 48 skein order, I would be making $624. However, the order has cost me $647.68, leaving me with a debit of $-23.68.  

If I did 30% off the retail price, 30% of 1248 equals  $873.60, so my potential wholesale price for 48 skeins would be $873.60, leaving me with an owner profit of $225.92. 

This is with me paying myself $25/hr. If I was fine with paying myself much less, like $12/hr, making my total costs $498.18, then 50% wholesale pricing would give me an owner profit of $125.82. I give that as an example so that if you are thinking that you'd be totally fine with paying yourself less per hour, you still wouldn't end up with much profit at all. 

And, we've actually left out a few numbers that would figure into all of this. Shipping supplies, time spent doing that, for instance. But also very important ones like rent, mortgage, utilities, water, Etsy fees if on Etsy, PayPal or credit card transaction fees, website, advertising. If you're paying someone for help, that would make your margins even less. You can see how one can lose money with wholesale easily. Too easily. 

Then, let's say I want to make $30,000 a year. I would have to make $2500 a month, meaning I would have to sell 200 skeins a month full retail price, also keeping in mind the additional costs that can factor in that we discussed above.

Those are things you need to think about. If you're thinking about wholesaling, you need to really think about it. This is why I get worried when I see wholesale being thrown out there as a suggestion when a dyer is having money issues, because it may not be the right decision for that dyer at that time. I've also heard wholesaling being used as a tactic to compete amongst the saturated market, and while I understand wanting to get the word out, I personally don't think it's the best tactic unless you've already got your finances all figured out and are comfortably making a retail profit, enough to live on, already. 

I cut way back on what I was offering for wholesale, and changed my terms to 30% after that horrifying realization that I'd been losing so much money, plus I haven't been seeking it out. However, I'm not taking any wholesale orders on right now, or for the forseeable future, due to the massive -- and really weird--physical issues I've been dealing with, which you can read about if you want here. I've done a couple of collaborations with Knit-Purl here in Portland, but both projects, the yarn and the colorways, were exclusive to the store, so I was able to make sure I made the profit that I wanted.

(disclaimer: that link is to the insane saga of my last three months, but it is on a medical and illness go fund me page. Starting that was one of the hardest decisions I've ever had to make, and I still feel uncomfortable about it, (although there was no other option) so I'm just going to link to it and emphasize that I have no expectations of and am not asking for contributions, especially from anybody who doesn't know me personally. It's an really interesting story, though, as it's something that nobody's seen before. I guess yay for being original?) 

 

Pigeonroof Studios and Knit Purl collaborations

Pigeonroof Studios and Knit Purl collaborations

I think that wholesale is something that as new dyers we think is or should be the next step, and these days I don't think it always is or should be. We're not making a mass produced commodity. We're making a product by hand, that is time and labor intensive, so why wholesale? To get the word out? Because all the cool kids are doing it? When I started, it was before Ravelry, before Instagram, before Twitter, before Facebook got popular, so it was harder to get the word out, making wholesale as an advertising option something to consider. Now, however, with all the social media platforms available to us as well as Ravelry, there are so many advertising options, whether going for native reach or purchasing ads. So ask yourself that question, and be honest with yourself, why do you want to wholesale? 

Sundara, of Sundara Yarn, with the exception of once at the very beginning of her career, has never done wholesale. I'm going to try to get an interview with her at some point to talk to her about that, because I think that's awesome, and shows more common sense than I ever had. In the end, though, you will have to figure out what is right for you. I just don't want you to blindly go into wholesale, like I did, and end up losing money, being stressed, and generally not having a very good time. 

If you read this, however, and think, 'yeah, whatever, I still want to do wholesale', then hey, go for it. Just go slow. Try one small order and see how that goes, before taking on multiple orders. Really make sure all your bases are covered and you feel like you have a steady financial base to work from. 

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Hot Tips Tuesday: Stability.

"Start from a place of stability if possible. If you go all in and it doesn't work out quickly, it's quickly going to become a train wreck of freaking out. Either have a lot of money saved up, or start it as a hobby, because "I'm going to lose the house if this doesn't work out" is going to cause bad decisions. You'll end up doing whatever it takes to survive one day more, even if it dooms any sort of long term viability." 

 Mil-spec Monkey

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