Vital numbers: the Real Bare Minimum Price

All that's left !

This is another story about Jonah, the man haunted by mailboxes, and his quest to be magnificent. Go read it first if you don’t know that story. Also, “sparky” is Aussie/New Zealand slang for an electrician. Many of you have quietly told me that you missed my lessons in Aussie slang, so this is just for you.

Jonah was ludicrously happy for the first three months when he quit his job as a sparky and started building mailboxes full time. He built the one like a Kodiak bear, and one like a reverse Jack-in-the-box. (He heard the postman giggling on the day he tested that one.) He danced around the house with the boys, and packed loving lunches for Marie-Claire as she went off to work at the law firm.

He and Marie-Claire had prepared as thoroughly as they could for Jonah’s career change. All of the profit from the sales of his earlier mailboxes had gone into savings, with her end-of-year bonuses and any left over from the monthly budget. They could live for a year off the savings (but they really didn’t want to).

So when Jonah sat down with Marie-Claire to complete their three-month review, he did so with a light heart and a plate of scones.

The smile disappeared as they put the numbers into the spreadsheet.

The scones were absent-mindedly scoffed while checking the receipts.

It must be admitted that Jonah looked very sulky by the end.

It was left to Marie-Claire to say the words.

“The business is running at a loss, and we’re only getting by because we’re dipping into the savings. At this rate, they’ll be gone in fifteen months. Awww, crap.”

“What do we do, sweetheart?”

“I don’t know. We could get some advice from Jim?”

Jim was an accountant and the dad of Harry’s best friend; he’d become a good mate after he got divorced and kept the kids. For the price of roast lamb and two slices of pavlova – never to be sniffed at by a man who couldn’t cook – he agreed to have a look at the numbers.

He thoughtfully sucked a bit of rogue lamb out of his teeth and said, “Okay, I see the problem. Your model is stuffed.”

He elaborated: “So Jonah, you take roughly how long to make a mailbox? About six weeks?”

“Yeah. I thought it’d be less, but with getting the kids from school and things, it’s never going to get down below five even when everything is going well.”

“And you need to make how much every month?”

Marie-Claire jumped in. “Well, it’s $5,000 for his share of the bills because we want to pay off the mortgage as soon as possible. And another $2,000 for the workshop he has to rent because we don’t have enough space here.”

“And how much do you pay in materials for every piece?”

“Jeez, I let me check. Right now I’m building a lot of the stocks from scratch, I’d be surprised if it was less than a grand for each.”

“And how much have you sold the mailboxes for before now?”

“Well, I wanted $10,000, but one guy talked me down to eight.”

“How did you reach that number?”

“I… guessed? There’s not a lot of call for artisan mailboxes.”

Jim grabbed a pen and wrote in big numbers. “You need to make $7,000 a month, right?” They nodded. “And it takes six weeks at least to build a mailbox, plus $1,000 of materials.” Nod again. “And you’re charging $8-10,000 per mailbox.” Marie-Claire looked pale and bit her lip. “You see the problem?” She nodded ruefully.

Jonah said, “I don’t get it.”

Jim showed him the notepad. “For neatness, I’m saying it takes two months to build a mailbox. Because you get sick sometimes, and you probably take at least a week off between mailboxes to think about the new one and you’re not including that.”

“Oh shit, I do too…”

“Okay. So if it takes two months to make a mailbox, then each mailbox needs to be sold for the cost of materials AND two months’ worth of the money you need to make AND a third again for taxes AND any extra money to buy more equipment.”

“But… that’s like… $25,000 or something!”

“Yeah, pretty close.”

“I can’t imagine that ANYONE would pay $25,000 for a mailbox!”

“Look, there are probably some, but not many, yeah.”

Oh, bugger.

Jonah looked like he’d been kicked in the unmentionables. Marie-Claire looked very alone.

Jim hastily said, “But there are things you can do! It could work out!”

As they stared at him intently, he kept going. “You could change your business model.”

“How?”

“Right now, you’re working one-to-one, but what if you made prototypes for mailboxes that could be mass-produced?”

I won’t make crap!

“Yeah, okay, not crap – defensive artists, sheesh – but licenced to someone who could make thirty instead of one, and you get paid $500 for each. And you could make sure that standards of quality were in the agreement.”

“But I really like making one-of-a-kind ones…”

“And if there’s someone who values that as much as you do and happens to have $25,000 laying around, then they should have it. But you have to start with the amount you want to make each month and do the math from there.”

Both Marie-Claire and Jonah were silent for a long moment.

“You’re right, damn your eyes. Have some more pavlova.”

It worked out, eventually, although at one stage Jonah and Marie-Claire were down to two months worth of savings and were talking about selling the car. A year after, they were making so much money that Marie-Claire could quit her job if she wanted to (she didn’t, but she appreciated the option when it came to salary review time).

And Jim claimed his share: lamb roast and three slices of pavlova, at least once a month. He said it was the least he deserved for saving them from bankruptcy.

The moral of the story

This is a marketing story, really.

You need to choose a market that can afford to pay you AND values your work enough to want to.

The market of “people who have $25,000 to spend on mailboxes, and want to” is pretty small.

The market of “people who have $2,500 to spend on mailboxes, and want to” is much much bigger.

This doesn’t mean you always have to go for the cheaper solution – it’s easier to sell two copies of a $1,000 artwork than to sell a thousand copies of a $2 artwork, or a hundred copies of a $20 artwork.

But to start choosing the right market, you need to know your real bare minimum price.

If you’re selling something with hard limits, like your time or your handiwork (which essentially comes down to time, anyway) – then you have to sanity-check this math:

Amount I want to make each month Γ· average number I can produce + (average number x production cost per item) + other costs like taxes and admin and business development + 10% for all the stuff you’ve forgotten = the absolute bare minimum price.

Here’s a pretty version!

bare minimum price

If the bare minimum price is very high (I love woollen bobble hats, but it had better be a damn special one if it costs $300… at that price it should make me look like Eliza Dushku and quietly tidy up the house when I’m away), then you must either change your business model dramatically, or have an audience to whom your price looks completely reasonable.

Doing this math the other way around leads to insanity and bankruptcy, as you realise that charging $50 for a hat but needing to make $5,000 a month Does Not Work.

What’s your bare minimum?

P.S. If you want to start making profitable magnificence of your own, I created the world’s awesomest resource to help you get all the tangles (like this one) unknotted. It’s called DIY Magnificence.

Creative Commons License photo credit: pfala

21 thoughts on “Vital numbers: the Real Bare Minimum Price

    1. How much I want to make + taxes (1/3 or so), business development, etc + 20% (more cushion for sick leave!) Γ· how many hours I can work, on average = your minimum hourly rate.

      Then if you’re offering a package, then you go with: average number of hours it would take to do this x the rate.

      Make sense?

  1. My prices are now going up. And by at least a whole zero (at the end). With a new teeny tiny web package for the mom-n-pops who has the $2500 mailbox budget.

  2. Interesting post. Definitely worth working out what you need to earn in order to survive. It makes things much easier to plan, and decisions almost answer themselves when you’re decided how much to spend on what.

    1. Yeah, and it eliminates most of the mental fudging that creates wildly improbably numbers. (Well, if I sold TEN, and then I paid the rent and had $200 left over, then I’d be okay for the week. Oh, I have to pay PayPal fees? Why hello, two-minute noodles!)

  3. Thank you for this.

    I have been procrastinating, since last year, about selling my few of a kind totes online. I know that they will sell, I know that the quality is there, and I know that this is easily sustainable since I am using my humongous fabric stash, which makes for a near zero materials cost. I’ve already made 75 and they have been hanging in the closet for the past 4 months.

    My hesitance has been that I was going to sell them for $32 but was keeping myself in a state of “false confusion”, not sure that I could make a living at that price. I crunched the numbers this way and that, and it always came back to, it was totally doable and the only thing left was to do it.

    I also have the exact problem that Jonah has in that I am in love with making the few of a kinds myself and feel like it will be less, “authentic” if I were to hire seamstresses to make my totes, even if they sew with the same quality as me.

    So, for the “heck of it”, I crunched the numbers using your above formula and came up with….$21. $21 per tote is the minimum I need, to make $4000 a month, which will more than cover my financial wants, needs and desires.

    I can no longer pretend that there are any viable excuses left.

    Priority #1 is to get set money aside to hire you. This story was powerful enough to make me cry(and I am NOT a cryer) AND get off my ass, right-the-hell-now!!

    I am heterosexual, but I would totally kiss you right now. πŸ™‚

    Stephanie

  4. i’ve read those calculations before, but you actually make it real. like holy fuck real. like the kind of real that gives you a big kick in the pants. thanks for that!

  5. Loving it Catherine. I have realised that making my thing myself is not viable and am gathering info on getting it made in larger quantities by others like Jonah. Can you please tell the story about how Jonah found the courage to lay out the $30,000 (30 x $1,000 approx prodn cost) and gamble on whether he would actually sell the 30 he’d paid for. Did Jonah do lots of market research? How did he do this? Thank you πŸ™‚

    1. Kirralee,

      Why is the cost so high? I can understand $1000 for initial set up but ongoing production should get cheaper as you make more units.

      There are many ways to market test before spending any money having your product made. I don’t want to overstep my bounds, I don’t know if this is the type of thing Catherine offers as one of her services, but if it isn’t then I can direct you to some excellent sources I have been reading and researching about manufacturing on a small scale, or with “creative” terms, or ways to find out if there is even a market for your item.

      I’ll bet if you search a little more, and think outside-the-box, you will find a way to bring your idea to fruition. πŸ™‚ or at the very least, find out if the market is there.

      1. $1,000 only relates to Catherine’s post, not my business. If Jonah sells his mailboxes for $2,500 I was assuming his production cost was $1,000 just for purposes of my question.

  6. Exactly exactly EXACTLY how I teach pricing to makers-of-stuff!
    Without knowing what YOU need or knowing what it costs or how much time it makes, you’ll guess something ridiculously low….and that, as you say, is a marketing question.

  7. This post reminds me of a “Chef!” moment, where his wife-the-business-side-of-things starts Listing the List of Costs.

    And it keeps going.

    And going.

    And going.

    Thnx for the day-brightener!
    GODS know I needed it!

    Thnx also for the formula!
    Needed that too.

    Six to nine weeks.

    *mutter-grumble-fly-away-to-do-the-math*

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