Calculating Your True Costs of Direct to Garment to Make a Profit

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If we are in this industry as a business the goal is to turn a profit. Terry and Aaron have seen way too many businesses struggle just to break even and the main culprit is the inability to truly calculate their costs and then accurately set their prices. This week is part 2 of a 3 part series where Terry and Aaron will discuss calculating your true costs of direct to garment. Then they will dive into some pricing strategies and provide you with some great info that can help your business turn a profit.

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Calculating Your True Costs of Direct to Garment

Aaron: Give us an overview of DTG costs and pricing.

• Unlike other decoration methods, there are not as many variables with DTG. A screen printer can go from a manual press to an automatic press and substantially increase production capability with virtually the same staff. A sublimation printer can go from a desktop printer to a large format printer and cut ink costs dramatically, again with the same staff.
• But on the other hand, here’s an interesting point about DTG printing. With other decoration methods when you add equipment (Go from one manual press to two manual presses) you need to add staff. But in DTG printing, you could realistically add up to three machines for a total of four and operate with the same staffing.
• I stumbled across this pricing suggestion on FB this week… find your ink and garment cost, and triple it. That advice is just a meaningless formula that tells you nothing about profitability.
• The end pricing standard has already been set by all the large online resellers (people who sell full-color custom images in as few as one piece). I regularly ask DTG owners and the answer is always within the same range – $20… $20… $20. We have the big online resellers to thank for that.
• Now, if you’re out there and haven’t opened your doors yet, you need to allow for cash on hand while you build up to the numbers we’ll be talking about here. You’ll need to allow time to learn the business and the machines. You’ll need to allow for a learning curve.
• My plan for today’s show is to take a simplified overview of costs and pricing. And to make some general assumptions about costs and production times. In the end, it’s all about making educated estimates anyway. The further down the road we get with our businesses, the more educated our estimates will get.

Aaron: You focus a lot of your seminars and comments here on the show about available production time. How does this impact your numbers?

• What we’re talking about is indirect and direct production time. Indirect production time is preparing art, pretreating shirts, even sweeping up when you’re done. Direct production time is actual time spent printing shirts.
• Direct production time is when we’re making money, so this is where we’re going to focus our attention. In the scenario I want to build here, I’m going to say our example business has two employees and one DTG printer. Based on my personal experience, I’m going to use numbers for the Epson F2000. You can in turn drop in your own numbers if you have or plan to have a different machine. In this example our two employees spend half their time doing things other than printing such as sales, paying the bills, promoting their business in social media and doing all the indirect functions of the business. Therefore, we’re going to say we have 20 hours of production time per week – ½ our time is spent producing the product and making money. We’re closed two weeks during the year – one week in July and one week in December. So we have 50 remaining weeks x 20 hours equals 1,000 direct production hours.
• This is where new businesses get into trouble, not being realistic about how much production you will really have time to accomplish.

Aaron: Let’s talk about paying the bills – our overhead expenses and breaking them down.

• We’re going to look at fixed costs such as rent, insurance, power, water, the lease on our equipment and wages for our two employees. When you start your business these will be estimates. After you have a year or two under your belt you’ll use actual numbers. Variable expenses such as inks, etc. are going to be built into our printing costs, and in turn our pricing structure. In our example let’s say all our overhead expenses are $100,000.

Aaron: You spend a lot of time on the “how” and talking about being more efficient and changing the bottom line of your business that way. But it seems that the speed of production is pretty set in stone with DTG. How does this impact pricing?

• In nearly every production environment there’s always room for improvement, but you’re right, these printers run at a finite rate so, in the end, it makes these calculations easier to make.
• On the Epson printer, your production rate should be about 40 light shirts or 20 dark shirts per hour, assuming you’re doing pretreating, art, etc. during your other 20 hours of indirect work. Here’s where you’ll fill in the numbers for your own DTG brand of machine.

Aaron: Are there some ways to improve efficiencies to have more production time?

• Pretreat in advance

GET BUSINESS TRAINING TO HELP YOU SUCCEED!

Aaron: Now we’re getting to the part that listeners tuned in to hear. How about the actual costs of producing a garment?

• For a light shirt (no white ink) I can produce approximately 40 garments per hour
  • Garment plus shipping – $2.25
  • Ink on an average image – $.50
  • Curing silicon paper – $.05
  • Maintenance cost – $.06 – This covers the print head cleaning kit. The monthly tube wash chemical is a flat $10 per month so we’ll leave that in overhead fixed expense.
  • Cost – $2.86 – This is my cost to produce a shirt
  • A second side print here, I’ll skip the shirt cost but add all the other items.
  • Plus overhead expense – $100K / 1,000 hrs / 40 garments = $2.50
  • Total – $5.36

• For a dark shirt (with white underbase) I can produce approximately 20 garments
  • Garment plus shipping – $2.50
  • Pretreat Solution – $.25
  • Drying silicon paper – $.05
  • Ink on an average image – $2.00
  • Curing silicon paper – $.05
  • Maintenance cost – $.12
  • Cost – $4.97
  • Again, a second side print and I’ll skip the garment cost and add the other items.
  • Plus overhead expense – $100K / 1,000 hrs / 20 garments = $5.00
  • Total – $9.97

Aaron: OK, we’ve covered costs, so let’s talk about making a profit.

• To break even and pay the bills, our light shirt price is $5.36 and dark $9.97. We have to do this just to keep the lights on and satisfy our debts with no money for growth, new staff, new equipment, etc.
• A commonly accepted profit number is 40% of selling price. You calculate this by multiplying your finished shirt cost x1.67. Remember this is 40% of selling price, not just a straight multiplying by 40%.
• With 40% of selling price markup, our light shirt will sell for $8.95 and dark $16.65
• As you can see, if we look at these prices as the basement, there’s still substantial room for additional profit since the online printers have set the standard of $20.

Aaron: Anything you want to share to wrap up this DTG portion of our series?

• Yes, be brutally honest with your numbers. Fudging the numbers to make them fit the scenario you want to accomplish means you’ll be just another statistic on the graph of failed businesses. As I often say on this show, there’s always room for improvement and innovation, but what we have to work with is what we’re capable of accomplishing today!

If anyone wants to read more details from Aaron on this subject, check out his Screen Printing Magazine Article.

Terry’s Books

Screen Printing: A Practical Guide to Starting Your Own T-Shirt Business Just $4.95 as an e-book.

Direct to Garment: A Practical Guide to Starting Your Own T-Shirt Business Just $4.95 as an e-book.

Scheduling and Estimating Production Time for Garment Screen Printing Just $2.99 as an e-book

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