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 starts a short 3 part series where Terry and Aaron will discuss calculating your true costs of sublimation. 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 Sublimation
Terry: So what are we trying to get out of this series of programs over the next 3 weeks?
- This is a huge area we hear people struggle with all the time.
- Not only costs but then how to price your products to maximize your profits
- Found that people coming from Analog (SP) to Digital (Sub/DTG) really struggle
Terry: Why not just got these figures from the supplier and plug them into a spreadsheet?
- Will a high-cost ink manufacturer really be the one to count on for this?
- They will point you to other areas to look at and while it is not untrue or deceitful, it doesn’t give you the whole picture.
- They will make you focus on time, and we typically do completely undervalue that, the MFGs are going to way overvalue that so you feel like a millionaire day 1.
Terry: Then what is the formula to figure this out?
- Want to be factoring in true costs of sublimation blanks and labor, plus a few other areas like the waste, inventory costs, and overhead.
- In business for a while and really good at tracking, this is going to be pretty easy, but most are running a business, not conducting a scientific experiment.
- We need a more round figure. This info is from actual businesses, not MFG. Desktop printers on the market in the US are going to run about $1.00 per job and 44” printers are going to run about $0.05 for the same size job.
Terry: Can you give us an example then to help us figure this out?
- Yes – Error on the high side as it is good to always make sure you can improve your bottom line, not break even.
- Blank Face Mask = $3.20 (Do not forget to add the inbound freight into this figure as that can drastically change the cost of the blank. Buy enough quantity to gain price breaks, but not so much that you would not be able to sell that inventory in the course of 6-12 months. There are costs to carry inventory for extended periods of time.)
- Paper and Ink = $.30 (As mentioned the printer you use can make a world of difference in this area, but in general, you are looking at about .0095 per square inch with a small format and .065 per square foot with a wide format.)
- Pressing Labor = $.50 (To calculate this take the cost of an employee you would trust to do production as your base for this figure. This should not be what you think you should make an hour for your time, even if you are the only employee. Look ahead on this one or you will price yourself out of the market. Assume that you are going to be pressing one at a time especially at the beginning. Eventually, becoming more efficient, like pressing multiple at a time to improve your bottom line.)
- Packaging = $.20 (Even if you are going to hand-deliver your finished product to the customer, a legitimate business is going to put the finished goods in some sort of a package. In this case, a poly mailer bag works great; just remember with breakable items, the cost can be much higher.)
- Additional Labor = $.50 (Many small businesses, totally miss on this critical factor, making growing in business near impossible. Just like pressing labor, consider the cost of an employee to take the order, prep and print the job, as well as the time to package and handle the job before delivery.)
- Scrap and Other = $.30 (This is a tricky area, but it must be included in some form or you are at risk of possibly losing money on every job down the road. With sublimation, the permanency of the ink is its draw, but for the producer, it is also a challenge. If an error occurs in production, there is no fixing it; you must make a new one. Even the most efficient production facilities should consider about a 5% defect rate. This cost should also factor in inventory that you cannot sell. Lastly, remember the cost of trial and error that comes along with perfecting your production of a new product.)
- Outbound Shipping = $3.50 (Recommend adding this cost in and then use it as a profit center when dealing with bulk purchases or the need to give free freight to compete with online retailers. If your business is only walk-in then, you could remove this, but make sure you will never have to eat the cost of shipping something before taking this off your cost calculation.)
- TOTAL Cost to produce = $8.50
Terry: So now what should a sublimation business do with that $8.50 cost figure.
- We now need to use that cost to price out our products to help us reach our profit goals and to also cover your overhead costs like rent, electricity, and the cell phone.
- 2 pricing methods. Cost Plus and Market Value. Don’t believe cost-plus is the way to go, so won’t cover it.
Terry: So explain to the listeners how market value pricing works.
- Takes more time than Cost Plus, but in the end, will gain you more profit and sales.
- A big part of it is doing as much research as you can to what your niche market will pay for that item you are selling.
- The second key is to figure out what you can do to the item without increasing the cost much to give it more perceived value – PERSONALIZE!
- Take your cost, add a percentage value that will allow you to cover your overhead then whatever beyond that total, which people are willing to pay for that item becomes your profit.
- OK and encouraged to slide the price up and down a bit to gain more market research. Use discounts over price changes as much as possible.
Terry: You mentioned personalization as a way to increase the value, can you explain that more and also give us other ways to increase your perceived value.
- Start by not offering a price list with price breaks. Sell each product as an individual masterpiece.
- Personalization = Face Masks with Name Drops. Picture of Grand Kids over an off the shelf design.
- Describe your product differently. For example, if you are selling garments, you would not be selling a T-Shirt, you would be selling moisture-wicking activewear garment that is decorated to last the life of the garment. Signage is another good example. You are not selling a simple sign; rather it is a full-color marketing tool that allows the company to show off their brand while still directing someone to the restroom.
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