Margins, Margins, Margins
In the movie “A Christmas Story”, there is a scene where Ralphie is daydreaming in school about Mrs. Shields, grading their theme papers.
She rants and raves about every child’s papers, giving them an enthusiastic “F!” before moving onto the next victim’s assignment. One of these papers, she marks all over and proclaims “Margins, Margins, MARGINS!” before giving it the failing grade.
The daydream finishes with Ralphie getting an “A++++++++++++++”, but we’re going to stop short of that happy conclusion.
When I consult with new and existing clients, the number one piece of advice I give is “Margins”.
“We’re sold out, but can’t pay our bills!”
We’re selling lots of stuff, but can’t make payroll!”
“We just started wholesale and there’s no cash in the bank!”
“We can’t reprint the game, we don’t have the money!”
“We had a great Kickstarter, but they didn’t give us enough to make the project!”
Do any of these situations sound familiar? More often than not, the underlying cause is – you guessed it – margins!
Many money problems can be avoided in your business if you price your product properly from the beginning and protect your margins.
For direct sales and Kickstarter-only projects, I recommend no less than a 5x markup from landed cost, or 80% margin. (4x is only good when you are the video games “Master of Orion” or “Civilization”, pun fully intended.)
For products ultimately headed into distribution or wholesale, I recommend no less than a 7x markup from landed cost, or 85.7% margin.
I’ve rarely seen any business or project with a well-priced product fail in our industry.
A common pricing misconception is to make your profit margins narrow – or even negative – then make up the offset with volume. But when reality sets in this simply doesn’t work. Losing “only” $0.25 per item after overhead while increasing volume will just result in you losing more quarters for every unit sold.
In short, one of the biggest mistakes you can make as a business owner is underpricing your goods. It results in a long walk off a short pier, into The Sea of Eternal Debt, where you are likely to never be heard from again.