Why You Need to Figure Out Your Profit Margins Now
f you ask Misty Money her biggest issue as a new shop owner, it was figuring out a profitable margin. “I started by marking up the cost of my shirt by 50% – and that wasn’t the best business practice,” says Money, owner of 6Money's Creations. “I didn’t take other things like the cost of decoration or my work hours into consideration at all.”
If you’re not prioritizing your profit margins, it’s time to start. Your profit margin shows you how much of every revenue dollar goes toward your bottom line. Believe it or not, a lot business owners don’t actually know their true profit margins, let alone their costs.
The top result from a Google search of “What’s the best profit margin for an apparel shop?” was a general 53% gross profit margin, with about 7% net profit. Based on the data analysis of the market sector in January 2022, this sounds like a good number to base your prices on, but there’s a lot more to consider for your business than just relying on general numbers posted online. That’s why we’re breaking down an easy way to figure out your current profit – and what you can do to increase it.
Why You Should Focus on Your Margins
As her business grew, Money got serious on what just one piece cost her to make from start to finish. She looked at how long she spent designing artwork, prepping and decorating the t-shirt, folding and bagging it, and so on for several different styles. “We got a general percentage of time on what one piece would cost us to produce,” she says. “We knew the cost of the garment and the type of design application.”
Once Money determined that base cost, she figured out what type of profit margin she wanted for retail sales. Then, she worked her way backward for large order discounts and even wholesale pricing. “Because of the time we took to really dig deep into pricing, it’s made us more profitable and efficient,” she says. “Having a ‘base price’ helped us so much. Plus, knowing the rock bottom price we’re willing to work for has enabled us to feel confident when quoting jobs.” Many shops fall into Money’s original situation: not taking the time to look at actual numbers in their shops.
“When it comes to making more margin, what’s your existing margin? Many owners guess, since they don’t even know. Your shop decisions and what you charge should be based on real math. What are your actual costs to run your business? The average cost per imprint? That’s your biggest mistake if you don’t know.”
- Marshall Atkinson, business consultant at Atkinson Consulting and Shirt Lab Tribe
Where Do I Start to Figure Out My Shop’s Profit Margins?
Distributors and decorators absolutely must know the true cost of every product and service they provide. Otherwise, you’re undercutting your profits and ultimately risking the future of your business. Here are seven tips to help you better understand your overhead costs and add them into your pricing structure:
Start with your basic expenses.
Review your expenses for supplies, mortgage/rent, equipment, utilities (including phone and internet), and decorating materials. Look at your total costs for a month and then divide it by the days in the month. That’s how much you’ll need to break even.
Factor in regular cost-of-living expenses.
This may be hard in the current economy, but it’s necessary to stay ahead of inflation. Make sure you’re paying your staff a fair wage so you can retain great employees.
Minimum wage is $15/hour in many places, but you may need to pay more to get reliable employees.
This impacts your overall cost, and you don’t want to downsize your staff or reduce hours. Remember that if you have a high employee turnover rate, you could lose production time from being short-staffed and training new employees. Consider what pay rate and benefits will keep your shop successful in the long run.
Raise prices before you must.
Raising prices after you find you’re not making your profit margin puts you at risk of staying negative on your P&L sheet. Ideally, raising prices regularly over time makes more sense than a big reactionary price hike.
Do you have an online shop?
Include the yearly domain cost, hosting, SSL certification and regular maintenance into your total expenses, when calculating your daily costs.
Include debit/credit cards fees.
Payments made by credit cards have costs associated with processing – factor this increasing cost into the bottom line.
Include your design time in the cost.
(Better yet, charge for this time.) Many shops don’t ask for a fee when they discuss logos or other artwork/decorating options for their customers. This is valuable consulting time that you could instead be using to make money on other orders.
How Do I Figure Out My Profit Margins?
Now, it's time to determine your profit margins. Atkinson simplifies the process of determining your profit margins by knowing these things:
1. COGs (Cost of goods) or variable costs. You spend these costs on doing business to push out your orders. They vary based on your work lineup, and include garments, ink or thread, labor, boxes, shipping, and so on.
2. Overhead or operating costs. These are the costs you spend regardless of whether you have any sales. These include your lease or mortgage, equipment payments, insurance, loans, and so on.
3. Gross. Your gross profit amount is when you take your total revenue (income) and subtract the COGs. To get the gross profit percentage, divide your gross profit by the total revenue, and then multiply by 100.
4. Net. Your net profit amount is when you take your gross profit amount and subtract your overhead costs. To get your net profit percentage, divide your net profit by total revenue, and then multiply by 100.
Top Ways to Increase Your Shop’s Profit Margins
There are several ways to add to your shop’s profit margins, including:
1. Sell higher-profit-margin items.
Sell product categories with more significant margins, including hoodies and outerwear. Pitch apparel from name brands like adidas or Columbia, that look more retail and have performance features like moisture-wicking, wrinkle resistance, UV protection, and stain resistance. Consider more upscale fabrics like soft tri-blends, or U.S.-grown combed ringspun cotton. You can also charge more for decoration, by showing and pitching multiple or unique locations for your client’s artwork. “We’re known for our high-quality, super-soft apparel, so our customers expect to pay a higher price per item,” Money says.
"Using a premium brand may cost $1 to $3 more per piece, but that perceived value has enabled us to gain a customer base that wants higher-quality items. They’re willing to pay a base price that can sometimes be $10 more than average screen printers in our area get.” - Misty Money, owner of 6Money's Creations
2. Bundle items.
If you sell multiple types of products, you can increase sales (and profits) by bundling them. “Product bundles are always great, especially around special holidays,” Money says. “You can offer a hoodie, t-shirt and hat combo for back to school/team-spirit wear or for homecoming. Most recently, we offered a fan wear bundle of a decorated pillow cover, blanket and bag. Whenever you offer a bundled package that’s useful for your customers, it’s a win. Why sell just one pillow cover when you can sell an entire bundle?”
6Money also sells specialty gift boxes once or twice a year. “Being able to buy bulk quantities of products is a way to lessen our upfront cost, but the value of our box is still high,” Money says.
3. Improve your inventory.
It’s incredibly important to use your sales data to drive new sales. For instance, you need to know what your big sellers are. That way, you can adjust your future orders to sell more hot-ticket items, while steering away from products that end in clearance bin.
“We always offer one to two specialty items to our line, but adding $5 to $7 to the product for the premium item that they can’t get elsewhere,” Money says. “The different product adds the perceived value to our customers and in turn has helped us raise our profit margins.”
4. Level up your decoration options.
For example, adding a bit of glitter or foil to a design can add $5 to $10 to that item. “Using our white toner printer or DTF to create full-color designs is a great way to bring eye-catching designs to items, without having to add additional labor to the application process,” Money says.
Know Your Costs to Improve Your Profits
Profit margins drive your business, as you look to increase sales while also keeping costs tamped down. But if you really want to improve your profit margins, you need to take a deep dive into all the numbers of your business’, so you know what you have to do to get the profit you’re looking for.
