Costing A Startup

For the past month, I’ve been helping my daughter set up a small side hustle selling stickers on Etsy that she designed. It’s been a microcosm of what it takes to start a business in going from an idea to sourcing a manufacturer to creating a marketing plan. One thing we’ve focused on since the beginning is figuring out her product and other startup costs to determine if the whole project would be viable.

Name Your Costs: We started by listing all the costs, which did take a bit of research to figure out. This includes stamps, envelopes, processing fees, and the stickers themselves. The interesting thing here is that the production cost per sticker is based on the quantity ordered:

Higher quantity = Lower per item cost = Higher investment.

Let’s look at three tiers of sticker quantities: 100, 200, and 300 per order. One thing to note, is that she is launching with three different styles, so whichever quantity is chosen, she would be buying that package three times (once for each style).

Quantity 1 Style Order Cost Cost Each 3 Style Order Cost
100 95.00 0.95 285.00
200 135.00 0.68 405.00
300 157.00 0.52 471.00

She could drop the cost per sticker cost by 45% by ordering 300 instead of 100, but this also means spending almost twice as much on the initial order. And because of starting with three different styles, it means the right column in the chart above will be her initial investment. To put these amounts in better perspective, we looked at the total cost of goods for all three quantities to weigh the profit per sale v. how many stickers it takes to recoup the initial investment.

Here are the other costs which are included in the chart below: $0.50 for a single stamp, $0.10 for a small, thick envelope resistant to bending, and the three types of Etsy fees. These fees are: $0.20 for a Listing Fee charged for each sale, 3.5% of the sale price for a Transaction Fee, and 3% of the total payment plus a quarter ($0.25) for a Payment Fee. We know her target sales price is $2 per sticker plus $1.00 shipping. We’ll use these to calculate the Etsy Fees, so let’s look at it in another chart:

Variable Costs Q 100 Q 200 Q 300
Sticker 0.95 0.68 0.52
Envelope 0.10 0.10 0.10
Stamp 0.50 0.50 0.50
Etsy Listing $0.20 0.20 0.20 0.20
Etsy Transaction 3.5% 0.07 0.07 0.07
Etsy Payment 3% + $0.25 0.34 0.34 0.34
Total Product Cost 2.16 1.89 1.73

Here we can see that only the cost of the sticker is changing based on whether we order 100, 200, or 300. All other costs remain the same in each scenario. The cost of 1 stamp and envelope per order is the same regardless of the sticker quantity. The Etsy fees are also the same because the transaction revenue of $3.00 ($2 sticker plus $1 shipping) is the same for each sale in the model above.

Making Business Decisions: Let’s take this one step forward to look at what she will earn per sticker. I’ve inserted the revenue of $3.00 per sale ($2 sticker plus $1 shipping), then subtracted the Cost of Goods Sold which we calculated above. This leaves us with the Gross Profit per sticker.

Variable Costs Q 100 Q 200 Q 300
Revenue Each 3.00 3.00 3.00
Total Product Cost Each – 2.16 – 1.89 – 1.73
Gross Profit Each 0.84 1.11 1.27

Armed with this information, she had two factors to consider: First, what is her time worth to create, package, and ship the stickers; respond to questions or issues; and maintain the site. Second, how much starting capital is she able and willing to invest?

She knew quick that 84¢ did not feel like enough to potentially fulfill one or a few orders each day. She reminded me of an old Seinfeld episode where Jerry was receiving hundreds of royalty checks for just a few cents each, and he ended up crippling his hand from all the signing1.  The initial cost between 200 & 300 stickers was not a huge jump, and she figured that once she sold the first 200, the next hundred would go smoother and easier, so she decided on the larger quantity of 300.

But… It’s Just Stickers: It is just stickers, but the principles of how to calculate your product costs and use that information to make decisions is universal. By understanding your costs, you should be able to price your own goods more strategically and also determine the high and low margin items in your product mix. Good information will always help make informed decisions.

I hope you’ve enjoyed walking through this discovery process with my daughter and me. Here’s a link to her Etsy sticker shop Dae After Tomorrow if you’d like to see how they turned out, or you may even need a couple stickers for the cat lover in your life.

 

  1. “The Checks” was episode 141 from Season 8. I was unable to find a clip showing the checks signing, but this was also the episode that Elaine’s BF way too into the song Desperado, so here is a clip of that instead.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s