“Ten Rules for Maker Businesses” by Wired’s Chris Anderson — Rule #1

Make a profit.

You would think this would go without saying, but one of the first mistakes Makers, well, make when they start to sell their product is not charging enough. It’s easy to see why, for all sorts of reasons.

They want the product to be popular and the lower the price the more it will sell. They’re generous and they don’t feel right charging more than is absolutely necessary. Maybe they even feel that if the product was created with community volunteer help it would be immoral to charge more than it costs.

Understandable, but wrong. You’ve got to charge a reasonable profit, and the reason is simply because it’s the only way to build a sustainable business.

Consider what happens if you make 100 units of your delightful laser-cut handcrank toy drummer kit. You do the math, and between the wood, the laser cutting, the hardware, the box and the instructions, it costs you $20 to make each one. You pack the kits in your spare time, price them at $25 just to cover any costs you may have missed, and start selling.

Since it’s a fun kit and pretty cheap, it sells quickly. You suddenly realize that you’ve got to do it all again, this time in a batch of 1,000. Rather than putting up a couple thousand dollars to buy the materials, you’ve got to put up a couple tens of thousand dollars. Instead of packing the kits in your spare time, you’ve got to hire someone to do it. You need to rent space to store all the boxes, and you’ve got to make daily trips to FedEx.

Now your hobby is starting to feel like a real job. Even worse, the popularity of your kit has come to the attention of some big online retailers, and they’re asking about buying in batches of 100, with a volume wholesale discount.

You’re thrilled that your kit is so popular and flattered that these retailers, who can reach many more people than your own website, want to sell it. But since you’re still selling it yourself at $25, that’s the market price and the retailers typically can’t sell it for more (if manufacturers undercut their retail partners, that’s called “channel conflict” and typically leads to trouble).

The retailers ask for a lower price because they need to make their own profit on each one, usually around 50%. So they need to buy them at no more than $17 each. Now you’ve got to sell each one at a loss! Your costs, which were once within the limits of hobby spending, are now at risk of driving you into debt.

Thus the rule of 2.3x. You should price your product at at least 2.3 times its cost to allow for at least one 50% margin for you and another 50% margin for your retailer (1.5 x 1.5 = 2.25).

That first 50% margin for you is really mostly covering the hidden costs of doing business at scale that you hadn’t thought of when you first started, from the employees that you didn’t think you’d have to hire to the insurance you didn’t think you’d need to take out and the customer support and returns you never expected. And the 50% margin for the third-party retailers is just the way retail works.

(Actually most companies base their model on a 60% margin, which would lead to a 2.6x multiplier, but I’m applying a bit of a discount to capture that initial Maker altruism.)

So your $20 kit should have been priced at $46, not $25. It may feel steep to you now, but if you don’t get the price right at the start, you won’t be able to keep making them, and everyone loses. It’s the difference between a hobby and a real business.

#1 Make a profit.
#2 It takes lots of cash to stay in stock.
#3 Buy smart.
#4 Basic business rules still apply.
#5 You get no leeway for being a maker.
#6 Be as open as you can.
#7 Create a community to support and enhance your products.
#8 Design for manufacturability.
#9 Marketing is your job.
#10 Your second most important relationship is with your package carrier.

One Response to ““Ten Rules for Maker Businesses” by Wired’s Chris Anderson — Rule #1”

  1. electronica Says:

    Great post 😀 i’m considering starting my own company of open source hardware and these 10 rules explained are awesome.