You don’t have to wait for a new year to hit the refresh button on your business; you can turn things around at any point.
The only requirement before jumping into change is looking back and reviewing what has brought you to where you are now; especially if you want to improve results.
Let’s use an analogy to compare setting and achieving a personal goal to a business goal.
If I wanted to improve my health and lose weight, I wouldn’t start a new diet or insane exercise routine without first assessing my health, as well as my past efforts and the results they’ve produced. I’d want to know how overweight I was before deciding how much I wanted to lose, and I’d also want to look at my current diet and exercise routine to determine where there’s room for improvement.
The same idea applies to your business.
Before setting goals or jumping into changes, you should look at the current health of your business, as well as your past efforts and the results they’ve produced. Then you’ll know where there are opportunities to increase profits.
Here are three key areas to review before making plans for next month/quarter/year.
Metric #1 – PROFITS
Profits allow you to grow your business and your bank account. It’s calculated by subtracting ALL costs (including your hourly wage) from your revenue (the total of all sales before subtracting costs).
Imagine paying an event organizer $50 for a table, then spending your time and money preparing, setting up, selling and packing up, only to earn your $50 back.
You wouldn’t sign up for that craft fair again, would you?
A similar situation happens when expenses and hours aren’t tracked and product prices are set based on the cost of materials and hours to create alone.
Outside of production costs, there’s always time and money spent on marketing, selling and operating your business.
When you don’t account for those costs, you don’t properly set prices and likely aren’t profiting.
Yes, you add padding that helps cover additional expenses and hours when you follow the basic formula of: materials + hours x 2 = wholesale price, wholesale price x 2 = retail price.
But that formula isn’t a fit for every handmade business and you must review each month to ensure you’re actually profiting.
>> Here’s a more accurate formula for pricing your handmade products: The Right Way to Price a Handmade Product (Step-by-Step Formula)
Without a profit, you don’t have money to buy more materials next month, place more ads, or create more listings to move more product.
You also don’t have money to pay yourself above and beyond the hours you put in. Which means you’re more of an employee of your business, rather than an owner. And you and I both know you’re doing enough work to be rewarded as an owner should.
There are times (such as startup or growth stages) you must invest more than you have in your bank account. Outside of those times, profits should help dictate what you spend on your business or how much money you move into your personal bank account.
If month after month you have to cut yourself out of pay or dip into your personal bank account to buy more materials or cover craft show fees, you need to increase profits.
Metric #2 – RETURN ON INVESTMENT (ROI)
When your business isn’t profiting, isn’t profiting enough, or you’re looking for ways to profit more, analyzing your return on investment (ROI) should be the first step.
ROI is measured by dividing the profits an investment produced, by the cost of the investment.
It helps determine if you’re profiting, breaking even or at a loss after putting time and/or money into a task.
For example, if last month, I spent a significant amount of time and money on Facebook marketing, I’d use Google Analytics to assess if Facebook brought me more traffic and if those visitors ended up buying (e.g. did their path lead to a shopping cart or “purchase complete” page?). If my Facebook traffic resulted in sales, I’d want to know if those sales covered the cost of my Facebook ads and time spent on the platform, and if they made me a profit.
If I spent $20 on an ad and four hours on Facebook related tasks, at $25/hour, the investment total is $120.
With the sale of each product, I must first cover all expenses aside from my Facebook marketing costs (because we want to determine the ROI of my Facebook marketing).
If I sell a product and am left with $30 after covering expenses outside of Facebook marketing (e.g. production costs, Etsy fees, etc.), I would require four sales to break even on my Facebook investment (120 ÷ 30 = 4).
If my Facebook ad generated more than four sales, then my investment produced a profit; less than four sales and I’d be at a loss for the time and money spent on Facebook.
At a loss, I’d consider no longer using Facebook for marketing, putting minimal hours towards it, or testing different Facebook marketing methods (e.g. try Facebook Live or targeting a different demographic with ads).
Return on investment should also be considered before you spend time and money on a task.
The return amount is estimated (e.g. how much you think you’ll earn at a craft show), so it won’t be as accurate, but can still help you make decisions. If you spend X dollars (in time or money), are you likely to make X dollars back?
There are some tasks that won’t return money to you but are necessary.
For example, you must pay your bills each month, which requires time and money to go out without any coming back, but it’s a necessary cost of doing business.
Regularly review tasks like these to ensure they’re completed with maximum efficiency and using minimum resources.
Metric #3 – CONVERSION RATES
With each new year, quarter and month you’re trying to improve your business. Before jumping into changes, you must review conversion rates to see where improvements need to be made.
Although “conversion rate” typically applies to sales and how many shoppers you converted into customers, the basic calculation can help uncover valuable information in many areas of business.
Conversion rates are calculated by determining the action you want people to take (e.g. buy a product), then dividing the number of people who took that action, by the total number of people who did and didn’t take the action (e.g. divide how many people purchased by the total number of people who visited your website).
Looking at conversion rates is beneficial for finding holes in your sales funnel.
If I wanted to improve sales, where would I start?
>> Are sales low due to the products I’m selling?
>> My marketing efforts?
>> Or the sales channels and techniques I’m using?
Calculating the conversion rates of actions people can take within each area, will tell me where I’m losing them. For example:
I may calculate the conversion rate of each product. Out of all my customers, how many purchase product #1, vs. product #2, vs. product #3, etc. I may decide to make more of the highest converting product and less of the lowest converting product in an effort to increase sales.
I may calculate the conversion rate of my social media posts. How many people click a link and visit my website out of all the people who saw my post? If 5 – 10% click the link, I’d continue posting similar content. If less than 1% click the link, I’d test different types of posts or different platforms.
I may calculate the conversion rate of my website. How many visitors who land on the listing page for product #1 end up placing the item in their cart? How many purchase? And how many leave within seconds? If a high percentage of visitors quickly leave, I would look at the design and speed of my website, check in on the product and how it’s presented, or assess if I’m attracting the right people to my website through marketing. If the conversion rate of people who put an item in their cart is high but the number of people who buy is low, I’d look at the functionality of my shopping cart or my shipping fees to see if they’re hindering sales.
Online reports make it easy to gather numbers needed for calculating online conversion rates.
To calculate conversion rates for offline efforts, such as how many people who received your flyer came to the craft show, how many people at the craft show stopped by your table, how many people who stopped by your table purchased, etc., you must track numbers.
>> For more details on conversion rates, check out: How To Use Conversion Rates to Increase Sales
At the end of each month, fill in each field and use the information in this article to calculate profits, return on investment, and conversion rates.
Reviewing is the first step in growing your craft business.
There are 5 steps you should regularly complete to build a successful business:
The Success Planner explains all 5 steps and includes worksheets to help you complete them.
Hey, I’m Erin 🙂 I write about small business and craft show techniques I’ve learned from being a small business owner for almost 2 decades, selling at dozens of craft shows, and earning a diploma in Visual Communication Design. I hope you find my advice helpful!