## Monday, October 3, 2011

### :: figuring the break-even ::

statistics are slippery things.

they're not just numbers that line up and present themselves to you in the shape of answers.

or at least, they're not effective that way. certainly it's possible to make them do that. it's possible to enter all the raw data into your little spreadsheet and then find some averages and such and call it a day.

but there's more to the story.

there are different questions you can ask the data. different filters you can use. there are important comparisons to be made from within the data. there are freak-occurrences to account for, or not to account for.

if i want to defend my experiment i can look at the numbers one way; if i want to poke holes in my experiment i can look at them other ways. if i want to answer questions about what, exactly, people paid me for, i need to root a little bit deeper.

...

my first time through the data i added everything from the experiment up and i compared it to two important numbers i use in price calculations all the time: my break-even price and my retail price. (i plan, also, to compare to a third number i use all the time: my wholesale price. but more on that later this week.)

according to those comparisons, the data looks like this:

total named price (excluding paypal fees and the price each customer paid for shipping) across all 33 orders = \$7916
total break-even price (which pays for all raw materials plus the labor required to print & assemble each order, labor which i have found ways to keep to a minimum (i order almost all of my raw materials at their finished sizes, for example) and which i bill at my standard rate of \$60/hour) = \$8445
total retail cost = \$17832

so voila! the total named price covered 94% of my break-even price and about 44% of my retail price (usually wholesale = half of retail, so that's not too shabby). i was thrilled! whee! (yesterday i said in the comments i think that it was within 4% of breakeven -- i was wrong. sorry!)

but as i started to work on this reflection article i'm working on for another blog next week, and i started noticing that 17 of the 33 orders were for completely custom designs, i started to realize that the picture i'd just painted with those numbers - the one in which i danced my happy dance because i'd been paid for my raw materials and almost paid for my time printing, cutting, and otherwise assembling all those orders - wasn't really a very accurate picture.

because those two important numbers i compared everything to, the ones i said i use all the time in price calculations? they're for the designs in my "catalog" so to speak. for the designs i've already designed. the designs that require a bit of time for me to typeset each couple's individual wording and change everything to their particular colors (chosen from 48 colors i've pre-selected) but that require no new design work.

those numbers - the break-even price and the retail price -  really only compare fairly to the prices of the 16 people who ordered "catalog" designs. for those 16 orders, the numbers bear out like this:
total named price across all 16 non-custom orders = \$3471
total break-even price = \$3720
total retail cost = \$8073

so these customers paid 93% of my break-even price (43% of retail). yay! awesome! woohoo!

but then what do i do about the custom-design folks? the 17 orders i received for completely custom suite designs? if it's not fair to compare them to my catalog designs, then what should i compare them to? how do i figure out what the data from these orders means?

figuring this out means taking an honest look at my own value of my work, and i don't just mean my hourly rate.

now truthfully, each custom design is different. each situation is different. despite the fact that each order gets a set of prototypes to choose from and then up to two rounds of revisions to the chosen prototype, each custom project takes a different amount of time. a different amount of effort. a different amount of personal investment. a different amount of pushing the boundaries of my own aesthetic. a different amount of joy on my part, even. a different amount of technical design-software illustration-technique expertise. so it's hard to even begin to come up with a number of design hours that need to be included in my comparisons here.

but i decided that a fair estimate of the total number of design hours required by these particular 17 custom orders is 50 hours. i've completed a few of these seventeen and have done enough custom wedding suite design in the past to think that this is a reasonably fair guess. at \$60 an hour (and before you non-designers in the bunch balk at this, consider that this hourly wage is before self-employment tax, before rent, before all business-related overhead, before the cost of maintaining a website, before advertising… chances are good that if you're employed and you make \$12 an hour, the company you work for is paying out significantly more than this on each of your worked hours) this amounts to \$3000 worth of custom design work ordered in september.

so where does the additional \$3000 in design-hours go? is it part of the break-even price?

if you look at the survey questions i asked, i think a lot of people would add it to the total retail price line, but not to the break-even line. after all, 90% of respondents to the survey indicated that in order to name a fair price they would want to know my raw material costs. 63% of respondents said that if i want to somehow continue to incorporate this pricing model into my business for the future, i should only allow people to name their own price on the custom design work but charge set prices for the printing.

i get the logic here, i do. the fact is, there is a set amount of money going out of my pocket to pay for the raw materials. if i don't take that much in, then i will slowly (or quickly!) go bankrupt. but i tend to see my time the same way. i've only got so many hours i can work in a day. in a week. in a year. and if i'm not paid for those hours then they're gone.

imagine logging 37.5 hours each week at your office job and finding that while maybe you didn't have to pay a cent out of your pocket to be there, you're not going to be paid for those hours. those hours are gone and you're no better able to pay your bills. feed yourself. live.

my hourly wage is set according to the amount of money i need to cover expenses and a modest "salary" to me based on the number of hours i work in a week. that means that in order to cover those expenses and pay myself (so that i can, in turn, pay the babysitter, the mortgage company, the grocery store) i need to actually be paid for those hours. being paid less than my standard rate means working extra hours at a reduced rate (imagine if bosses asked us to do that!!) or simply not making ends meet at month's end.

for september's orders, i'll be doing the former -- i'll be putting in lots of extra hours at a greatly reduced rate. or, i'll be working the usual number of hours at my usual rate and then donating 50+ hours for free. the numbers are as follows:

total named price across all 17 custom orders = \$4444
total break-even price (including custom design-hours) = \$7726
total retail cost (including custom design-hours) = \$12759

so these customers paid 58% of my break-even price (35% of retail). it's kinda not as awesome. these customers paid for a little more than half of my materials and half of my time. the rest is mine to absorb.

or put another way, they paid me as if i were making non-custom stuff. they did not pay me for my design work.

the thing is, i don't like writing this because i really really believe that most of the people who ordered custom work from me really believe that they were paying me for my time. for some of them i think they grossly underestimated the cost of my materials; for others i think they underestimated how long i work on custom designs; for still others i think they underestimated the hourly freelance rate required to make a living wage. for most of them it was probably some combination of all three factors.

i should note at this point that none of these 33 orders were negotiated in any way. i only tried negotiating that one really crazy order, and she eventually requested a refund instead (and it was granted, of course). these other 33 orders had almost no input from me regarding pricing except for one or two people who wanted to tell me their price first and as long as it wasn't insane i said it was fine.

so in the end, what's a girl to make of things?

i'm not totally sure.

there was awesomeness this month and i loved it. i ended up with decent money in the coffers, payment for my labor mostly, but not enough to cover any of my design work, which was (and will continue to be throughout october - i think i've completed about 1/3 of the orders so far) significant. i learned that people are looking to be inspired. i learned that people want custom work done and they think they're willing to pay a premium for it, but they may not know how or actually be willing to.

i'm still not decided on how the whole thing feels as i sit here wearing it this october 3rd. it feels good and bad. it feels interesting and completely uninteresting. there are some surprises here for me. and there were amazing conversations about value and pricing and worth and time. conversations that made me happy and sad and angry and uncomfortable.

that part of the experiment was a wholehearted no-doubt success.

i still want to compare this with the wholesale model, which will come later this week. in some ways i see myself as having done two major experiments this year: NSS and this one. and i need to do some more thinking about the advantages and disadvantages of each.

i'll end with one last thing: i still really want to see if i can make this work somehow. i love the spirit of it. i love the customer it attracts. i've got my thinking cap on here, folks, and i hope that you do, too.

...

and before anyone points out that the analysis of the custom stuff throws the conclusions at top about the whole experiment, statistically speaking, out the window, let me assure you i've already thought of that. if i use a weighted method of combining these two categories of orders, the analysis of the whole project changes significantly:

total named price across all 33 orders = \$7916 (this has not changed)
total break-even price (including custom design-hours) = \$11,445
total retail cost (including custom design-hours) = \$20,832

so that means that overall, the named prices covered 69% of my combined break-even cost, and 38% of the retail cost.