Profitability check

From a different perspective. I am retired. I had a successful business career and I am very comfortably retired. I love to work with my hands and I have a very strong creative bent. During my business career I always maintained a creative hobby: woodworking, silversmithing and over the last three years, knifemaking. My deal has always been pride, pride in what I do. I have always sold what I make but not all of what I make. I set my prices based an what a true craftsman would or could charge. Some of it sells some of it doesn't. With regard to knifemaking when I first started I set my minimum price at $300 and committed to not selling a knife for less than $300 (just a matter of my personal pride - nothing else). What that does is set the bar for my skill-set. I've got a box full of knives that didn't sell - mostly because the weren't and aren't worth $300, but I've also sold a lot of knives, some for quite a bit more than $300 (Top price $1600). The wonderful thing about the free market is that things usually sell for what they are worth. If a knife is only worth $150 and I insist on selling it for $300 it usually ends up in the box. Point: I didn't start building knives and then pricing them at what the market would allow. I set the price on a knife and then build it to be worth that price. What that means is that my skill-set has to be good enough to produce a $300 knife and I have to keep working until it is or find a new hobby. So far, I'm still building knives. I think I make a profit but I don't really know, don't really care. What I do know is that I'm never sell too cheap and I'm thinking about raising my minimum to $350.

Wallace
 
"The moment you step across the line from giving away knives, to selling knives, everything about your responsibilities changes.... and if you're not ready for it/have thought it through, it can cause you a LOT of grief."


This was what I was instinctively sensing....and one of the reasons I do a lot of testing. I get to thinking I'm being overly concerned with details.....then hearing a top guy state it plainly helps me realize that separating the fun/emotional side of knife making from the down-to-brass-tacks of planning to sell knives is a good thing...and that I have to keep my eyes and ears open. Thanks again Ed.
 
Good stuff Wallace.

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Labor + Materials + Expenses = Cost

Cost x 2 = Wholesale Price

Wholesale Price x 2 = Retail Price

My gut tells me nobody making knives uses this formula. It would be nice if we could though. Lets say you have 25 hrs in a custom knife. (that's being generous towards the low I believe. But as I am just learning maybe some of you are much faster? Ed has this stunning hand carved handle on a knife on his site that had 80hrs into it alone....very much not your typical handle but you see how quick the hours stack up when creativity is at it's highest!)

So, 25 hrs x $20 per hr= $500

labor only x 2 = $1,000 wholesale price

double again for retail price = $2000

doesn't work. So the real only variable is labor. Because you control that. so take that knife and drop the price to $500 and subtract expenses and materials. for example $20 steel, $10 belts, $2 epoxy, $30 scales, $15 heat treat, $2 pins, $15 shipping. (I'm just guessing amounts for the equation...you guys have a better idea of the cost to make one custom knife) total materials/expenses= $94.00

$500-$94 = $406 divide that by the 25 hrs = $16.24 per hour

I think the Walmart greeter make more than that...BUT.....no way they enjoy their job more than you do....and this indeed does weigh in on satisfaction of life.

So, as your shop's efficiency rises your hourly rate rises also. Efficiency in this arena, defined by hierarchy of importance, should always be at best: an increase in quality and a reduction in time...next best is: an increase in quality with no increase in time...third best is: a reduction in time with no decrease in quality. The first increases your hourly income and increases the desirability of your product (or increase of sales). The second will add to the desirability of the product with no increase in hourly income. The third will increase hourly income with no increase in desirability of end product.


You can debate the order but most knife makers are quality driven and will seek to improve that(quality) over time reduction. As it should be. Yet both are important.
If somebody is consistently creating pure beauty they should be working with an increase in efficiency in mind. usually the Artiste is totally unmotivated by profit....yet business is business and often with a little thought can make his stuff profitable. I did not invent these notions....had 'em pounded into me by shop owners over the years....as I always tried to make my work look beautiful...sometimes at the expense of the shop owner...lol. But I learned...eventually.

Anyways....good thread guys. Thanks for the education.....

If you have thoughts on this stuff share it please.....
 
WY_Not said:
One set of formulas I've run into quite often related to various handmade goods...
Labor + Materials + Expenses = Cost
Cost x 2 = Wholesale Price
Wholesale Price x 2 = Retail Price
This is just a rough formula as it will depend on other variables such as competition, market, etc.
Click to expand...

In my experience in this industry, this is dead on for production runs. For customs, a dealer margin will be 25% to 30%. Some dealers with an established maker relationship will go 20% but those tend to be high end.

I would add machine wear and tear and repair as a set number per knife, say $5. Call it machine reserve.
 
wmhammond said:
From a different perspective. I am retired. I had a successful business career and I am very comfortably retired. I love to work with my hands and I have a very strong creative bent. During my business career I always maintained a creative hobby: woodworking, silversmithing and over the last three years, knifemaking. My deal has always been pride, pride in what I do. I have always sold what I make but not all of what I make. I set my prices based an what a true craftsman would or could charge. Some of it sells some of it doesn't. With regard to knifemaking when I first started I set my minimum price at $300 and committed to not selling a knife for less than $300 (just a matter of my personal pride - nothing else). What that does is set the bar for my skill-set. I've got a box full of knives that didn't sell - mostly because the weren't and aren't worth $300, but I've also sold a lot of knives, some for quite a bit more than $300 (Top price $1600). The wonderful thing about the free market is that things usually sell for what they are worth. If a knife is only worth $150 and I insist on selling it for $300 it usually ends up in the box. Point: I didn't start building knives and then pricing them at what the market would allow. I set the price on a knife and then build it to be worth that price. What that means is that my skill-set has to be good enough to produce a $300 knife and I have to keep working until it is or find a new hobby. So far, I'm still building knives. I think I make a profit but I don't really know, don't really care. What I do know is that I'm never sell too cheap and I'm thinking about raising my minimum to $350.

Wallace
Click to expand...


Great perspective!
 
Production runs... Yep, that is where I was heading with that post but got sidetracked. That is what I get for posting in a hurry. Did remember the disclaimer at the end of the formulas regarding it being a rough formula and subject to other variables though.

BossDog said:
In my experience in this industry, this is dead on for production runs. For customs, a dealer margin will be 25% to 30%. Some dealers with an established maker relationship will go 20% but those tend to be high end.
Click to expand...

Just gotta remember to set that money aside so that it is there when repairs or replacement is needed.

BossDog said:
I would add machine wear and tear and repair as a set number per knife, say $5. Call it machine reserve.
Click to expand...
 
If you research this site history, we had an in depth conversation about this( my apologies, can't find) my thought is charge a fair labor rate for yourself, say $20/hr. but gotta be fair with that, 2 2hr tempers doesn't add 80$ to the price.
one thing we found was how small blade material cost was for most knives. for example, a 4" full tang (8"overall) knife in Starrett O1, would cost about $3 in steel. Your highest costs typically are sanding belts and handle material. if you are a new, no-name maker, I would not charge more than Labor+material+utilities. Would you rather sell two knives at $90 each(L+M+U) or wait for months for one knife to sell at $180(2xLMU). I made the challenge then that you should be able to make and sell a basic no frills 4" paring/utility/hunting knife(52100 or O1 or 1084 steel) for $40 and cover L+M+U.
scott
 
"but gotta be fair with that, 2 2hr tempers doesn't add 80$ to the price. "

Yeah...point taken. e-bill there but you're doing something else during that time anyway....back to the efficiency thing.




Can someone describe what a production run is? Is that ten from a custom maker or 300 from a waterjet shop? And who here fits which profile predominately?
 
To me, a production run implies automation. I cut no deals on multiple-knife orders because there is zero time or work savings on my end. In fact, usually the "I want three matching knives" makes the job infinitely harder. I make everything freehand, by eye. I tell them up front that I can get darned close, but if you look closely there will be things that make each knife unique. Nevermind that I have no control over the wood. Six scales from the same block of wood will all look different and they need to expect that.

On the price thing, I think the cost-basis is particularly useful to new makers for one reason only, and that is set your BOTTOM PRICE when you have no idea where to price yourself. Your cost determines the absolute lowest you can sell something for so that you don't chase after a sale and end up losing money. I was that guy. After a good while of being Johnny's Cheapo Knives I got tired of being a slave to my low dollar orders. At some point you have to begin believing in yourself and standing on a price that you think you are worth, just like Wallace said. This is my price. I'm sure you can find a cheaper price, but if you want me to make it, then here's what my price is....

I've been raising my prices steadily over the past year. I haven't a clue what the maximum is I could get for a knife. I keep bumping the price up and people keep saying yes. I've finally gotten the prices up enough that the tire kickers don't respond to my quote, and that's exactly where I want to be. I have to give a lot of credit to John Doyle who has helped me get my mind right on these things, because I was in that low-ball trap, slaving all my free time away to fill orders I agreed to for stupid low prices.
 
Since we're all kind of tiptoeing around the price issue...

I just posted a knife in Custom Knife forum. (4 inch Hunter in walnut) I just sold three of those for $300 each. Last night I got a call on one just like it. I quoted $350 and the buyer didn't blink. So guess what my new price is? I'm just a squirrel looking for a nut, and I don't have a whole lot of experience in this either. A year ago that knife could be had for $150. These prices include the sheath, too. A year from now I hope that I'll look back and say "I can't believe I was letting knives go for $350)

This is the first time I've ever posted actual prices, not because I'm ashamed but because I didn't want any potential customer in the future to find something I posted years ago and want something for that price. My intent is to keep raising my prices just as I intend to keep improving my skills.

Here's the knife: Yes, I see the flaws.

IMGP0893.jpgIMGP0897.jpg
 
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John...That's a very nice knife and sheath.

Are you fairly disciplined in tracking time and costs? Ultimately that is the rub.....

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Years ago I lost a potential customer because in my naiveté as a shop owner I replied to a question, "what is your shop rate?".....$75/per hr...sez me. "Oh...such and such a shop is only $30 an hour..."

Coupla weeks go by and I get a call...."such and such a shop scrapped these parts....we know you are more but need them right away..."...sure bring some material and a blueprint sez me. Guy shows up I look at the print..."How much was he charging for the parts?" I ask....."$35 per part"...."I'll do 'em for $27 per part"...."wow...we appreciate you dropping your shop-rate so low to help us out of a bind!"......I knew I could make about $90/hr on that job. I did. AND...I learned something.....

What one person/shop can do in an hour vs. another can be drastic....based on skill, equipment, personality, time management, how well a job "fits the shop"(which is an average of all the other stuff)

I have never been considered fast at my trade...but have always been steady. After that job I refused to give a shop-rate unless doing time-and-material jobs. I would price thing by the part. That particular job fit me to a "T"....and gained me a good customer.

All this to say, after hitting a decent price on a knife (one that isn't making the pros sigh in despair:35:) One fella may be making money and the other is not. Which once again is profitability.


Profitability is an internal thing....no one knows but each guy in his own shop....And then only if a guy really wants to know the truth. Ed made a very good point when he discovered fellow high-end makers were taking out loans to buy booths at a show. Maybe they were living too high on the hog or maybe just a lack of business sense.

My best friend shut down his shop a couple years ago. He refused to invest in things that would make him profitable....as soon as he was making money it was spent on the Fam (toys...motorhome, scooters, etc) with little going back in the Biz.....He hated working for others. Now he has no choice....

So I guess I'm done banging the profitability gong. I was asking because I had a very difficult time reading the knife trade....I genuinely appreciate all the help.
 
Regardless of the process, regardless of the industry, regardless of the product: The market determines the sale price. Your cost to produce determines your profit. People buy your knives, not your time.

I am anal about tracking time and costs. I have spreadsheeted every part of my costs down to ounces of epoxy. The caveat is this: No two knives are the same if you are making them by hand. Add to that the variability of materials and tweaks to satisfy customer requests and the best you are going to get is an approximation based on your own experience.

I know *on average* what it's going to take me to make a knife. However, the knife is not done until it's done and that takes as long as it takes. When making anything by hand I do not believe that you can take the hourly rate approach. I think you can estimate, but I think it's the wrong way to go about setting the sale price. The estimation is for your cost so that you'll know not to undercharge / under quote, but the final sale price of the knife ought to be based on what it is worth as a finished product, and how long that takes you to accomplish is largely irrelevant to anyone but you.

If you are knocking out mid-tech knives on a CNC and then basically assembling them: for sure. Treat it like production and you can forecast all day long. When it comes to handmade I think you need to see profit over the long term because as soon as you start sweating the hours and minutes on a knife you start cutting corners and the finished product suffers. It simply takes as long as it takes. As soon as you get a union mentality about making knives you might as well buy a CNC machine because you're going to get pissed off every time you have to do something twice and not get paid extra for the time.

I'm not some artsy-fartsy weirdo. I'm a dirty hands, knuckle dragging type of guy. But there is a huge part of making handmade knives that falls squarely into the art category and that means the rules change. Bob Ross doesn't charge by the brush stroke, and neither can we.
 
One thing about time versus cost which is a real concern. In my limited experience there is zero money to be made doing one-off customs. This is where having an hourly rate in the back of your mind does matter so that you don't fall into the trap of pleasing people against your better judgement. As soon as your friends discover that you make handmade knives you will be inundated with requests for Rambo knives and incredibly stupid and exotic ideas based on stuff they saw at the flea market for fifteen dollars. This is where you have to be willing to say NO to people.

On a new design, you can bet that it's going to take you four times longer to make the first one since you don't have a process and have no idea what pitfalls await. This isn't a big deal if you plan to make 50 over the next couple of years because you can take the whipping on your time lost on the first one and recover that lost time on the next 49 you do. But when it's truly a one-off you will never make another one. Who pays for all that time and trial and error? That's when you tell the person that you'd have to charge a thousand bucks because it's going to take you 50 hours to complete it by the time it's all said and done.
 
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That's good stuff to think on John.

How many custom guys build two or three or six similar knives at a whack? If you build two of a similar knife does that lessen the art aspect of building only one? I think you hit the nail on the head with building 49 similar ones over a couple years. I guarantee number 15 or so will be better than number 1. Maybe not as much artistic satisfaction but surely much closer to perfection?

Also one thing I would observe is that in any field...you hear about what the market will bear. The assumption being that the market is a solid static unchanging thing....it isn't. no-one sells many buggy whips today because the market has changed. Every market changes and certain influences and attitudes can drive a market. That change may be slow but it is constant. If folks in any field make a concentrated effort to change things that need to be changed it usually does over time (excepting politics of course....)

finally, what seems to have crept out subtly in the bulk of these posts almost from the first is: Expect to be a starving artist for a long time. Make sure the art of knife making feeds your soul...cause it won't feed your wallet.

I know this whole thread is potentially a touchy subject...If my ignorance in this area has offended anyone I am sorry...merely trying to learn. I am not at liberty to act like a retired person doing a hobby at this time. If something I love doing can help put food on the table great....if I have to wait 10 years to make income....probably best to leave it alone. The only way I know to lift a veil in any area that seems foggy is to ask a lot of questions....

The fog has lifted a bit...thanks all.
 
Great stuff, Smallshop. I don't think you've offended anyone, nor should anyone be offended based on anything I've read. This is a forum for kicking around thoughts and ideas. I enjoy your posts a great deal. In any endeavor, the only way to improve is to have our notions challenged and that goes both ways in a conversation. In any discussion I believe that if you can't defend your ideas then maybe you ought to reconsider them.

I can't speak for others, but in my case "starving" is a good word for it in the beginning. There's just no way around the hefty costs associated with getting started. It's not even the tools so much. The consumables eat you out of house and home.

As to making multiples of the same knife at a whack, I started out doing that. It's a very good way to get your grinder skills nailed down. You nailed it- the first one will suck and the tenth one will be a whole let better and be done a whole lot quicker. Again, speaking personally- now that I'm a couple years into it I know what my big sellers are. Since I grind everything post heat treat I make a batch of blanks per design and have the hard blanks ready to go when I get an order. I don't make any finished knife until I have an order for it. Effectively, every knife I make is sold before I make it (if you don't count the blank).
 
Usually four pages of threads around money devolves into name calling and attacks. This one is going well and is a great topic. It's bouncing all over the place but that's fine too. Nice job guys.

Knife making might be one of the very few legacy crafts left that the majority of makers sell their output and there is a thriving market to sell to.

Part Time compared to Full Time.
I talk to a lot of makers, brand new ones, part time and full time. A class of maker that has stormed into the business in the last ten years is the machinist makers. These are full time guys with machining skills that are able to produce hundreds of high quality, custom style knives. This the holy grail job for a lot of guys.

Each group seems to have a different set of motivations and desired outcomes.

Many new makers are just glad to have sold something -- anything and can't wait to sell another one. Price isn't at all the issue right now. It's getting the rush that someone actually paid them for a knife. They have no problem selling it at or below cost if it gains them some knowledge and experience. With the internet and a little effort new makers can put out a pretty decent product with a very short learning curve. New makers probably buy more knives than they sell. These guys help keep the craft alive. I see more innovation in technique from new guys than many veteran makers.

Many Part time guys are interested in improving their game with new tools, techniques and materials. They are learning different styles of knives and sell off their learning projects to fund more learning projects. They see higher end makers getting what they feel is pretty good money and they are motivated by that. Getting to high end level making from intermediate takes longer than new guy to intermediate guy. Building a reputation for quality/style/personality to charge higher prices is also part of it. Price matters but also there are shop bills to pay. Part timers often bounce between selling for income and selling to grow their skills and equipment. There is a huge difference in those two motivations. One is profit driven, the other is driven to grow hard assets and skills. The motivation can switch back and forth often.

The full time guys have the skills and equipment they need and are focused on production and problem solving to increase production. They are the most cost aware and frugal because making knives full time is not high income and every buck matters. They can spout off the math to you because they have studied it and know their numbers. They have to or they starve. They have bills to pay. Most part timers have a day job and knife making is their second income. That is also a biggly (Thanks for the new word Donald). Most full timers have a very supportive spouse as it usually takes a partnership to make a living at knife making.

The full time machinist makers are another group. They blend knife making skills or design skills with machine production to put out some big numbers. Full and part time guys usually work alone. Machinist makers hire help or farm out part of the process. It's a group activity for them. If you are paying for a CNC machine, you have to keep it running. If you keep it running, you don't have time to finish the knives. It has to be a team sport for them.

So as far as pricing goes on the end product knife, each group has their own motivations and prices are going to be driven by different things.
 
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Man, this thread is getting filled with some great ideas and much food for thought. Tracy did a great job at explaining the difference between each category of knife maker and how differently each approaches his work. I think I would consider myself in that "Intermediate" category as I'm still working to outfit my shop, improve my techniques, and experiment with different materials and design ideas.

The original post asked about how accurate and honest we were about tracking our costs and profit. Since I'm just a hobbyist, I don't make or sell a lot of knives when compared to other makers. I've been enjoying my adventures into knife making for a few years now and I'm almost to that point where knife sales have finally payed for all of the tools that have been acquired to make them in the first place. I still have several more tools that I would like to add to my arsenal, but I have enough to get the job done. Since profit for me has not been very high, I have been very careful to track where all of my dollars have gone. I keep a spreadsheet updated with current prices for my raw materials from the most economical suppliers and shop those suppliers regularly to track any price changes. I try to bundle my orders so that I'm not losing too much money in shipping costs. I keep a spreadsheet on each knife I make to track the actual cost of materials, consumables, and even throw a set figure in for electrical costs. I'll even track the hours spent on each knife by penciling in hourly tick marks on a 3x5 index card that I keep with each project. I know this might seem overkill for those who make a lot of knives to track things so closely, but since I make them one at a time, it's not that much more work. Needless to say, I have a fairly accurate idea of the actual cost of each one of my knives.

The subject of pricing our work has also been a hot topic of this thread. I've found that the main variable for me to play with when pricing my knives is my time. For my day job I charge $75/hr for my time. If I charged that for my knife-making hours, I would never sell a single one. So, I do a little research, find knives posted on the internet that are similar to what I make, and get a feel for the going prices, and set my own prices accordingly. I find that my hourly earnings for the most part are not that great. In fact, I could earn more getting a part-time job somewhere else. As my skills advance, the time it takes me to create the next knife will go down and, at the same time, hourly wages will go up. I look forward to that day. As for now, I will be content with making a modest profit.

So, why do we hobbyists or part-time makers spend so much time building knives for wages less than we could earn flipping burgers down at the local fast food place? For me its the love of knives and primal instinct to build something beautiful and useful with my own two hands from raw materials that keeps me motivated. There is something so satisfying about creating something out of essentially nothing that keeps me coming back for more. I know that many are in this field to earn a living and to provide for their families. I wish them all the best with success and profitability. As for me, I simply love what I do, and if I can earn a little bit of money on the side, that's just the icing on the cake.
 
Tracy....that was a VERY helpful post! Thanks.


"For me its the love of knives and primal instinct to build something beautiful and useful with my own two hands from raw materials that keeps me motivated. There is something so satisfying about creating something out of essentially nothing that keeps me coming back for more."
Brandant Robinson

Excellent!



I think no matter which category a guy finds himself in the goal of producing something beautiful and functional is the drive. I doubt any of the guys doing huge production started out with a different goal. A knife is such a basic necessary tool...it deserves the beauty we labor to put into it.
 
c36353a9198e83ac50f6f1b550bc478c.jpg

So as a hobbyist maker who is about to start making knives to sell in a buddies military surplus store, this knife with about 11 solid hrs into it should be priced around the $125 area?
Seeing as this is just a hobby to pay for itself and mabbe a lil extra I should charge more around the $150 mark?
If I am understanding these formulas right I am under selling since my cost in the 11hrs
to what I feel my skills is a 7.00 an hr 77.00.
My materials and consumables is 30.00 for this knife bringing my cost to produce this knife to a 107.00 total, profit of 18.00 just enough to have a romantic McDs dinner. Lol
 
Thanks Tracy for breaking those sub-groups down! Sometimes guys like me, who are the Sole Proprietor/one off makers, have a hard time grasping some of the other groups' logic. :) It makes more sense when a more objective eye/explanation is presented.

It clearly presents the fact that there are MANY ways to look at, and approach knifemaking as a business.
 
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