This blog is about Graphic Design, Vector Art, and Cartoon Illustration

Understanding what making a profit is

I can tell that a lot of people are confused about the idea of making a profit. At the risk of over-simplifying it, profit just means money that is left over after a business has paid for it's cost of business. And this where it can get very tricky. I'll see if I can explain.

Imagine that you're in the business of selling little square blocks of wood. As a businessperson, your first cost of business is paying for the wood. And even if the wood is delivered to you for free, unless it's already in the shape that you need, you will have to do a bit of manufacturing. And that means you have buy the tools needed to shape the wood. And even assuming that you get the tools for free, you will need a place to store the blocks of wood until your customers need them. And even if you can store them for free, you will need to get them to your customers.

Delivering something to a customer is usually done by paying the Post Office. And for most people this is their first hard cost of business - postage. There can also be the costs of boxing, and preparing. Yes, boxes, and bubble-wrap, and tape, which your business can possibly get for free.

If you deliver the items personally, then there's the hard cost of paying for gasoline, paying to own and operate a vehicle. Many people don't consider driving their cars to be a cost, but the last time I checked, gasoline wasn't free. You could, of course, ask your customers to come and pick up their items. In the business world, this is known as FOB (Freight on Board). That is, the price you quote doesn't include shipping. Most customers resent having to spend extra time and gasoline to go pick up your item, and businesses that quote prices FOB are seen as kinda unethical. Most people expect things to either be delivered to them, or for you to have a store nearby to them.

Looking at the cost of business is something that businesspeople do. They want to keep those costs as low as possible so that they can sell their items at an attractive price. As you can see by this example, even that little block of wood would cost you real money to sell. So once, you've determined your cost of business, you determine a price. If that price is too low, you will lose money with every sale. This happens all of the time. If it's too high, you will make a profit. In order to not lose money or make a profit, the price has to be exactly right. And as much experience as people have in business, doing that is just about impossible.

So here's what I recommend: aim for a profit. That is, price your item high enough to cover the costs of doing business. If your block of wood costs you, for example, two dollars to manufacture and ship, try to price it at $2.01. If you feel guilty about making a profit, then you can donate that money. But you're still making a profit, you can't avoid that. Profit is your goal, not loss.

I hope this helps.