The futility of the "Etsy" way

Everybody seems to be starting businesses these days.  If that includes you, that is a great thing, but today I want to talk about a trap I want you to avoid.  I will refer to that trap as “The Etsy Way.”
 
I have named it The Etsy Way in honor of Etsy, the ultra-successful home-made goods website where some 400,000 individuals sell goods that they make themselves. Etsy sold $314 million dollars worth of those goods in 2010, which sounds great until you realize that works out to a pathetic $785 per seller.
 
That is only the beginning. Etsy forbids its sellers to advertise anything that they don’t make themselves.  Imagine the headaches that causes if you actually do get some orders.  In fact, “successful” Etsy sellers often find themselves facing miserable hundred-hour work weeks trying fill orders.

And it gets worse.  Things are so competitive on Etsy, individuals often find themselves working hard for almost no money (or at least little money when compared to their invested time).

This scenario is just not a picture of success.  It is a horrible way to operate a business and one I want you to run from.

In the end of the day, the big mistake that Etsy sellers make and many other small businesses make is in regard to the value they place on their time.

Let’s say you sell an item on Etsy for $20, you have $5 invested in raw materials, and you spend three hours making it.  Let’s assume that there are no other business costs involved (which is highly unlikely). Congratulations! You are netting$5/hour which is only 33% less than you would get slinging french fries. 

Unfortunately, that $5/hour is really probably closer to $2.50/hour.  Here’s why: in a business, you usually spend about half your time on things that don’t directly earn money.  In an Etsy business, that would include writing marketing copy, taking product pictures, packing, creating invoices/receipts, keeping financial records, and numerous other things.  So, you can figure that you really have not 3 but 6 hours invested in that product.  Divide the $15 net income by 6 hours and you get $2.50/hour.

Here is an easy formula to help you price your stuff.  Figure out how much you would need to earn in a year if you were working full time to make your time investment worthwhile.  Divide by 1000 and that is how much you need to earn an hour.

Let’s say that if your business was full time, you would want to earn a minimum of $40,000/year.  That means you need to earn $40/hour.

Going back to our original example, with $5 in raw materials and 3 hours of work, you need to sell your item for a minimum of $125 ($5 + (3 hours * $40/hour)). 

Unfortunately, you probably can’t do that on Etsy because you are competing there with people who don’t understand this concept and are perfectly willing to give away their time for practically nothing.

Don’t get me wrong.  There is nothing wrong with working for cheap for a while if you are investing in the future.  In other words, it may be smart to work for free now if it means in a few years, you will be able to play golf while the money keeps rolling in. 

But that scenario does not exist on Etsy.  The irony of Etsy is that it punishes success by forcing you to make everything you sell.  If you grow your business until it is bigger than you, you cannot sell on Etsy anymore.

If you have figured out that I am not a fan of Etsy, you are right.  I think it is a morally questionable business model.  They have figured out a fairly clever way to sell things that are made in self-imposed sweat shops.  All their talk about social responsibility does not impress me a bit. (BTW, I have have no connection or experience with them in any way but have watched them for years.)

You do not want to personally be making crafts at slave labor rates for
the next 30 years.  There is no good ending to that story.  Here is a better alternative.  Forget Etsy and go buy The E-Myth.  That classic book presents a model of a business that is actually enjoyable to run.