The irrational economics of a craft business: A breakdown of my costs (Part 2 of 3)
This is part 2 of a look at why crafted products are expensive, using my Judd mailbox as an example. In Part 1, we looked at how larger companies benefit from their size. Today we’ll look at other ways they lower the cost of their products, though often to the detriment of the consumer.
Cost Engineering
“Right to repair” advocates are very familiar with cost engineering. It is the practice of reducing the cost of products by eliminating what are deemed unnecessary materials, features and production steps. The goal is to achieve a product that meets the set out requirements, such as how long the product should last, or how it should look, at the minimum cost possible. Advances in production technology and cost engineering are reasons why consumer goods are more affordable today than they’ve ever been, which is great! But cost engineering is also the reason why many products feel disposable -- blame cost engineering for cheap plastic switches and products that don't last as long as they used to.
Craftspeople work on the other end of the spectrum from cost engineering, prioritizing aesthetic vision and material honesty over cost efficiency. That commitment is the draw of crafted products, but it also guarantees higher costs. For example, the Judd mailbox uses 0.064” thick aluminum when it could be made more easily and economically with 0.05” aluminum, saving about $5. But thinner aluminum will flex and is more prone to dents. Would it be worth it?
The wood on the Judd is three-quarter inch thick solid mahogany, but it could be substituted with a thinner piece, or even imitation wood if I absolutely stopped caring. That substitution could save another $5. The Judd features a pricey stainless steel piano hinge which I chose not only because it gives the lid a smooth action, but also because it can be attached without any visible welds or fasteners. An aluminum hinge would cost half as much, saving $2-3, and smaller hinges would cost less still, but would compromise how it looks and how it feels. Craftspeople are mindful of costs to some extent, but are motivated by our vision for the finished product, rather than optimal economics. Because cost is never the first priority, crafted products simply use more costly materials.
Labor/Land Arbitrage
Manufacturers have long avoided building factories in high-cost urban areas when less expensive neighboring areas will do. What’s new is how manufacturers have stopped building in the US at all. Viewed purely on an economic basis, it’s easy to make the case to build elsewhere: The average wage in the Chinese city of Zhengzhou, where Foxconn owns a factory, is $1035/mo (2018). The median income in Oakland is four times greater, according to the US Census Bureau (2019). Because of higher labor and land costs, manufacturing in the US is at an all-time low. High profile attempts to establish manufacturing have failed spectacularly -- see the Lordstown and Foxconn debacles, and don’t look too closely at brands like Shinola that make US manufacturing part of its identity. Companies rely on lower land and labor costs overseas to maximize earnings and return to shareholders, and company behaviors won’t change unless the economics change.
The Material Mailbox shop space is close to 400 square feet. At a low-for-Oakland rental value of $1/sqft, and production rate of two mailboxes per day, the cost of land per mailbox is ~$10. Adding up the cost of land, labor, materials for each Judd mailbox, we arrive at $150. In comparison, I’d estimate that I could pay a Chinese contract manufacturer to make the mailbox at small volumes for $75-90 all in. A company that establishes a production facility in the US is betting that consumers will pay premium American land and labor rates for their products. Few companies can justify making that bet.
The Total Cost
While we’ve examined the land, labor and material costs that go into the Judd mailbox, we don’t have a complete picture without adding in costs of free shipping, payment transaction fees and marketing, which includes Etsy’s and Shopify’s platform fees. With those costs added to our previous total of $150, we are over the retail price tag for the Judd mailbox.
Cost % of Total
Labor $98 53%
Materials $41 22%
Land $10 5%
Shipping $20 10%
Mktg/Fees $15 8%
TOTAL $184
Is the Judd mailbox expensive? Yes it is, but it’s certainly not because it’s profitable. In Part 3, I’ll talk about why despite the challenging economics for the maker and the high price for the buyer, you might still want to choose a crafted product over a mass-produced one.
Art makes things for Material Mailbox. He is also an engineer, designer, and person who plays with data. Email him: art (at) materialmailbox.com