The irrational economics of a craft business: The cost of handmade products (Part 1 of 3)
When my toaster recently died, I was surprised to find at least 60 individual components after prying it open. That's impressive for a $15 product. Meanwhile, my handcrafted Judd mailbox is made from five parts, retails for over ten times that price and it’s one of the cheaper mailboxes available on Etsy. It begs the question, why are handmade items so much more expensive?
Mailboxes aren’t generally known to be expensive. A metal mailbox from your local hardware store can be had for as little as $30. You might assume that the premium cost of the handmade product goes into a premium wage for the maker. But in the case of the Judd mailbox, I “pay” myself $14/hr, which is minimum wage in Oakland, but wouldn’t qualify as a living wage for an employee.
So crafters aren’t becoming wealthy from their products, but they do face costs that large manufacturers avoid or mitigate. Let’s talk about them so you understand the challenging economics of a craft business. Though I’ll use my Judd mailbox as an example, the same should apply to any handmade product, from these lovely cups to this fantastic furniture.
In this first part, we’ll talk about the biggest cost of a craft product: labor. In the following two parts, I’ll break down the rest of the costs, and how large manufacturers avoid them, and then make a case for why you should want craft businesses to succeed.
Bigger is Better
“We lose money on every sale, but make it up on volume.”
For most of the 20th century, this was a punchline of a joke, but today it’s the business model behind some of the most valuable companies of the past two decades; companies such as Amazon, Uber and DoorDash. Uber egregiously continues to lose billions every year. While these companies take the concept of economies of scale to an extreme, often with negative consequences for their workers and competition, a company doesn’t need to be Amazon’s size to drive costs down. How much savings are we talking about really? Let’s look at some actual numbers.
To produce a Judd mailbox requires nine steps. The metal body must be cut from a large sheet, then drilled, sanded, and bent. The wood must also be cut and sanded. Then both must be coated with paint and polyurethane respectively, after which they are assembled into a mailbox, then waterproofed with sealant. In my workshop, these steps take about seven hours from start to finish. At the minimum wage of $14/hr, that’s $98 in cost due to labor. If I were to hire an employee at a living wage of $22/hr, the labor cost would be $175. That’s approaching the current retail price of the mailbox, just for labor.
So labor, or production time, is a huge cost for handmade items -- how do large manufacturers reduce it? Because my workshop has limited free space, I spend a fair amount of time setting up tools to switch from one stage of production to the next. Large manufacturers use dedicated stations for each process to minimize the time spent switching tasks. This factory assembly line can save anywhere from 15-30% of production time. A factory can find additional time savings by using specialized machinery, such as an automatic metal bending tool, that can save anywhere from 20% to 400% of production time, depending on the process. With a modest setup, a factory could likely produce the Judd with only one and a half hours of labor, saving $77 compared to my craft workshop. While the factory must account for the cost of the machines, those costs are spread over each machine’s lifetime output, hence, the company makes it up on volume.
Larger companies have an advantage beyond cheaper production costs -- they also buy on the cheap. My cost for materials for each Judd mailbox, including the metal, wood and finishes is $41. The average cost of shipping, which is included in the price of the mailbox, is $20. A company working at high volumes could negotiate those costs down 15-30%, saving $9-$18 per mailbox. Size is power, especially when dealing with suppliers and vendors.
While it isn’t news to anyone that bigger companies can make products at less cost, the degree of difference might still be surprising -- a big company can probably produce the Judd mailbox for $85 less than our craft workshop, half the retail price, simply by taking advantage of its size. In the next post, I’ll dive into other ways that large companies lower the cost of their products, though not necessarily to the buyer’s benefit, and why in spite of the higher cost, many people are happier buying handcrafted products.
Art makes things for Material Mailbox. He is also an engineer, designer, and person who plays with data. Email him: art (at) materialmailbox.com