As an artist or any type of creative, having multiple forms of revenue beyond your main artistic output is key to building a sustainable career and business. For many, selling merch is an obvious choice. People are willing to buy $20 t-shirts to support their favorite artists, why not cash in on this?
Merch can also be a promotional vehicle. People walking around wearing your t-shirt or patch is free marketing!
Before placing an order for 1000 t-shirts, there are several factors to consider: upfront costs, cost of goods, margin, and demand being the most important factors.
Profit or Promotion?
This question determines the rollout of your entire merchandising strategy. Is your goal to maximize profit or is your goal to get as many people as possible wearing your merch?
Optimizing for promotion means selling as much merch as possible for the lowest possible price to the consumer. Make the barrier of purchasing so low that any fan that wants merch can get one. Financially, you just need to break even and cover your costs. Merch in the Entrepreneurship & Art store, for example, is sold at cost with all hosting and logistics covered by our on-demand merch provider, TeeSpring.
Optimizing for profit is a different equation. You need to understand demand, manufacturing costs, design costs, and shipping expenses to maximize your margin per item. Especially during COVID, when touring and live events are not a reality, it can be very difficult to forecast sales. This article will go into those different variables and how to hedge your bets to minimize risk.
Aside from the profit or promotion decision, demand has the biggest impact on your merchandising strategy. For creatives with a small number of fans or fans that have not previously purchased merch before, it would be extremely risky to place a manufacturing order for hundreds of t-shirts or posters. Whereas an establishing creative that knows their fanbases demand for merch can safely place an order for hundreds or thousands of units at a low cost per unit.
On-demand manufacturing (sometimes referred to as drop shipping), allows small creators to offer merch with no upfront manufacturing investment and merch is created as orders come in. This how Entrepreneurship & Art sells merch. We have not merch “in stock” or in boxes in our attics and garages. Instead, we run sales through a service that manufactures items when they are ordered. Because these merch items are “made to order”, the cost per item is higher than if we manufactured them in bulk. However, the merch is only manufactured when someone orders, so we never run the risk of losing money.
Traditional manufacturing is done by placing orders in bulk. An established artist will place an order for thousands of t-shirts, sweatshirts, posters, etc. for a large upfront fee but very small per-unit price. For example, ordering 1000 t-shirts may cost $4000 ($4 per t-shirt). This means that their margins will be higher when they go to sell that item to fans. If an artist overestimates demand, they could end up losing money if they sell less than $4000 worth of shirts.
On-Demand Per T-Shirt Cost: $15
Sale Price: $20
Bulk Manufactured T-Shirt Cost: $4
Sale price: $20
As you can see from the hypothetical above, there is a big difference in margin between on-demand and bulk manufacturing. Now imagine that 1000 shirts are sold at $20. An artist using on-demand will earn $5000 in profit, but an artist using bulk manufacturing will earn $16,000 in profit.
Of course, there are other expenses involved in merch sales beyond manufacturing. Depending on the size of the operation, there could be a lot of different types of expenses including staffing and licensing for the biggest operations, but let’s focus on more ubiquitous expenses:
- Graphic design work
- Marketing (Promo photos, video, and advertising)
- eCommerce hosting
- Payment Processors
- Partner fees and commission
Graphic Design Work
For bootstrapping creatives, using their own designs or designs that have been created for other uses is the best way to cut out this expense. Hiring a graphic designer to create a new bespoke design for your merch can easily go into hundreds of dollars, but there are few reasons to bring on that expense.
Any good merch release includes a marketing strategy. This means photos, videos, and possibly an advertising budget. Like with graphic design work, it’s possible to create photos and videos around the merch rollout by yourself. If margins are already tight, hiring a photographer and a model is an unnecessary expense that could be the difference between making and losing money.
If your merch has potential appeal beyond your fan base or your fan base is so big that you can’t reach everyone organically through social media and email, advertising can be a good idea. If you decide to run advertising, make sure you are using tracking pixels to measure how many sales are attributable to your ads and what you are paying per sale. The more you pay per sale in advertising costs, the smaller your margin.
eCommerce Hosting and Payment Processors
There are a wide range of options for selling merch online. Most of the WYSIWYG web platforms (Squarespace, Wix, Webflow) offer eCommerce functionality for a monthly fee and/or some percentage of merch sales. Bandcamp can be used for physical sales for musicians with a 10% commission rate. Shopify is the go-to platform for most eCommerce business and has many more features but a higher cost; $29-299 per month.
In addition to eCommerce hosting, you must pay processing fees. These fees range from 2.5% to 6% depending on the platform. Some platforms may bake this cost into their standard fees, but know that you are paying that processing fee in one form or another.
The most frustrating step, based on this author’s personal experience, is shipping. Especially if you have an international audience, there are a multitude of shipping options with a wide range of tracking options, delivery times, and fees...not to mention the time it takes to package and drop off shipments.
Shopify, as the premium eCommerce platform, will assist you in calculating shipping and even provide postage discounts as part of the partnerships that they have with companies like DHL and UPS (up to 74% off, they claim).
In the age of Amazon, where shipping is free and packages arrive in 2 days or less with uniform packaging, there is little to no way for independent artists to match that level of service. Even showing shipping as an additional cost can turn off the most cost-sensitive consumers. Before offering anything for sale you must know the accurate shipping price (go to your local post office if you must!) and decide if that will be listed as an additional expense at checkout or if you will include that in the retail price.
Partner Fees and Commission
If all of the above seems overwhelming, you are not alone. In fact, there is a whole industry built around managing these logistics of selling and shipping merch. There are many companies, some specific for artists and bands, that will build the eCommerce store, manufacture the merch, fulfill (ship) the orders, and deliver you a report at the end of the month. Of course, these services come at a cost.
There are several different models for full-service merch companies, but generally, a full-service merch partner will charge you bulk prices for manufacturing, a flat fee for design, a flat fee per order for fulfillment, and 20-50% of profit (depending on their level of involvement in the strategy and marketing).
This cocktail of fees and commission make a full-service merch partner a reality only for artists that are already selling a reasonably high quantity of orders. Most of these companies offer their services a la cart as well. They might offer standalone manufacturing or fulfillment services for artists that are self-fulfilling or already have merch.
What should you do?
If you have low demand and not want to lose money, on-demand manufacturing is the best starting point, regardless of your objective. From there you can focus on building demand for your merch or at least have a barometer that tells you that demand is increasing.
As demand increases, bulk manufacturing allows you to either increase your margin (thus increasing profit) or decrease the retail cost of your merch (increasing quantity of sales). Being aware of the additional expenses ensures that you are setting accurate prices and making the appropriate decisions when it comes to considering vendors and partners.
The value of having multiple revenue streams cannot be overstated. As a creative, not having merch can mean that you are leaving money on the table, but jumping too quickly into merch sales can mean losing money on miscalculating demand or underestimating fees. A calculated launch can be the difference between a gradually increasingly profitable side business and an immediate financial loss that keeps you from growing.