Normally I write about successful businesses we have created. Well, today is slightly different. Today I’m writing about a business we failed to even start.
This following post is from November 2015 and I am reposting it as it is still very relevant and was the subject of my latest podcast episode: “How To Make Sure Your Business Is Scalable”.
For the last few months, we have been looking into creating a clothing department for our table tennis brand, Eastfield. Obviously we decided to start with t-shirts. I mean a t-shirt printing business is incredibly straightforward and can be created for hardly any money from the luxury of your bedroom. I’m sure we all know someone who has started and tried to make money from t-shirt printing.
We spent a lot of time on it. Speaking to multiple suppliers, trying on hundreds of t-shirts, buying multiple prototypes, setting up a logistics network and calculating all the costs. We got everything ready to the point where we were poised to make our first order. But we didn’t. The numbers just didn’t add up and after some soul searching we scrapped our plans.
How can a t-shirt printing business, that is known for having huge margins, possibly ‘not add up’? I think this is a great example of how a very good basement business doesn’t always survive scaling.
In this post, I’m going to work through all the steps of transforming a t-shirt printing business from the basement into a proper scalable company. Although we didn’t go through with this business, all the quotes and companies are those that we would have gone with.
Stage One – Ironing Designs onto Plain T-Shirts
This is as simple as we can get. All we need is a plain t-shirt, some transfer paper, a home printer and an iron.
Perhaps the hardest part is deciding which base t-shirt is the best.
There are some really horrible ones about, but a reasonably good quality cheap t-shirt cut in a modern style is the Gildan Softstyle. It is also one of the most popular base t-shirts around. In fact, there’s a good chance you already own at least one. Once you know what it looks like you’ll start to realise that a lot of well-known brands use it.
You can purchase them in singles for £2.25 each, which is great because at this stage there’s no point taking the risk of ordering wholesale.
The actual process is straightforward. Create a design. Print them onto the transfer paper. Iron the transfer paper onto the t-shirt.
Finally, so that people don’t realise exactly what you’re doing, cut out the Gildan labels with a pair of scissors. It’s better to have no label than another brand’s.
£15 sounds like a reasonable price. It’s definitely towards the higher end of what we can charge for a design ironed onto a cheap t-shirt, but it’s not enough to make people feel they are getting a bad deal.
£12.25 profit! That’s over an 80% profit margin!
This t-shirt business is great. With a bit of hustling, we should be able to convince our friends and family to buy plenty of t-shirts as Christmas presents for people who’ll never wear them.
Stage 2 – Setting Up An Online Store
Buoyed on by our success the next step is to expand. There’s only so many sales we can get via word of mouth and hassling people on Facebook. An easy next step then is to set up an online store so people we have never met can find out about and buy our beautiful t-shirts.
My favourite way to create an online store is through Shopify, an out-of-the-box e-commerce store. It only takes a few minutes to set-up, has some good looking templates and Shopify manage all the payment processing.
Unfortunately, having an online store does add a few extra costs. There is a monthly fee of about £20 for the basic package, plus 2.4% + 20p on each sale. Worse, those figures are excluding VAT.
So on our £15 retail price we have to pay Shopify 56p + 11p VAT (actually it’s slightly more than that because of the processing of the shipping cost).
Unlike friends and family, strangers have no hesitation in returning t-shirts. Maybe the t-shirt didn’t fit, or maybe they just didn’t like the look of them. Each time a t-shirt is returned: we lose the shirt, lose the cost of payment processing and have to reimburse the buyer for the cost of delivering the t-shirt to them and back to us. It’s hard to know exactly what the rate of returns will be, but let’s assume returns averages out at 75p per sale.
Even with returns and the Shopify fees, profit is still looking very, very good.
Stage 3 – Outsourcing the T-Shirt Printing
But there is a problem. Ironed on heat transfers just aren’t good enough for a real brand. After a few washes, the transfer will start to peel off and it’s pretty weird that there’s no label.
Plus by this point I bet you’re getting pretty damn fed up of ironing. Time to take this business to the next level and upgrade. We’ll upgrade from heat transfers to the much more durable and high-quality screen printing. Plus we can create our own branded labels and sew them into the t-shirts.
Together that is a job too big be done from home and requiring some expensive equipment. Luckily there are plenty of companies out there that offer a full service.
The process is simple. You provide the designs and they do the rest. They hold the stock, do the screen printing and create and sew in the labels.
All this outsourcing comes at a cost. We need to pay for each step: the screen print, creating the label, picking out the old label, sewing in the new one, bagging and delivering the finished product to us.
One requirement of these companies is that you use them to purchase the base t-shirts wholesale, meaning the price per t-shirt changes. At first glance it looks like we’re saving a bit of money – we get quoted £1.9 each. Unfortunately, that saving is an illusion. The wholesale price doesn’t include VAT.
Even worse, as we’re ordering a lot of different sizes and designs we are going to start to get wastage. Sizes or designs that no one wants and we just can’t sell. Let’s assume the cost of wastage averages out another 75p per sale.
(The prices below are the actual prices we were quoted when we went to visit Firelabel)
Wow, where did all our margin go? We could greatly reduce the costs by taking our manufacturing offshore, but for a t-shirt business where we want many different designs and sizes that just isn’t practical. We would need to be selling a lot of t-shirts before it’s worth the time and expense of shipping prototypes to and from China. (if you’re interested in how to manufacture goods off-shore, check out this article).
For the time being it is best to keep our theoretical t-shirt printing business in the UK. The margin is still very healthy, a comfortable 50% profit.
Step 4 – Outsourcing the Order Processing and Fulfilment
The business is growing, but at some point your parents/housemates/spouse are getting annoyed with all the boxes of t-shirts lying around. Worse, try telling them you can’t go on holiday because you need to be at home just in case someone orders a t-shirt…
The next logical step is to pay someone else to do all that for us. There are plenty of fulfilment companies out there, but I use Shipwire when combining with a Shopify store. It has a complete online dashboard and connects directly to Shopify via a plugin meaning that the entire order and delivery process can be automated.
But once again this adds to our expenses. We need to pay both the storage costs and also for the pick & pack each time someone places an order.
These prices are based on what we pay for using Shipwire to fulfil our table tennis bat cases.
Our margin is disappearing fast, we’re down to 30%. But despite that there’s still a business here.
Step 5 – Marketing and Scaling the Business
Some people will stumble across the website on their own and a few more will hear about it by word of mouth. But to really grow the business, some time and money needs to be put into marketing.
Marketing and advertising can cost as much as you want it to and most traditional methods make it notoriously difficult to track sales. Even marketing methods with good tracking data, such as Google AdWords, are saturated and very difficult to profit from.
There is one form of marketing that not only motivates other people to promote your product for you but only costs you money after there is a sale. It is called affiliate marketing.
When someone becomes an affiliate for your business, you agree to pay them a commission on every sale they generate. Anyone can be an affiliate: from people with a large social media following, to blogs, to other businesses. Each affiliate is given a unique link to your website that keeps track of sales.
On a side note, the only way this blog makes money is through affiliate links to various products and brands. I don’t make much – here’s a break-down of my first six months of earnings.
Let’s say we create a pretty standard affiliate program that offers a 10% commission on each sale. If 80% of our t-shirt printing customers come from affiliates, then it will cost on average £1.2 per sale.
Our margins are getting really hammered now…
(ps. if you want to promote our table tennis equipment have a look at the Eastfield Affiliate Program)
Step 6 – Upgrading the Quality
The affiliates have customers rolling in, but as the brand gains a following there are more and more complaints:
“My T-shirt shrunk in the watch”
“The T-shirt is really ill fitting”
“The material is very thin and flimsy”
There’s no real way to get around it, the t-shirts are bad quality. That’s not a good way to build a brand. We’re selling a t-shirt for £15 that apart from the design printed on it, can be bought off Amazon for £2.25.
Even though margins are tight, for the brand to succeed the base t-shirt needs to be upgraded. Bella Canvas is a slightly more premium brand that is often compared to American Apparel. In particular the Canvas 3001 T-Shirt is a good quality but still affordable base t-shirt.
From Firelabel they are £3 plus VAT. So £3.6 each.
Step 7 – Hitting the VAT Threshold
Time goes on, margins are rubbish, but the business continues growing. It’s starting to feel worth all the work but then one day your accountant telephones you:
You’re just about to hit the VAT threshold!
Here in the UK in order to be liable to pay our extortionate 20% sales tax known as VAT, you need to turnover £82,000 in any 12-month period. That sounds like a lot, but it isn’t really. For each £15 t-shirt we sell we currently make £1.91.
£85,000 turnover would give us a gross profit of £10,823. That’s not exactly enough to live on… and that doesn’t even include all the other costs around running a business: accountancy, design, loan interest, Shopify monthly fees, insurance, etc.
VAT is a hidden tax – as a consumer we don’t know if the company we’re buying from is paying it or not. So when a new business hits the VAT threshold, the tax comes straight off the bottom line. The only slight plus side is that you can reclaim all the VAT paid in the other steps.
£1.14 profit per T-Shirt??!! That’s not a business. We’d need to sell thousands just to cover our running costs.
The business had a margin of over 80% in step 1. Now as a scaled and efficient business it is making under 8%.
Ok granted we could always just up the price. To make this business viable, we would need to be selling each t-shirt for £25 each.
Now the business is making a 33.7% gross margin. That is a good business. But before you dive in and start your t-shirt printing empire consider these two questions:
Will anyone be willing to pay £25 plus shipping for a simple graphic t-shirt? Are you comfortable selling a t-shirt for £25 that minus the design someone can buy off Amazon for £3.5?
I can think of quite a few situations where the answer to both would be a resounding yes (for instance if you’re a brilliant artist or for a limited edition design), but for Eastfield it was time to leave clothing and return to table tennis equipment.