Cost of "super steels"

I see a lot of people go full time at mid point or later in their career. If one is lucky enough to have a machine shop on the farm growing up, not having to buy everything from scratch would help a lot. (We we’re grain farmers, but my dad hired an outside machine shop to do his work) Otherwise, it takes a lot of knives to cover the $10,000-$20,000 in equipment to be able to do things efficiently enough to produce enough volume to survive. Living expenses vary a lot from location to location as well.
 
I think where the real money is being made is the guys selling to us knife makers. Thy know we are addicted and can’t stop. I think one can make money doing knives but it involves doing large enough batches to amortise the gross cost out over each blade. But then you run into another problem and that’s selling them. A knife is really only worth what someone is willing to pay.
 
You guys have to remember that you can make your own super super by taking mild steel and cryo quenching it at least 17 times. Paying for all that powder this and vanadium that is pretty much pure marketing.o_O
 
Stacy E. Apelt - Bladesmith said:
Dan,
I think you are looking at it in a factory production cost analysis level. For a small time knifemaker, those percentage comparisons make a specious argument.

It works more like this for the average knife guy:
You invest $25 and make $75 to $125 profit.
You invest $45 and make $155 to $205 profit

Same basic time and shop expense to do the knife .... twice the profit.

Now, if it takes 8 hours work to make a knife, and you do that five days a week. you can make $375 to $625 a week one way, or $775 to $1025 the other. Which sound like a better way to make money?

Obviously, there are many other expenses that come out of that gross profit number.
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Stacy, you simultaneously get and miss my point! ;) Particularly with the big guys production vs. the small shop production. The little HAS to figure it my way to survive.

First let me clarify part of what I was saying. Will use your example and ignore for the moment the added costs of time and shop tools etc.
If, in your raw stock you "invest"
$25 for regular steel and you sell for $125 you get $100 "profit" - $100 / $25 = a 400% return on your investment (ROI)
$45 for a super steel and you sell for $205 you get $160 "profit" - BUT $160 / $45 = 356% return on your investment. (ROI)

What this means, is yes, you "clear" more dollars, but you invest more, for a lower return. Roughly the equivalent to putting your money into the bank that is paying the lower interest rate. :confused: It also means you are having to put up more money (higher risk) to get that lower rate of return. All of that is before calculating your production costs of time, shop tools, etc. that all affect the profitability. Since Super steels cost more in time and supplies to make, your actual rate of return - and possibly even your cash dollars - is lower than simply using regular steels.

The other very important point I want to clarify, and this specifically applies to small manufacturers - Trust me the big boys would never make this mistake - is in what you consider "profit". Again taking your example, $45 super steel, sold for $205. $205 - $45 = $160 "Profit". This is how far too many small business men view their business and profit margin WRONG!!!!

If you are smart, you will figure your profit margin this way:
Raw stock $45
Labor $60 Always figure this in regardless if it is your time or an employee's
Materials $25
Tot. Cost $130

Sale Price $205 - $130 costs = $75 profit.

Don't figure the cash you get from a sale as your return or profit on making that knife! The reason is you get a very distorted view of how well your business is doing. Most people don't have the discipline or the resources to work that way, and still maintain the ability to survive slow times.
Never pay yourself all the cash from the sale! I can't emphasize that firmly enough.

Always, always, always, pay yourself and THEN calculate your Profits! Doing that will insure that:
1. your business really is profitable.
2. That you start having money to put back into the business, either to make it grow, repair equipment when needed, or provide money to you when sales are off.
3. You have a clear idea of whether you really can afford to hire that assistant you have been contemplating.

The last one is the point that gets most people into trouble. They figure Sales are up, I can't fill the orders I have, I have to hire someone. Well if you have been taking all the cash and putting it into your pocket, you are in for a rude awakening when you have to pay the employee out of what had been "your" wages. At best, you will see a big cut in the money that makes it into your pocket. If you still have a little luck on your side, you end up working for free to keep everything going. If you are without any luck at all, worst case scenario, it ends up costing you money every month to keep the doors open and your product shipping. Not a good business plan.

As stated in earlier posts, the math and calculations are never this cut and dried because they do not taking into account the benefits of using the super steel. Maybe sales go up for you because your customer base demands the high end stuff. Without enough steady sales, no business can survive. If you make a product nobody wants to buy, having a 5000% profit margin cannot make up for 0 sales.
 
Thank you for making a long story short. ;)

Anyone talented can certainly make a living doing this! If I wasn't disabled and could invest 10 or 12 hours a day, then sure, I could deffinately make a respectable living. I lose dozens and dozens of sales because I simply can't invest the time due to being in pain all day, every day. I can only turn out a very small amount of blades each year. But you are never going to get rich, and will likely struggle as a single income.
 
Dan,
I really wish it worked that way, but knifemaking doesn't.
Percentages are only scalable is volume. Dollars are a tangible thing. You can't spend percentages at the grocery store.

Lets look at percentages vs dollars to illustrate where you are wrong.

A big corporation like McDonalds is very happy to make 50% gross profit. Why? .... because their food cost was 10 billion and gross sales was 20 billion dollars. I'll take 10 million dollars gross profit any day ( the net profit was 5 billion). The reason is they have millions of customers every day. This is virtually an unlimited market.

My buddy is barely surviving in his little sandwich shop while making 50% gross profit. Why, because his food cost is $25K and gross sales are $50K.
$25,000 isn't enough gross profit to survive on. After expenses, he is lucky not to have a negative bottom line. This is because he has ten to twenty customers a day. His market is very limited, and there is little he can do to change that.

Knifemaking works the same way. Unless you have an unlimited market - which we don't - the percentage profit is a specious argument. The only thing that matters is the actual amount of dollars you generate. It is one out of a thousand knifemakers who actually draws a salary from his business. Most sell to pay for more steel, wood, and tools.


In knifemaking, the formula most use to price a knife is around 4X steel/handle cost ( or something close to this). That breaks down to a break down of:
Materials - 25%
Supplies - 25%
Tools - 25%
Profit- 25% ( this almost always gets put into more materials, supplies, and tools)
 
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From the point of view of one of the makers who is incorporated and is paid a paycheck from that Corporation....



To add to what Stacy said, it also doesn't matter if your business makes no profit at all as long as you are paying yourself and your employees. The idea is for you to earn a living not for the business itself to be profitable. Actually from a tax perspective it is sometime best if your business doesn't make any money at all. If your business is showing a lot of money at the end of the year you need to be giving yourself a raise or finding ways to spend that money while retaining wealth otherwise the tax man gets a chunk of it.

Obviously this is a different situation with a large corporation with shareholders Etc.
 
Custom knives are much more expensive than production knives. The consumer might be willing to pay that extra cost for a variety of reasons, including: the person likes the maker, the customer believes the knife is of superior quality, the knife has artistic or collecting value, etc. If part of the belief on the part of the buyer is that the steel chosen is superior then the steel selection is not based only on costs and profits. There may be ways around this; some makers have built a reputation for having superior heat treatments for relatively inexpensive steels. However, applying typical cost analysis isn’t apples to apples with “luxury” products like custom knives. Sure, it is important for a businessman to understand his costs, but he must also understand his market and customer expectations.
 
Nathan the Machinist said:
From the point of view of one of the makers who is incorporated and is paid a paycheck from that Corporation....



To add to what Stacy said, it also doesn't matter if your business makes no profit at all as long as you are paying yourself and your employees. The idea is for you to earn a living not for the business itself to be profitable. Actually from a tax perspective it is sometime best if your business doesn't make any money at all. If your business is showing a lot of money at the end of the year you need to be giving yourself a raise or finding ways to spend that money while retaining wealth otherwise the tax man gets a chunk of it.

Obviously this is a different situation with a large corporation with shareholders Etc.
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This is exactly how it works. My mental health private practise is incorporated, and in year three we made no profit, but lived comfortably with the same standard of living I had working for the government.

This is also (risking a political point) lowering tax rates results in businesses investing less money into employees when tax rates are reduced. The money you invest in your business is tax free. The money you claim as profits is taxed. One incentivises increased wages and investment in the business infrastructure, the other incentivises taking higher profits.

This is really, really, really basic economics (not politics) that get skewed by people with a motive.
 
No one is tracking depreciation? Do you even capitalize bro? :p
Willie71 said:
This is exactly how it works. My mental health private practise is incorporated, and in year three we made no profit, but lived comfortably with the same standard of living I had working for the government.

This is also (risking a political point) lowering tax rates results in businesses investing less money into employees when tax rates are reduced. The money you invest in your business is tax free. The money you claim as profits is taxed. One incentivises increased wages and investment in the business infrastructure, the other incentivises taking higher profits.

This is really, really, really basic economics (not politics) that get skewed by people with a motive.
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I have to disagree with this. I understand how it can appear that way, especially when looking at a very large corporation. Amazon for example, has such high income from operations they require no leveraging to expand. Reinvestment and minimal net income works fine for them.

Smaller businesses absolutely cannot operate this way, and if they do, will not be around for the long haul - at least not without major expansions and contractions with the greater market. They need cash on hand. The only way for the business to build cash on hand is with net income. If my company operated the way you suggest, we would have sent everyone home in 2015 and shuttered the doors possibly to never reopen. Instead, we burned through our cash reserve to keep people employed with the expectation that market conditions would change.

A lower corporate tax rate now means I can increase wages and profit sharing and still replenish our cash on hand at the same rate. No one wants to loan money to a small business with no net income.
 
kuraki said:
No one is tracking depreciation? Do you even capitalize bro? :p


I have to disagree with this. I understand how it can appear that way, especially when looking at a very large corporation. Amazon for example, has such high income from operations they require no leveraging to expand. Reinvestment and minimal net income works fine for them.

Smaller businesses absolutely cannot operate this way, and if they do, will not be around for the long haul - at least not without major expansions and contractions with the greater market. They need cash on hand. The only way for the business to build cash on hand is with net income. If my company operated the way you suggest, we would have sent everyone home in 2015 and shuttered the doors possibly to never reopen. Instead, we burned through our cash reserve to keep people employed with the expectation that market conditions would change.

A lower corporate tax rate now means I can increase wages and profit sharing and still replenish our cash on hand at the same rate. No one wants to loan money to a small business with no net income.
Click to expand...

You have to structure a mid sized business differently from a family business.
 
It's simple .................super steel + superknifemaker = super price = super profit :D
 
Dan of Bazz Clazz said:
Stacy, you simultaneously get and miss my point! ;) Particularly with the big guys production vs. the small shop production. The little HAS to figure it my way to survive.

First let me clarify part of what I was saying. Will use your example and ignore for the moment the added costs of time and shop tools etc.
If, in your raw stock you "invest"
$25 for regular steel and you sell for $125 you get $100 "profit" - $100 / $25 = a 400% return on your investment (ROI)
$45 for a super steel and you sell for $205 you get $160 "profit" - BUT $160 / $45 = 356% return on your investment. (ROI)

What this means, is yes, you "clear" more dollars, but you invest more, for a lower return. Roughly the equivalent to putting your money into the bank that is paying the lower interest rate. :confused: It also means you are having to put up more money (higher risk) to get that lower rate of return. All of that is before calculating your production costs of time, shop tools, etc. that all affect the profitability. Since Super steels cost more in time and supplies to make, your actual rate of return - and possibly even your cash dollars - is lower than simply using regular steels.

The other very important point I want to clarify, and this specifically applies to small manufacturers - Trust me the big boys would never make this mistake - is in what you consider "profit". Again taking your example, $45 super steel, sold for $205. $205 - $45 = $160 "Profit". This is how far too many small business men view their business and profit margin WRONG!!!!

If you are smart, you will figure your profit margin this way:
Raw stock $45
Labor $60 Always figure this in regardless if it is your time or an employee's
Materials $25
Tot. Cost $130

Sale Price $205 - $130 costs = $75 profit.

Don't figure the cash you get from a sale as your return or profit on making that knife! The reason is you get a very distorted view of how well your business is doing. Most people don't have the discipline or the resources to work that way, and still maintain the ability to survive slow times.
Never pay yourself all the cash from the sale! I can't emphasize that firmly enough.

Always, always, always, pay yourself and THEN calculate your Profits! Doing that will insure that:
1. your business really is profitable.
2. That you start having money to put back into the business, either to make it grow, repair equipment when needed, or provide money to you when sales are off.
3. You have a clear idea of whether you really can afford to hire that assistant you have been contemplating.

The last one is the point that gets most people into trouble. They figure Sales are up, I can't fill the orders I have, I have to hire someone. Well if you have been taking all the cash and putting it into your pocket, you are in for a rude awakening when you have to pay the employee out of what had been "your" wages. At best, you will see a big cut in the money that makes it into your pocket. If you still have a little luck on your side, you end up working for free to keep everything going. If you are without any luck at all, worst case scenario, it ends up costing you money every month to keep the doors open and your product shipping. Not a good business plan.

As stated in earlier posts, the math and calculations are never this cut and dried because they do not taking into account the benefits of using the super steel. Maybe sales go up for you because your customer base demands the high end stuff. Without enough steady sales, no business can survive. If you make a product nobody wants to buy, having a 5000% profit margin cannot make up for 0 sales.
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/———————————- Lets Say I have $100 in Steel, wood, Ht, Water jet, belts, fasteners, epoxy etc I sell the knife for 3-4 times that! 1/3rd of sale price goes to me, 1/3rd goes for new machinery, Belts, etc.. 1/3rd goes to Steel & Handle materials Loveless bolts , drill bits etc. I save every receipt including meals out while working and I employ a book keeper & a Accountant to tell me exactly what is my bottom line!————Also gents, never lower your prices! It’s the kiss of death! The custom knife buying community is small and folks talk about that Super Deal they got!:eek: Have fun & stay safe!!
 
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Stacy E. Apelt - Bladesmith said:
And all businesses are different from a hobby business.
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Very true! I'm not "under the gun" to get knives out, so my family can eat this week! Person wants a knife from me, I tell them it'll be done when it's done!(not quite so bluntly!) And I don't accept payment until the the knife is about to ship.
 
Natlek said:
It's simple .................super steel + superknifemaker = super price = super profit :D
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I know you are joking, but we have all seen this. And it burns me up! When I taught myself to make knives I had a vision. To bring super high performance blades, made with premium materials to anyone.

Before I made knives, as a young adult, I could never have afforded one of these! I remember the $300, $400, $700+ price tags! Fogetaboutit! Closest I could ever cone was an Adventure Sworne Rat 4! (Esse4 today) good knives, but when I finish one of mine now there is simply no comparison! Strange thing.
 
Stacy E. Apelt - Bladesmith said:
You have an XHP nikiri for sale at $650 that I would guess has $60 in blade/handle materials. That is a gross profit of a bit over 1000%.
Once one factors is belts, tools, electricity and propane, rent, taxes, etc., it gets down to hard to make even 100% profit. Your own salary is never in the equation. As you say, it is hard for most folks to make any real money making knives.
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ended up having to send to retail so $ made nope not so much
 
Stacy E. Apelt - Bladesmith said:
Dan,
I really wish it worked that way, but knifemaking doesn't.
Percentages are only scalable is volume. Dollars are a tangible thing. You can't spend percentages at the grocery store.

Lets look at percentages vs dollars to illustrate where you are wrong.

A big corporation like McDonalds is very happy to make 50% gross profit. Why? .... because their food cost was 10 billion and gross sales was 20 billion dollars. I'll take 10 million dollars gross profit any day ( the net profit was 5 billion). The reason is they have millions of customers every day. This is virtually an unlimited market.

My buddy is barely surviving in his little sandwich shop while making 50% gross profit. Why, because his food cost is $25K and gross sales are $50K.
$25,000 isn't enough gross profit to survive on. After expenses, he is lucky not to have a negative bottom line. This is because he has ten to twenty customers a day. His market is very limited, and there is little he can do to change that.

Knifemaking works the same way. Unless you have an unlimited market - which we don't - the percentage profit is a specious argument. The only thing that matters is the actual amount of dollars you generate. It is one out of a thousand knifemakers who actually draws a salary from his business. Most sell to pay for more steel, wood, and tools.


In knifemaking, the formula most use to price a knife is around 4X steel/handle cost ( or something close to this). That breaks down to a break down of:
Materials - 25%
Supplies - 25%
Tools - 25%
Profit- 25% ( this almost always gets put into more materials, supplies, and tools)
Click to expand...


Stacy,
You have pretty well proved all of my points. Each business case you refer to is failing. And Micky D's ain't doing so great either. Sales have been off for them for years and their market share continues to shrink. Your sandwich maker and the knife making profit margins are recipes for failure. Food service needs a 200-300% profit margin to work. Manufacturing profit margins vary quite a bit depending on the industry, and a host of other factors.
If they aren't following the percentages, they are losing.

If you propose to only operate at a break even point so you don't have to pay taxes, then you probably won't have a business come the next business downturn. Your company will be without any cash reserves to see you through. Of course you can pay yourself all the additional profits so your business doesn't show a profit, but then you have higher personal taxes to pay. The problem with owners paying themselves the money is they invariably don't have the discipline to save that money for coming hard times or emergencies. Or they become very reluctant to put that money back into the business when needed. I am willing to bet most small knife makers are Sole proprietorship's, which means you will get hit with the same tax bill whether you pay yourself, or keep the money in the business. If you are set up as a corporation or an LLC, that scenario changes.

The examples I gave earlier, are demonstrations of figuring out how to structure your business and make sound business decisions. Remember my comment at the end saying "having a 5000% profit margin cannot make up for 0 sales." That clearly states that profit margins are only one factor. What I was illustrating with the differences in profit margins was the simple fact that Super Steels, on the surface, are not the most profitable road to take - using your figures. Remember, my examples only dealt with raw steel costs. It did not include labor, tools, supplies, rent, etc. Given that super steels seem to have higher production costs, that cuts into the overall profit margins even more. But it all depends on how you set it up your pricing, and how you work your business

What any successful business has to do, is work the numbers, and make the best decisions possible to provide the best chances for success. On the surface, the use of super steels under the example given, MAY not be the smart move. I say that because profit margin percentages are only one component you need to create a successful business model. A whole range of factors come into play that should be looked at to make a successful business. Some of them are
1. Volume of sales. NO sales, no business. Simple as that. For custom and small production scale knife makers, it is a small market. Which means you need higher profit margins to survive.
2. No business in immune to the laws of supply and demand. If you can only manage $50K of gross sales a year, you don't have a successful business. It is unlikely you will make enough to live on - unless of course you have zero costs to cut into that $50K. I can only think of one business that does that and it is illegal in 49 of the 50 states. lol
3. The size of your market. How many knives can you realistically expect to sell in a month? In a year? Is it enough to keep a business alive? I once worked for a company who was trying to develop a control system to sell to other studios in LA. They had 2 guys - part owners in the company, who worked on developing the gear and the programming for 3 years. When they couldn't generate sales, they hired a consultant to figure out what was wrong. Consultant simply looked at the market place. There were only 13 potential customers for them in all of Los Angeles. Not a big enough market to justify even starting the company in the first place. Expensive lesson.
4. Consumer tastes. Your customers may only buy from you because you use super steel. If that is the case, the decision of what to use is made for you. You have to use super steel. But let's be honest. Most knife buyers place style about steel. Yes there are steel snobs who insist on the latest greatest steel alloys available. But they are a minority of the general knife buying market. They are however, a bigger part of the custom, and small production buying market. As a manufacturer, you must figure out if you will do better with low cost steel or the expensive stuff.
5. What business model are you planning to use? If it is your intention to sell high volume, then lower cost materials for a lower retail price is the way you have to go. If you intend to sell very low volume, high priced knives, you almost have to use the super steels to differentiate yourself from the low end knives. If you think you can get $5000 for a knife and sell 20 a year, you can make a living at it if you can do it.
6. Which steel is your best bet to make a living? If you expect to sell 100 knives regardless of which steel you use, then your decision is easy. Follow your argument and go with the steel that will put the most cash in your pocket. The percentages become irrelevant and you only look at the total cash you can expect to generate. However, if you can only expect to sell 50 knives a year in super steel, but can sell 100 knives in the cheap stuff, that is when you need to really grind the numbers and see which route is going to be the most profitable. You have to compute all of your costs and overhead see which is going to be the best route for you to take. Once you have the costs worked out, What is your profit margin, best case and worst case scenarios? For a small knife maker, if you are only making 25% profit margin, you better go back to the drawing board and figure out ways to get that percentage up. It is too low to be successful.
7. Why are you in the business? Is it for the love of it? That's fine. Admit it and forget about the bottom line or at least ignore it for the most part. Plenty of satisfaction and benefit to be had from a hobby or a work of love. But cash is not likely to be one of the benefits.
 
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