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In researching “5 Ways to Pump Up Your Income,” a story that ran in the December 2009 issue of Money, my co-author Donna Rosato and I discovered a few helpful tips for people who want to make a business out of their hobby. Unfortunately, not all of these ideas made it into the published article. So here they are: To make the transition from hobbyist to small-business entrepreneur, be sure to take these key steps:

  • Vet Yourself. Talented you are, but are you great at customer service? To be successful, you’ve got to be. “You may love to make jewelry but may not have the personality to deal with returns, angry customers and rejection,” says Kimberly Seals-Allers, entrepreneur and author of The Mocha Manual to Turning Your Passion into Profit. Evaluate your time and resources, confirm that you have a consenting spouse on board, and be realistic about how much effort you'll put it to make your hobby business a success.
  • Research, Research, Research. Doing at least 20 hours of advanced research on building your business will increase your likelihood that your business can be successful, says Gene Fairbrother of the National Association for the Self-Employed. Identify your potential customer and determine whether there is a market for your product. Research similar products and their price points to see what you might be able to sell yours for. Two ways to gather opinions: Create a survey on SurveyMonkey.com asking friends if they would buy your product over a competitor’s, or hold a focus group session in your home to get honest feedback about your product.
  • Price Wisely. Be sure that you’ve priced your product high enough that you can make a profit after accounting for all expenses. It may seem simple, but “by the time you’ve accounted for the time spent in creating the product, you may not make tons of money,” says Rita Gunther McGrath, a professor at Columbia Business School. If reasonable, price at least 50 percent above expenses, so you can compensate yourself for your time and have reserves to reinvest in the business.
  • Make Smart Marketing Moves. Local community fairs and trade shows are great ways to create buzz around your business. Don’t bother putting an ad in your local newspaper, as you can gain more attention from a larger audience on the Web. Seals-Allers recommends setting up a simple Web site with photos of your product and your contact information, and then blogging for other Web sites where you can get free publicity for your business. If you plan to sell products online in the future, be sure to set up a PayPal account, which makes it easy to accept online payment (in return for a share of your sales). Also, be sure to register a domain name for your own Web site for $10 at godaddy.com.
  • Remember to Pay Uncle Sam. You have to report all your business income on Schedule C of your tax return. If your profit is greater than $400 a year, you’ll need to report all income and expenses on Schedule SE (for "self-employment") when you file your taxes, and you’ll have to pay social security takes on that income. If you lose money this year, check with you tax preparer about the hobby/loss rules in your state to see whether you can claim deductions on your losses.

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