When you attend a concert for your favorite band and you pass by the "Merch" booth you might not realize what goes into just having that booth or the shear importance of that booth.
Merchandise is one of the most important ways of getting yoru name out there along with your show. Everyone who has one of your items is like a traveling billboard advertising you and your brand. Yes you heard me, if you are a musician, you are a brand. It isn't selling out to sell merchandise. You make music because you love it and you work hard for years to develop your art. Why shouldn't you be paid for it too. You don't tell a businessman he can't get paid for doing all the work he does. This applies to musicians as well. So you might be saying okay great lets get some merch.
Here is where the closed loop comes in. The problem is merchandise especially custom merch can cost thousands to produce. So you have to be smart about it. On big tours the merch you see is another form of a record deal. You make a deal with a merchandise company to produce your merch very similar to getting a label to put out your record. This can be a very difficult task as transportation, people to run the booth and more are all part of this deal. You usually get an advance against sales and make a percentage of some kind depending on the deal and if you recoup your advance agaisnt sales. The average musician doesn't usually have a chance to get in on advances unless you are a name act or have a TON of backing cash behind you.
For the average musician playing locally or regionally this is usually impossible to come by on a large scale. However there are some very cool new advances in manufacturing you can use to your advantage to sell merch and it is basically free for you.
Sites like Spreadshirt, Createspace, Cafe Press work on an item by item basis. In that, they create each item at the time it is ordered. You don't have to pay anything up front. You just have to create the vector artwork or images, upload, create the product through the sites creation labs, set a commission price and BAM! You have merchandise for free. You can usually order items in bulk to sell at your shows or you can direct your fans to the merch site.
Another thing you can do for merch is have unorthodox items for sale at yoru shows that are basically free or really cheap like jelly bracelets, glowsticks, pencils, bouncy balls, pen lasers, etc. You can usually get these from international trading magazines REALLY or insanely cheap.
You can also find a local Tee Shirt shop that would be willing to create shirts for you in exchange for free advertising for that shop on the shirt. Or if you have the money have them make you up a bunch of shirts with yoru logo on it. Be sure to get a variety of sizes.