You're absolutely right. I used to hand-knit hats to a particular nerdy gamer theme, and was very quickly overwhelmed with orders (even at US$65/hat, which is a lot for a knit beanie!).

I had to institute a "slot" system where I'd open up orders for a short time, get a bunch, then knit my way through them. Once they'd all been shipped out, I'd open up for more orders (if I wasn't sick of knitting the damned things by that stage ;). It worked pretty well and kept me in pocket money through the last stages of my PhD.

One thing I decided was that I'd never compromise in quality - I used very fine wools (malabrigo for those who know) and each hat was made to order from a "menu" of options. Throughout the process I'd keep the customer up to date on what I was doing and where they were in the "queue".

It worked really well, but I wouldn't want to do it for a living since I was underselling my time as far as labour costs go. And I got sick of knitting so many hats. :)