Pricing work correctly is one of the most important and misunderstood challenges of any woodworking business today. Prices between shops for the same project vary drastically, yet costs and rates are really not much different. How can this be?
Someone once said, “The automotive business is a high volume, no profit business. So we got out of it.” If you aren’t pricing to make a profit, then why are you in business today?
Basic pricing strategies
Although bidding jobs using a price-per-measurement makes estimates a breeze, it can often be inaccurate and raise the potential for missing hidden costs.
Popular with some furniture makers, it’s likely to be highly inaccurate.
These should be key components of all pricing, but using this method has many shops overlooking crucial considerations such as overhead, profit, R&D.
Pricing all components individually can be highly accurate, but it requires constant updating. This can be used as both a pricing and selling strategy.
- Software pricing programs
Even the best computer program is no better than the information submitted.
Four pricing essentials
All time invested in production. Base estimates on history.
All the things needed for the job. Don’t forget to make it up!
Everything it takes to open the door, such as utilities, transportation, trash disposal, insurance, phones, Internet, Sales/reception staff, marketing, advertising, consumables, etc.
If you don’t add it, you won’t get it!
Creating a loaded hourly rate
T = hours available for work
O = total costs unrelated to production
O/T = minimum hourly income
Add profit and employee costs
Add project/product costs
How it works:
Total expenses for a year: $50,000
Total hours 50 weeks at 30 hours: 1500
Per hour loaded shop rate: $33.00
- Using the loaded rate to price a job
Number of hours 40
Multiple times loaded rate x33
$1320
Add project materials 500
$1820
Add profit percentage (15%) 273
$2093
Where pricing goes wrong
- Bad estimates
- Outdated calculations
- Poor knowledge of the market
- Attempting unfamiliar work
Pricing for the marketplace
Sometimes the biggest pressure on prices is what the other guy is charging, but do you really know what that is?
- What is your product worth in the eyes of potential customers?
That’s the ONLY measure that counts?
Value of follow-ups
Networking for knowledge
Bid success reality check
There’s a difference between what your best market is and the market as a whole. You may be competing in the wrong market.
Effective competition
Overhead in the marketplace, “My prices are set by my dumbest competitor.”
- Dealing with lowball bidders
The best tool you have is knowing what your bottom line is and refusing to dip below it. You can’t make money on unprofitable jobs!
- Compete on value, not price
Make sure your customers know and value what you are providing. If it’s not worth it to them, they won’t pay your price!
Make sure every job counts toward your bottom line. Every lowball job you do costs you in opportunity!
Pricing low to get in a new market seldom works long term. If they hired you on price, they will just as soon dump you on price!
Mark Karkos, president of Cut-To-Size Technology, gets it. He says, “For the most part we try to stick with our prices, because we have an excellent reputation as far as quality goes. That’s how I build the business. I don’t want to jeopardize quality to undercut someone.”
To learn more about how to price for profitability, attend Sean Benetin’s seminar during IWF.