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Solving the Pricing Puzzle

by Editor 26. June 2018 13:09

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

 

  • By the foot

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.

  • Materials multiplier

Popular with some furniture makers, it’s likely to be highly inaccurate.

  • Time and materials

These should be key components of all pricing, but using this method has many shops overlooking crucial considerations such as overhead, profit, R&D.

  • Components

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

  • Labor

All time invested in production. Base estimates on history.

  • Materials

All the things needed for the job. Don’t forget to make it up!

  • Overhead

Everything it takes to open the door, such as utilities, transportation, trash disposal, insurance, phones, Internet, Sales/reception staff, marketing, advertising, consumables, etc.

  • Profit

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

  • Know the market

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?

  • Pricing reconnaissance

Value of follow-ups

Networking for knowledge

Bid success reality check

  • Know your market

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!

  • Don’t just work to work

Make sure every job counts toward your bottom line. Every lowball job you do costs you in opportunity!

  • Don’t bid to open doors

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.

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