How to price my woodworking (and sell it) #4: Putting all the numbers together (creating a shop labor rate)

 Blog entry by huff posted 06-02-2013 12:51 AM 17912 reads 20 times favorited 21 comments
 « Part 3: How to price my woodworking (Knowing what it cost to build a project) Part 4 of How to price my woodworking (and sell it) series Part 5: Summary »

How to price my woodworking?
(And sell it) Part 4

Putting all the numbers together
(Creating a shop labor rate)

Shop labor rate; what is that and why would I want or need to have a shop labor rate?

I’d like to take credit for coming up with this, but I learned this from another woodworker and you might have even heard of him; Marc Adams. He’s well known for his woodworking classes that his school teaches, but I was lucky enough to attend one of his seminars years ago and this was exactly the topic he covered.

Establishing a shop labor rate helps you be consistent in pricing your work because you have put all the cost factors together in the beginning and you’re dealing with facts and from that point on all you have to do is figure your material cost and the number of hours it will take to build a project.

So lets put together some of the numbers we talked about earlier and see if we can come up with a shop labor rate. Please remember this is only an example and you have to supply the correct numbers that pertain to you and your business.

I’m not sure how to condense this down to make it short and simple. I feel like I’m rewriting my book where I covered this in great detail. All I can say is if you have any questions or want to know more about it, just drop me a line and I will be glad to discuss everything in more detail.

So here we go; let’s use the figures we talked about earlier and you can add or subtract from there using your own figures;

Administrative overhead; again, I said it was really hard to put a number to this on a monthly basis, but let’s use 20% of our fixed overhead as a starting point for this example. That would amount to another \$30 month.

Your pay; this is a number that you and you alone have to determine, but let’s use \$15/hr. for our example here.

Profit; there’s a number of ways of figuring this, but I like to figure it up front so I have one basic figure to work with and it’s already figured in. Here’s one way you can do this.

I’m going to jump ahead a little with our figuring so we can determine a dollar amount for our profit.

Let’s take our \$150/month for our fixed overhead we used in our example and the \$30/month for our administrative overhead and add them together for \$180/month. Now let’s take the average number of hours you spend working your business and we used 20 -25 hours a month earlier, so we will use that again in our example.

Let’s take our \$180/month divided by 25 hours a month we work and you will see that it would cost you about \$7.20 per hour to cover your fixed and administrative overhead to operate your business.

Now if you take the \$7.20/hr. for overhead and let’s add what you would like to make per hour and for this example we will say you would like to make \$15.00/hr. and add the \$7.20/hr for overhead = \$22.20/hr. Now if you would like to figure some profit to this, you could add a percentage to our \$22.20.

We’ll use 15% for our example, which would add about \$3.30/hr to our total. This may seem a little confusing right now, but trust me; it will make more sense as we go along.

\$22.20 + \$3.30/hr. would make your “shop labor rate” \$25.50/hr.
You’re probably asking why you would want to do all that figuring just to come up with a shop labor rate. Simple, if this is the rate you use every time you price a job you will know exactly how much you will make. You know you would be able to pay all your overhead, pay yourself and also make a profit and that’s the key to any business if they want to make any money doing so.

Let’s do another example to see if any of this makes sense.

Let’s say you have to quote a price to a customer on a project that will take \$100.00 in materials and you figure you will have a total of 17 hours invested in getting materials, building, finishing and delivery the project.

2 hours to order and go get materials hardware and finishes
7 hours to build
1 hour to prep for finish
5 hours to finish and do final assembly
2 hours to deliver and set-up

Now, let’s use our good ole’ multiplier method of figuring our price and let’s times our material cost times 4 because we think he can afford that!
\$100×4 =\$400. Sounds like a money maker there, right?

Now let’s use that same scenario using our shop labor rate instead.
Same material cost and same number of hours invested.
17 hours x \$25.50/hr (shop labor rate) = \$433.50 + Materials = \$100.00 Total = \$533.50

Am I over priced? Not if I want to pay all my bills, pay myself and have a little profit for the business.

Facts; Sure you would feel better if you could sell your project for \$400 instead of having to try to sell it for \$533.50.
Sure it would make the customer happier if you would build it for \$400. In fact; if you times your material cost x 3, look how happy you would make the customer!

So if you charged \$300 or \$400 you would make enough to cover materials of \$100 and all the rest is profit…………….wrong, wrong, wrong! Facts are facts and that is; you may have enough to pay for materials and yourself, but there would not be enough to pay for your total overhead or profit and as a business that is not making money or even being able to stay in business.

This all goes back to what I’ve been saying from the very beginning; you can treat your woodworking strictly as a hobby and let your other job pay for all the expenses of your woodworking or you start treating your woodworking like a business and price your work to make a profit.

The biggest advantage of using a shop labor rate is consistency and accuracy.
You can feel confident when presenting a price to a customer that you are giving them as fair of a price you can and make a modest profit. If a customer begrudges you that, then you are probably better off by not doing a project for them.

There’s are ways of adjusting your selling price other than cheating yourself or your business, so before you get your skivvies in a bunch, let me continue on and we will talk about that a little later.

Five Pitfalls that can ruin a woodworking business when it come to pricing their work.

1. I’m new in this business, so I’ll price my work real low to get customers and they will refer me to others and I’ll build my business from referrals. That’s the best way to build my business, Right? The part about referrals is correct, but getting referrals because you low-ball a price will do more harm then good. Who do you think they are going to refer you to and what do you think their referral will expect from you? That’s right, they will expect the same kind of pricing as you gave your first customer and if your first customer comes back again as a repeat customer he will expect the same again.

That’s a very slippery slope and hard to stop once you begin pricing that way.

2. Friends and Relatives! It’s a lot easier to deal with friends and relatives once you’ve established yourself as a business, but in the beginning, they can worry you to death and you feel obligated to give them a “special” price. Another words, you work for nothing!
I’m not about to tell you how you should handle projects that your friends and relatives ask you to do, all I will say is you better be well aware that they can suck all the profit from you and even though they will enjoy and maybe appreciate a project from you, you will be the one left trying to pay bills, replace worn out equipment and lose time from your own family.

3. Times are tough and I really need this job, so I’ll discount my price to make sure I get it. First mistake; no guarantee you’ll get the job just because you priced it making no money. Second mistake; once you get the job, knowing you’re not going to make any money, you now have closed the door to being able to actually do a profitable job. Third and most fatal; bad, bad habit to get into, because it becomes easier to sell at a lower price so you begin to use that as an excuse to lower your price each time. I’ve seen this happen over and over with woodworking businesses. (Ex-woodworking businesses).

4. Changing your standards of quality so you can build it cheaper and sell it cheaper. A lot of businesses do this, but very few woodworkers do it for the right reason and even if they start doing it for the right reason, they fall into a bad habit that will destroy them down the road. Yes, you can offer your customer different levels of quality at different price points. You let your customer decide where they are willing to compromise on quality or service to be able to save some money, but usually what happens is the woodworker starts trying to second guess all of his customers and starts dropping his/her standards every time just so they have a lower price and an easy sale. I’ve seen this ruin the reputation of a lot of professional woodworkers.

5. Allowing your competition to set your pricing. Just because the guy down the street will build a project for a certain price doesn’t mean you have to price your work to match his. One of the first things I’ve always told my customers is; I promise you I am not the cheapest woodworker on the block, but I will be glad to put my quality, craftsmanship and service up against anyone.
If a low price is the only thing you have to offer a customer, then you probably won’t last long as a woodworking business.

What’s even worse then allowing your competition to set your pricing, is allowing your customer to set the price. How many times have you heard a prospective customer say; I’ve only got “this much” to spend on a project and even though you know there is no way in hell you could build it for that and make any money, you still try to convince yourself you could build it for “their” price. Oldest Trick in the Book! Even seasoned professionals fall for that one and here is what usually happens when they do that……..refer back to #4 and you will begin to understand how that happens. Trust me; the customer still wants all the quality, craftsmanship and service, just at the price they set and you’re trying to figure out how to cut corners so you can afford to build it at their price.

I would suggest you read those five pitfalls again and see if you fall into any of those categories. Don’t beat yourself up too bad; we all have at one time or another for whatever reason. What’s important is to realize they exist and don’t allow yourself to aimlessly fall prey to those fatal mistakes.

The main reason most woodworkers go out of business or change careers is they don’t make any money. They may use every excuse in the book; like the economy, tired of dealing with customers that don’t appreciate quality, tired of the hassle with schedules or whatever, but most of the time the real reason is they don’t make money.

Woodworking is fun as a hobby and money is not involved, but woodworking is not fun when all you’re trying to do is make ends meet, pay the bills on time and trying to support the family.

I’m as passionate about woodworking today as I was when I started. Has it been an easy career? Definitely not, but it has been very rewarding to me and my family.

For me, the hardest part was to never compromise my standards and hold true to my pricing, no matter what the economy was doing or how bad I thought I needed a job. I’m so glad I did though, because over the years I’ve seen a lot of woodworkers go out of business because they either compromised their standards or started lowering their prices just to get any job and usually the only thing they did was prolong the agony of going out of business.

I’ll write a summary tomorrow, hope you come back!