Going Pro: Pricing Your Work

By Douglas Bittinger
Smoky Mountain Woodworks  

One of the most brain-racking aspects of making a living by selling your woodworking is the problem of figuring out how much to charge for your work. Obviously you must get enough from your work to support yourself as well as paying the business bills, but if your prices exceed the item's market value you will have a hard time finding willing customers. So, how do you find a fair price for your work?

There are basically three schools of thought in regard to pricing non-mass produced work: the " Four Quarters " school, the " What Does it Cost? " school, and the " What is it Worth? " school. Nearly all mass-produced work I know of uses the "Cost" method to set an initial starting price, then pads the price according to demand.

The " What is it Worth? " school of thought takes very little number crunching but lots of research into your target market. If there are others producing a product similar to yours, you can shoot for a similar price. If your product is unique, then you will have to do some experimentation to figure out what price the market will bear. And you must keep in mind that "value" is a relative concept.

One pitfall to beware of is posting a low price thinking that this will make it more attractive to a larger number of people. If your product is a common item and several competitors offer a similar item, then yes, offering a slightly lower price than your competition can pull their customers to you. But if the price cut is too deep, or if it is a more artistic piece, this tactic can backfire.

For years I could not sell my hand turned wooden pens. Then one day at a fine crafts show I was talking to a fellow who made his living by making and selling these pens. He looked at my work and simply said, "You do good work, but your prices are half what they ought to be. Double the price and your pens will sell." I couldn't believe that. How could that possibly work? But you know what? It DID!

It has to do with perceived value. To someone who will see a finely crafted wooden writing instrument as an object to be desired, $40, $60, even $100 for some models is not too much to pay. But the same pen selling for $20 must be a "cheap" version. This has been one of the most difficult concepts for me to wrap my brain around, but it does work – for products that appeal to people willing to spend money on "fine" goods. People who place bargain basement prices above quality will not be swayed by the promise of a better product. They will go to Wal-Mart and buy a box of Bic pens for $2.00.

Obviously, this pricing method will work best with artistic items that offer a high aesthetic value. Items that are perceived as common or household necessities will be subjected to a relative value scale and the buyer will be asking themselves: "Can I get the same thing cheaper elsewhere?"

The " What Does It Cost? " school goes about it just the other way around. Here you figure out what it costs you to make an item, what you must add as your profit and set the price accordingly. Less guesswork, and no pretentiousness, but it takes lots of number crunching. For one thing you must account for everything consumed in making your product, not just wood and screws. Include all basic shop supplies, electricity, water, and heat for your workshop. Don't forget fees for sharpening blades and bits as well as occasionally replacing bits and blades and buying replacement parts for your tools. These are all Cost Of Goods Sold. (COGS to the accountants among us.)

Then you must figure out how much you need to be taking home every month to pay the household bills: this is your projected labor budget. Add labor costs to the materials costs by figuring how many hours of labor you invest in that product and you're almost there.

Overhead includes such things as cost of advertising, insurance, and mortgage or rental payments. How will you be selling these products? Is packaging involved? Shipping costs? If you're doing shows, there will be travel expenses, lodging, meals and show entry fees to factor in. It also covers the time you spend purchasing supplies, doing bookkeeping, discussing orders with customers, developing new designs, etc. These are costs that often slip through the cracks but come back to eat away at your projected profits, leaving you to wonder why you're not making the money you thought you would.

Those are the costs. Now you need to decide how much you need as profit to keep your company not just solvent but growing.

You can add up your monthly labor budget, overhead and profit margin and divide that by the number of hours you work in a month to set your hourly shop labor rate. Multiply your shop labor rate by the number of hours needed to produce the item you're pricing, add your materials cost and you have your base selling price.

This method works the best for production work – items you will be making on an on-going basis – but also works well for someone who will be producing mostly one-off and custom work as well. Once you have your shop labor rate established, you need only calculate materials cost and estimate the man-hours you will need to produce the piece. That becomes easier with practice. Initially, guess high and offer it as a maximum price.

If that is too much math for you, you may want to try the " Four Quarters " school of pricing. With this you say that no more than 1/4 of the item's cost will go to materials, 1/4 to overhead (this covers utilities, insurance, tools, etc.), 1/4 goes to labor and the final 1/4 is company profit. This way instead of projecting all the costs, you set a budget and find ways to stay within that budget. This method works best for items that are produced in occasional batches so you can minimize the labor costs per item produced and adjust prices between batches based on your success in keeping to the budget. In my mind this is more of a cost control scheme than a pricing formula, for you will still need to do some cost estimation and tracking during production to know where to start with a price.

A word about profit margins. When I say "profit" I do not mean the amount you pay yourself as personal income, which is labor. Rather it is the amount left over after all the bills and your salary are paid. If you end up with no company profits, you are still running as a hobby, not a business. This is not just my opinion; there is an IRS ruling called the "3 of 5 test." If your business does not show a profit in 3 of any 5 consecutive years, they can do an audit seeking to disqualify you as a business and refuse to allow you to claim business deductions against your woodworking income for any of those years. If you lose, they will also make you pay for the audit. ( http:// smallbusiness.yahoo.com/r-article-a-2574-m-4-sc-27-hobby_business_tax_rules-i )

They are very serious about not letting people use their hobby as a tax shelter. That said, any business that can demonstrate that they are TRYING to make a profit, whether they do or not, will usually pass the audit. Sometimes, times are just tough.

Also note that as a sole proprietor you cannot pay yourself a wage and count it as a business expense – this is pure personal income. But for costing purposes you need to look at it as wages paid. However, if you set your business up so your spouse is the legal sole proprietor – even if he/she does no woodworking – then you can work for him/her and draw a wage or salary and deduct these along with the payroll taxes as business expenses. Just make sure you stay on good terms with "The Boss"!

Whatever pricing method you use, don't let a higher-than-expected price scare you off right away. If this is what you need, then this is what you need – unless you are padding the deal with excessive profits. Just one example: I produced a bid for what has become known as our Wellington Garden Bench for a fellow in New Jersey. I thought the price too high, but presented it anyway. He said, "Great!" and placed the order. Later that afternoon he called me back and ordered TWO more! Since then we have sold several more to people seeking a solid, high quality outdoor bench. You just never know.

Once you've set your prices, listen to your prospective customers. If sales are brisk, maybe too brisk, take the advice offered by a wise and wily man, " When demand for your product exceeds your ability to produce it, raise your prices! " On the other hand, if most of your potential customers express opinions that this item is over priced, then you may want to look at ways of reducing the production cost so you can bring the price down. But do not just reduce the price – you must offset the price reduction with equal savings in production costs or you will end up losing money on the deal. You'd be better off to cut that product from your line, or redesign it in a simpler form if it won't sell as is. But there is another option.

Maybe you just need to do a better job of selling the product. Perhaps there are features that are not apparent to the casual observer that help justify the higher price. Fellow woodworker David DeCristoforo once explained in his blog that we don't have to sell customers on the entire price of a project, just the difference between what we are asking and what they were willing to give. For example; if I gave someone a price of $2500 for a piece and they told me that my price was too high, they were looking for a price of around $2000, I only needed to make a $500 sale by pointing out the superior quality, attention to detail, old world joinery, solid natural hardwoods, etc.

This is a standard bit of knowledge for experienced sales people. But to me it was a revelation. Since I became enlightened, my standard response to the statement that my price is too high is to ask what they expected to price to be. The difference between that number and my price is what I have to sell them.

Of course if they wanted it for $200, all I can do is laugh and wish them a nice day!

Adding to your labor budget is often a step taken only when business is so good you can't handle it by yourself. But even before that time, hiring help may actually save you money.

When I'm cutting a large number of parts at the table saw, I'll have my blanks stacked on the right extension wing or a rolling table. I feed one part through to make the cut, walk around the table saw to take it off the outfeed table and set it off on the "done" table, walk back around the saw and feed another piece through. If I have a helper for this, even an unskilled helper who can follow directions, just someone to stay on the outfeed side and "tail" the tablesaw for me so I can stay on the infeed side, the work gets done not just in half the time but in 1/3 or even 1/4 of the time it would take me to do it alone. When I have this sort of situation, it is beneficial to hire some temporary help: a friend or neighbor, or maybe that teenager who mows lawns in the neighborhood. To avoid any trouble with the labor department, this is an above board deal paying at least minimum wage (we will go more into that when we discuss employees) but I can still trim the labor budget for that process and speed up production significantly.

Similarly, purchasing a piece of equipment that will do a better job of an oft-repeated task than what you have now can be an investment that will return your money many times over in the long run. For example; buying a Jet 16/32 wide drum sander meant that I no longer had to make all panels over 13" wide in two pieces, surface plane the two parts to remove ridges at the joints then carefully glue the halves together and hand sand the center joint to fair it out. Now I can glue up a panel up to 32" wide at one time, then smooth it in one process. A series of panels for a large piece of casework that would take me three days to make, now take only two, a 33% reduction in labor. If you do a lot of raised panel work, having a shaper and two router tables allows you to set up for a continuous work flow to make all the parts needed in one pass across each machine ready for assembly without stopping to change bits.

Watching for ways to reduce labor and streamline production without sacrificing quality is one good way to help contain your costs. But be careful. Using this thought as an excuse to buy every tool on your wish list or hire people to do your work for you before you can really afford them would be a mistake! Think it through and be sure your business will truly benefit from the investment.

At least once a year you need to revisit your pricing structure. Have your costs gone up (or down)? Have you made improvements to streamline the production process that can offset some cost increases? Is demand high enough to justify a price increase? Are you using supplies in large enough quantities to make them worth buying in bulk at wholesale prices? Are there steps in the process where it would benefit you to hire help?

A good business manager will keep the operation profitable by tracking cost versus income, documenting profits per job, thus staying knowledgeable about where his or her money is coming from and going.

In the next couple of episodes we will discuss marketing your work and the hiring and management of employees. Please join us again for those, and until then, "May the sawdust be with you!"

Douglas Bittinger has been building custom fine furniture for over 25 years, and has been lead repair tech for a major furnishings retail store chain. Along with his wife, Marie, he currently operates Smoky Mountain Woodworks in Edwina, TN.

For your convenience, here are links to all the articles in the "Going Pro as a Woodworker" series:

Taking the Plunge into Professional Woodworking

Is Self-Employment Right For You?

A Suitable Workspace

Tooling Up

Finding Good Suppliers

Financial Tools

Setting Prices

Marketing Your Work

Hiring Employees

Retiring to Management

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