Competitive pricing
Establishing a pricing system that will bring you plenty of jobs and profit. November 22, 2001
Question
I build reception areas commercially but I can't find trustworthy help. I work with expensive veneers and metals, so I am setting up my shop to do standard laminate cabinets. I am trying to find out the going price per linear foot. They are standard base, upper, counter with 4" backsplash and melamine interior. Hardware is Blum 120 degree clip-on hinges, Accuride 100# full-ext. drawer guides and 3-1/2" wire pulls.
Forum Responses
First you must reckon what your costs truly are. What do you pay for all the materials you use? What do you pay for the labor that alters materials and makes them finished goods? What does your building cost to occupy (heat + utilities + rent + fixed overheads--things like insurance, employee based taxes, regular taxes, insurance, etc). Then you need to factor in how you want to grow, what machines you will need (money from every job will finance future machinery if that is the plan you work). You need to add in for problems like bad employees, bad customers, bad jobs--this is a soft insurance that shows up only if you need it.
And then you need to decide how much you want the business to earn for all this effort. A good business will retain 20-30% before taxes. If you are like most companies in America, you are inclined to treat your pay as profit. Sadly, no matter how much you pay yourself, it remains an expense and is not profitable. What you add on top of everything you spend is profit.
Jon Elvrum, forum technical advisor
From the original questioner:
I understand what you are saying, but I have to bid against other shops, so I have to be at or slightly under them to get the job. When I find the magical number (price), then I figure I should calculate up expenses and see if I can make a goal of it. With some of my specialty work, I can do what you're saying because I'm the only one bidding.
Nobody ever went out of business by raising prices. On the other hand, once a company decides to get out of business, no price is too low. You must certainly be attentive to what the market bears, but I assure you that a lower price does not mean equal value to your client. To get the best price you need to have the best understanding of what you can do for your customers. I sense that you feel your work is above the ordinary. If so, act like it is, and don't be drawn into defensive pricing. Quality manufacturing delivers on time at the price agreed what the customer wants and expects… or more! When a customer says they can get it cheaper down the road, let 30 seconds elapse before you say anything else. If they are still there, they are admitting that they cannot or will not go down the road. They are really waiting for you to defend your price--to explain why you build in the method you do, why you have chosen certain hardware, what you believe separates your product from every other shop.
Jon Elvrum, forum technical advisor
From the original questioner:
Most of my jobs in the laminate cabinets are for contractors with other shops bidding on the same goods. If the other shop is $100 cheaper, that's who they use. If I was selling to an individual, I could throw them an Accuride 3832 Self-closing drawer guide and Blum clip-on fully adjustable hinges. I could show them my portfolio that would leave most people scratching their head wondering where to begin, much less how to build. With those items I can pretty much ask and get what I want, because lots of other shops don't bid them or the contractor knows I can pull it off. My problem with those jobs is that I can't find people I can trust to work with veneers I've had on order 6 weeks to get. I'm just trying to set my shop up so monkeys could build the cabinets and the reception areas could be left to me.
The subject of pricing has been posted here many times before and Jon always encourages people to really "crunch their own numbers". I'm starting my own shop and I'm familiar with what prices are around my area because I've been working in the field for a while. However, I took Jon's advice to heart and don't regret it at all. It's a lot of work looking at all the figures (rent, utilities, materials, labor, licenses, insurance, etc.), but it is well worth the effort.
I work in mostly custom residential cabinetry, so my market is a bit different than yours, but I think the principles are the same. There is no way that I can compete with a one-man shop working out of a garage, but sometimes that's my competition. I've got more bills to pay than he does so I have to charge more. If I don't I won't be in business long. There's a fine line between knowing what you need to charge to be successful and what you need to charge to be competitive.
In the end, after the "crunching", I found that I could actually raise my price from what I thought I would charge.
From contributor R:
My business is high-end paneling, reception desks, solid surface, specialty work, etc. combined with plain vanilla plastic laminate casework and countertops. We are emphatically not the cheapest shop around, yet over and over again we get the jobs we go after. 2 reasons for this--one is a good solid reputation for quality and the other is that we are willing to do it all. Sole source responsibility is very important to most customers. They can get plastic laminate boxes anywhere but they buy them from us, often for more, because we will be there on time, complete, and we will supply them with all the other woodwork items that go in the package, which usually no one else will.
Of course I know our costs and I bid everything as tightly as I can while preserving my profit margin, but I don't consider that my competition's price has anything to do with what I should be charging. I am constantly working on keeping costs down and efficiency up, so if someone in my market is less than me it's either because they are better than me or they have left something out, or they don't make enough money to thrive. In the first case, I need to try harder, in the second two cases I am glad that my competition will be working for nothing, because they won't be around long, and I'll be ready when the dissatisfied customer comes back for help next time. I don't want to work for the guy who thinks my competition is better because he's $100 cheaper.
Lineal footage pricing by itself is business suicide--basing it on someone else's costs is doubly so.
As for setting up shop so that monkeys can build your boxes, it won't happen. You can set up a system that has a lot of built-in safeguards, and casework is simpler to understand, but you'll need an intelligent, well paid, highly committed group to produce it consistently, correctly and in budget. The more you invest in machinery and processes, the more skills you'll need to employ, even if they are machinist skills and not woodworker skills. However, I think your intuition is correct in looking for a bread and butter project to complement your more difficult and risky high end business.
What your competition charges for their product is not an issue. The question you have to answer is how much it costs you to manufacture your product. Sometimes you may have to buy a job to keep your people working for you, but don't make this a common practice.
You made reference to working for general contractors. If you are on a friendly basis with any of them, ask them for the spread on the bid. This can be very helpful information as to where the price point for your market is. But a word of caution--be sure that you know and trust the GC that you choose to get this information from. One other recommendation is to join some trade organizations in your area: Associated General Contractors, Association of General Contractors, Association of Home Builders (if you do residential). The main one that you should join is the Association of Sub-Contractors. You will have less networking with GC's in this organization but they are the ones that are working for your best interest.
From contributor R:
Getting the spread from the GC's is a good practice--once you've built up some records over time you can get an idea if you just need to add a machine or streamline a few processes to get yourself more competitive, or if you are in the wrong market altogether. I also always ask who I'm bidding against. I have enough data on my local competition to know that if Brand X is bidding the job, I don't need to bother. If Brand Y is bidding I just need to be very tight and it's worth the effort to do an estimate. If the numbers tell you you're not competitive, don't change your pricing, change your market--or change your business and lower your costs to attack the market you want. And be sure you want it!
Amen to changing from an unfruitful market. Once again, this is the issue. Do you sell what you make? Or do you make what you sell? Once you decide which you want to do, where do you sell and to whom? If you lose an order to a price buyer, and they come back to you...your prices are still too low! You do not want to attract price buyers... at all!
Jon Elvrum, forum technical advisor
From contributor R:
There I have to disagree. My mission is to build good customers--sometimes shopping cheap is part of their learning experience and when they come back they have at least partially learned what my company is worth. Then we do a good job for them and they learn a little more. It takes time and patience to build a customer. As much time and patience as to build a good piece of woodwork.
Point accepted. I contend, however, that this is a more mature choice made by a company that has evaluated themselves more accurately than most, which I infer from your comments. If you approach these issues out of an enlightened understanding about who you are and what you bring to the process, then you are sampling yourself to a market in order to improve business in the future. That is somewhat different from caving in on cost.
Jon Elvrum, forum technical advisor
From the original questioner:
Okay, I have crunched my numbers. I figured my material cost, then added 20%. I then figured my indirect labor (running to measure job, etc.) at $20 per hour. Then I figured my employees' hours on job and doubled what I pay them (their supposed to make you money, right?). Then I figured $35 per hour for me. Then I figured my shop cost for a month and divided by the working days of an average month and charged that amount per day to the cost of the job, to come up to a total. If the job is extra small, I add 20% on top of that because the people that use me understand there is still same red tape for a small job as a bigger job. If the job is rushed, then I add 1 1/2 on man hours on overtime.
I think that you are on the way to understanding your pricing structure better, and also seeing the need for a disciplined observation of the process. I recommend that you closely monitor the results on your next few jobs.
Look for a few "key indicators" that show up consistently. Does your laminate cost hold the same percentage from job to job? It should be fairly constant if you are doing casework that is repetitive--bases and uppers. If you see a spike, it probably means mistakes were made (rework was done). Get to the bottom of why and make those changes that will guarantee this mistake cannot occur again. Likewise, track man hours (planned vs real). Too few hours may indicate something was not done, or not done right. Over time you will develop several "key numbers" which you can look at along the way as warning sensors, indications that all is or is not going according to plan.
Finally, never stop examining costs and how you do what you do. Every time you eliminate steps and touches, every time you find a better or faster way to do any part of your process, you increase your bottom line. Don't give those savings away. You have earned the higher profit as a result of improving management and performance.
Jon Elvrum, forum technical advisor
