Wholesale, Commercial, and Retail Pricing

      Cabinetmakers discuss the idea of using a tiered pricing model to reflect volume, complexity, and customization of the job. July 12, 2012

I have sat here for about an hour now reading through some of the posts on everything from “Do I tell my client my hourly wage” to lawsuits. It seems as we have let so many people in the process of what we do on a job, we end up paying the price because we have become the weak ones. If there is a budget of 20K for a cabinet job and 30% or more of that is taken up by designer, G.C., and fees, this is why shops run into trouble. I just quoted a job and the designer called and said “why so much”? I said “here is my bid, if you have other bids then you see what the difference in the bids are and go from there”. Or is he saying come down on your bid so I can make tons of money on this? I wonder from others if you see this as a problem and what you think the fix is.

Forum Responses
(Business and Management Forum)
From contributor U:
I had a designer I have worked with for many years ask if I was giving him a wholesale price. My wife answered him and said no we did not. He then asked if we would charge his customer the same thing if they were to deal with us direct. The answer this time was they would pay about 10% more, but we no longer offered a discount wholesale price to professionals because no one was buying in volume these days. This designer’s last order was over a year ago.

Bottom line we said was that we simply charged what we needed to make a profit, get the job done correctly and on time, anything less and we did not want the order. Maybe we could not say that to everyone, but he understood and accepted our answer. But then we have worked for this guy for close to 20 years and he likes our work. Bottom line, I was just being honest with my customer and charging a fair price where I could make a profit.

From the original questioner:
I have heard that word wholesale also from designers and I have wondered if we should price our work with a suggested retail cost and discount from there just as retail stores do. I can tell you my wife goes shopping and comes home with a blazer that cost $30.00 but retail on it was $175.00. I have tried to tell her that they play that game with a retail price set high so discount can be applied. Maybe that is the route to take? It works for the big retails for years. I agree with you on being honest but I think some young companies are pressured by the designer or whoever to lower prices so they can make over and above the norm. The young companies drop pricing so they can just have the work. As we all know lower pricing only hurt the industry for all of us.

From contributor S:
In my business wholesale pricing is not determined by the volume of orders or who is placing the order. It is based on the payment terms, who pays me and who deals with the client.

To get my wholesale pricing you must place the order for the specific units and accessories you need and their sizes. We do not have any part in the design. It is similar to ordering from CraftMaid or Ikea. It is usually designers that order from us like this and they have a complete catalog of my cabinetry and the pricing. They generally draw up elevations using their own software and submit to us the assemblies they need to fill the order. All we have to do is make the cabinets, I never meet the client and I get paid by the designer up front. These are steep terms but good design firms like it because they can mark up my cabinets 20% or more.

If the designer wants terms (50% down, 35% after install, 15% 30 days) they get what we refer to as commercial pricing. This also goes for larger commercial orders for condo developments, town homes and apartments. The clients designer makes the design and we convert the design into our system and submit approval drawings to the client. In this case we did not really make the design, we just followed the clients design.

Our most expensive rate is Retail. This goes to home owners and contractors who have us bid, design, build and install the job. The payments usually come from the homeowner and we give a percentage to the contractor/architect. Sometimes clients know about our different rates and I can put the burden on them by explaining that I will gladly give them the better pricing if they can meet the conditions.

From contributor M:
All designers think they are entitled to a huge discount, some are and some aren't. If they are bringing you high dollar work you could not get without them they are worth it, they are making you money. If they are referring their clients to you and you are dealing with the clients, they don't deserve much. Unless of course they are supplying you with a huge percentage of your work than you better be giving them some type of kick back.

From contributor Y:
Having a product line allows you to offer designer or wholesale discounts in more ways than if you do strictly custom work, as I do. The designer I work with gets my price first and decides how much she can add without jeopardizing me getting the job. It used to be a very modest 10% but lately she has even cut below that, as clients now balk at what used to be reasonable and competitive pricing. It's worth pointing out that with work she is designing (not engineering or shop-drawing, which I still have to do) she is also billing the client for all her time.

On a related note, a recent referral speaks to another segment of customers. A couple wanted a king-size platform bed with six drawers underneath, a bookcase headboard, and a nice frame-and-panel footboard, in walnut or cherry. I knew they were shopping at local retailers and explained the significant price difference between that and a custom-made bed, even one modeled partly on an existing design. They said they were still interested and gave a budget range of $3000 to $4000, which was very encouraging. However when I sat down and priced the project, it priced out at about $4500. Someone mentioned profit; I don't even try to add profit lately because there is so little work available. So $4500 covers materials (a lot in this case) and labor, plus design and shop-drawing, delivery and installation of course. Still, because they were nice, lived locally, and were willing to move ahead with a first-time custom purchase like this, I decided to take a pay cut and priced the bed at $4000, the top of their stated range.

Lowering my price is exactly and directly the same as taking a pay cut, particularly when there is no profit margin in the price. But hey, it beats un-employment right? (Not to be confused with Unemployment Compensation). The clients said they were disappointed the price was so high, assuming I think that I took advantage of their stated price range. I imagined having a conversation with one of the clients: "Your manager comes to and says, hey, with have this potential project you'll love working on, but to get it you'll have to absorb a twenty or thirty percent pay cut for the next four weeks. You won't mind will you? So, do I take a deeper pay cut to keep the rent paid and my employee of the unemployment list? Nickel and dime some materials and gouge off a couple hundred dollars? Say I can lower the price if they'll let me lower my standards of construction and finishing and service? What would you do?

From contributor C:
I offer price points based on the amount of work it takes to complete a job.

1. Bid work. We are just regurgitating what the architect has pulled out of the client and all we have to do is field dimensions. They get it dropped off at the curb. Change orders happen and we won't touch them until it goes through proper channels.

2. Wholesale to retailers. They tell us what they want and the accessories in each cab like Lazy Susans and trash rollouts. They are responsible for it fitting and all the other time intensive crap like waiting by the phone for the designer to make the tenth change in color.

3. We handle it all. This is my price and that’s it. A mahogany library for instance, has to be grain filled for it to look right and this is what it's going to cost, period. When the client asks why so much I show samples and explain what truly goes into the process.

We, the cabinetmakers are the professionals and I think a lot has been lost in the art of selling and setting up a shop that makes the client think "If their shop looks like this, than I want them to build my dream kitchen, or project." Make the client want you, use smoke and mirrors if you have to.

Some of us started our own business out of necessity, like an alcoholic boss that wouldn't pay and no-one was hiring. Or, people kept asking for things to get made at "your" convenience.

Shops happen, but the craftsman takes hold and gets lost in the details or minutia of the stile and rail profiles and the client is just asking for a completed project. We forget to study marketing, we fail to study business and develop a plan so we can mold the business to adhere to the plan, all the while we feel like we are bystanders, not businessmen.

Some of us even forget there is a whole other world called life outside the world of boxes with doors. That's 'cause we are too busy trying to be busy, and we aren't making money. Letting the business run us and not running the business.

Contributor G mentions wasting some bids. "If you are getting everything you are bidding, you aren't making money." Very true, I finally understand.

1. Get other clients, designers that waste your time need to be given high estimates with their discount applied at the bottom for "their" price.

2. Bids should always be prepped with profit built in- period.

3. Quit running around. Use vendors to deliver to you. Use the internet and scanner. Field measure and take photos, mock up the space in you shop and plan to install well. Leave no rock un-turned in planning at the desk for a job well executed.

4. Learn salesmen techniques - I build your project from scratch, we don't cut boxes built in a factory down and make them work for you. Give reasons why you are better than the competition without cutting them down. Get cleaned up. Wear a collar shirt, clean your fingernails, shave. Clean up your office, show room and truck or van, and especially the shop. It, "the shop," can be one of your best sales tools. So organize it and clean it up.

5. Get real, it costs a lot to own the machinery and sit on inventory. Charge what is fair but make a profit.

6. Standardize and buy a little more hardware and materials than what you need and have it on hand. Amazing things happen when you can build a shop off the racks and not order almost anything.

7. Get a couple of software programs and let them do the work. Quickbooks will give you the option of downloading and categorizing expenses in seconds. Cabinet software will give the client the concept in minutes to close the sale and you don't have to redraw ten thousand times. Most will even give you a cut list.

8. Pay yourself!

9. This is my price and don't waiver. They don't know what it takes and the real secret is that most don't care!

From contributor E:
The real issue is that especially in tight times, not everyone who can bang out a cabinet has the talents to run a business successfully. Successfully running a business includes the talent to close the deal at a profit and leave the customer smiling. You also have to be able to handle the leeches of the industry - designers, architechs, and general contractors. All people who produce nothing but paper, yet feel they are entitled to more profit than the producers.

I have but one price. I don't discount, wheel and deal, and if you don’t have money don't waste my time. I have a limited customer base now at my own choosing, but they keep me as busy as I want to be. They kept me plenty busy before I retired also. You have to be firm about your price or you will be continually beat down. I'd rather have one $20K job that I made $10 off of than have a steady supply of $20K jobs that I discounted to $15K to get the job thus cutting my profit in half, but not the work or the risk. The designers aren't cutting their commissions (and the frequently make as much as the cabinet guy in actual profit) and our suppliers aren't cutting their prices, so what makes you feel we should be sucking up the losses?

Don't worry about what the leeches listed above are making or what the budget was, just worry about how much you need to be enticed into working. They want their cut and will find extra budget in order to get theirs. Take the first bite, and don't fight for crumbs and scraps. Some of you should look back through some of the "cost"/"selling price" posts from the '04-'07 range. The attitudes expressed back when work was plentiful is part of the reason you are short on work now.

From contributor Y:
The "I have one price and that's it" approach is great if you don't mind having no work for yourself or your employees, or have minimal overhead to cover each month. If you have overhead and employees and you do residential work, and you have other shops bidding on the same work, you better be a little more flexible if you want to stay afloat. Flexible means allowing room for negotiation, within a narrow but reasonable dollar range.

A short while ago I bid a project at $7000. It was a "bread-and-butter" job for me. The client was waiting on a bid from another shop, but they were slow. Eventually they provided the bid at $6800. By then she knew I was more eager and wanted to give me the project, but still wanted the lower price. Of course I lowered my price $200 and did the job. Shortly after completion I acquired another project from them, because they were delighted with my work. Walking away from that job for $200 would have been stupid.

"One price only" is self-defeating in a tight economy. I've tried it both ways: having no work definitely makes less sense than having work that pays somewhat less than you want, but still allows you to pay the rent, the home mortgage, and keep employees off unemployment. You have to be flexible, creative, and resilient in these tough economic times. In the above-related bed example, I was hard up against that line beyond which it really is unreasonable to go, and I let that job go, but only after lowering my ideal price some.

From contributor K:
To contributor Y: As you saw from your bed example, dropping your price even after not accounting for profit didn't help either. Then you had an example of a "bread and butter" job (which I assume means included profit) at $7K which you lowered $200 to get. You gambled and it paid off, but remember you had the profit to work with on the bread and butter deal. In more cases than not, that gamble works against you. I'd rather work harder at getting a profitable job rather than one where there's not only no profit, but I have to take a pay cut. Did your guys get a pay-cut as well?

I guess my question would be why was it necessary for you to give up that $200? They really told you that they wouldn't give it to you otherwise? It works out to just under a 3% difference. If they wanted that $6800 price, they would have gone to the other guy who gave it to them in the first place. They came back to you so that should have told you something. They judged you more worthy. If they were price shoppers only, they would have just used the other guy. That's all also assuming the other shop was a legitimate apples to apples bid in the first place, which in most cases is not.

Following that line of thinking (buying business) will bring you to the brink faster than passing up on it. It doesn't account for the "oops" factor, and assumes everything will go as planned - that's more a reality check.

From contributor L:
Once a price is given the only way it should be reduced is by negotiating something out of the project. If you are up against a less expensive producer, try to define where they are cutting the product. Buying work is a good way to end up unemployed. I've been at this a long time and know my costs but I also know that not all jobs go as planned. Only rarely do we make more than the targeted profit margin and that is usually on jobs that had a large risk factor that we were trying to cover.

From contributor R:
If you need to or want to get into a new market then drop your price. If you have all the work you want or can do then keep your prices where they are or try to raise them. This dogma of one price for all scenarios is an easy one to defeat. Companies do this all the time to get customers in the door and there is no reason you shouldn't either. Think of it like an investment. When you buy your first saw it doesn't pay out all at once. In the same way, cultivating a new customer group can pay you your dividends later.

From contributor G:
To contributor L: 40% (direct cost divided by.6). The cross we have to bear is to keep the volume there. A bad month means you lost 8% of your profit, plus the shortfall on overhead/labor. Our focus should be as much on staying above the breakeven point as on profitability. It is helpful to know what you have to do every week or day to break even to keep you focused. Some guys break the o/h down by departments which I can see makes sense in bigger shops.

From contributor H:
I’ve found lately that clients don’t want to pay for dovetailed drawer boxes and soft close drawers, because they only want “the look” of quality. I have lost many opportunities for profitable jobs because of my own convictions on materials and what I considered to be quality issues.

I recently had a client who wanted bookcases to fit a narrow space and wanted the convenience of my services but didn’t want the high prices that came along with that service, so I downgraded the material to banded and veneered chip board instead of ply and solids and that made the difference for them.

Consequently they have also commissioned a dining table from me. I am finding that when I am willing to work around the customers desires and not my own pre-conceived concerns for quality I get many more profitable jobs.

Chip board - I don’t like it. It doesn’t work well and smells funky when you cut it and it is fragile and fussy, but I am now finding that this could be the up and coming material of choice when profits are thin and budgets are small. It makes me money and gives the clients the “look” they want at the right price. I still prefer the high end of the spectrum that wants lasting quality and the knowledge that they commissioned a piece of furniture that is well built.

From contributor k:
"If you need to or want to get into a new market drop your price." You can't just drop your price without affecting every aspect of your business, including what you pay yourself. It has to come from somewhere. Less expensive materials, pay yourself a lower wage, or work harder to try and get it out the door quicker, which usually leads to mistakes and ends up costing more money to you. Your insurance, electric, materials, taxes, etc. certainly aren't going down, so it has to come from somewhere. In my opinion better processes should yield a ROI.

"This dogma of one price for all scenarios is an easy one to defeat. Companies do this all the time to get customers in the door and there is no reason you shouldn't either." You are comparing apples and oranges (retail vs. custom). People know that retail stores raise their prices to only lower them through a "sale". They expect it, which is why they are conditioned to ask for discounts.

I know guys in our industry who do this, and their close ratio is no better. Look at Contributor Y’s example above. Without even accounting for profit he lowered his gross sale price 11% to get to their stated pricing level, only to have them then say no. In reality, the discount was more than twice that when accounting for an actual company profit.

There have been many times we were not the least expensive but still got the deal, and I am sure I am not the only one. It is much better to find the business that actually supports what your company needs to make, than it is to buy business, as buying business sets you up for more work at less pay. The best thing to get your head around is that not everyone is your customer.

From contributor Z:
When analyzing this situation economists compare two metrics: Price Elasticity of Demand and Isoquant of Consumer Surplus. The first is a measurement of responsiveness of consumer demand to a change in price. The assumption is that more product is demanded at lower prices.

The second measures how much money you leave on the table if you charge X but the customer was willing to pay Y. You are never going to get the customer to pay more than Y and ideally you want the Y-X to be equal to zero.

Mathematics supports the concept that the margin on a zero dollar sale is exactly zero. You of course do not want to sell at below your cost but any single dollar above your cost is profit. Take a look at the general contractor market. Life used to be time plus materials plus 15% markup. The guys who are still in business today are at 10-12% markup and still don't have their whole crew working. Do you really think this is just phenomena where all they need to tune up their sales skills?

From contributor K:
To contributor Z: Again, you are comparing apples and oranges - retail versus custom.

"You of course do not want to sell at below your cost but any single dollar above your cost is profit." What you are missing is that by dropping prices to entice more volume you decrease what you are paying yourself and your company, unless you can get it out the door quicker or you are in a market where there is no competition. Looking at your pricing as every dollar above cost is profit is assuming that your pricing is 100% completely accurate and that no variables or the human factor present themselves.

Profit allows for this. Without it, if the variables present themselves (and they usually do on jobs where no profit is accounted for), the only place left for it to come out of is your pocket, as all the other parts of your sales pie require payment - things like rent, electric, phone, insurance, etc. They are certainly not going to lower their prices just because you bought business from a "customer" who was nothing of the sort.

"Take a look at the general contractor market. Life used to be time plus materials plus 15% mark up. The guys who are still in business today are at 10-12% mark up and still don't have their whole crew working." Our company also does general contracting, and I can tell you that the formula you listed is nowhere near reality, unless you are punching a whole lot of numbers into your time quotient. That formula is ideal for the people who end up robbing Peter to pay Paul exactly because they confuse "profit" with what they pay themselves.

"Do you really think this is just phenomena where all they need to tune up their sales skills?" Tuning up your sales skills is always a good thing, but that isn't what I was referring to. If you have a customer who is a price shopper primarily, that is their focus, and if they cannot be turned, they are not your customer. There is no reason to continue spending time with them, but rather using that time to find the customers who will buy your product at the price you need.

It is utterly useless to chase after a market your business is not set up to address. If you are fabricating furniture from scratch to market in a retail setting to play that price game (raise prices to lower them for a sale to increase volume) and think you are going to be able to do so against all the imports, history shows that is far more unlikely to succeed than not.

From contributor L:
Since it seems most people on this site are primarily in the residential market it's hard for them to establish any sort of niche moat. If you can't establish something that really sets you out as different, you will always struggle with bottom dollar deals. Since most residential customers can't tell a good set of cabinets from cardboard boxes with crappy raised panel doors, you need to develop the ability to qualify (not waste any more time on).

Hone your skills at reading people. Listen mostly and take notes if you need too. Then address each point made buy the potential customer. Always offer a few options, better function and why, and lower cost alternatives and why. This will work better than the plaid suite, at least for direct sales, but nothing always works. Most likely it won't work for interior decorators since they have already decided.

If you insist on cutting your prices to get your foot in the door don't complain about smashed toes. Doing a job at less than cost is usually just a faster way to go broke. For you guys working as very small shops always price your labor as a separate part of the bid, it should not come out of the profit. Have you set goals for where you want to be in five or ten years. Are you on target? It takes a healthy profit to expand a shop, not low wages for you. Growing a business is expensive.
Bottom line: you control your business!

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