How to price my woodworking?
(And sell it) Part 3
Knowing what it really cost to build your project to sell
Again, like I said in my earlier series, if you’re a hobbyist and you really don’t sell your work, then no need to follow along, but for what ever reason you are building and wanting to sell some of your woodworking, then this series is real important to read and understand when it comes to pricing your work.
One of the first things you have to realize when you decide you would like to sell some of your woodworking and especially if you want to sell your work and actually make some money doing so, then you need to know the true cost of building your project.
You may not want to think of your woodworking as a business, but once you make the decision to start selling some of your work, then you are a business and you should treat it as such.
There’s a lot of gray area between making a little money as a hobby and actually selling your work and being considered a business, part-time or not. I’m not going to get into that, and if you only look at your woodworking as a hobby and you don’t think of it as “making money”, then again, there is no reason to worry about how much to charge or knowing the true cost to build it.
Here are three ways of figuring your selling price that will be a sure way to “NOT” make a profit if you do not fully understand what the true cost is to manufacture or build your project. If you simply base it on the cost of materials and nothing else, then you are bond to lose out in the end.
1. Simply pulling a figure from the top of your head or out the crack of your butt, because you can roughly guess what the materials will cost and you think you would like to “make this much” or “you really need the job”! Now that’s a losing combination all the way around and sorry if I stepped on some toes.
2. Material cost times 2 or 3 or 4 or maybe even 5. How does this work? I really need the job so I better only times materials x 2, or this guy looks like he can afford it so I think I’ll times my material cost x 4 or the best one of all; I want a new BMW, so I think I’ll times it x 5. ?
Bottom line; are you really dealing with any facts or just guessing you are going to make a profit?
3. Pricing by the lineal foot. This way of pricing is usually done by the full time professional cabinet shop, but I have to ask, are they pricing this way because that’s how their competition prices their work or simply because it’s a fast and easy way to give a quote. All I can say is; if you don’t know the true cost of how much it cost to build a certain product by the lineal foot, then at best are shooting in the dark…….and how does that work for custom work?
I could easily add style changes, building techniques and options to at least double the material cost or triple the time to build with most any 24” of cabinet.
From this point on, I’m going to be talking more to the woodworker that is trying to have a side-line business as a woodworker and make some money and to the woodworker that is really considering doing woodworking as a living and trying to decide if they could actually make a living doing so.
I would hope the full time professionals would know their true cost of building a project and their pricing system takes all that in consideration when determining a price, but it’s still OK for you to follow along if you would like.
One of the hardest things for a hobbyist to do is to change his/her way of thinking from treating their woodworking as a hobby to treating their woodworking as a business and making a profit.
I’m about to get long winded and cover a lot of stuff. If you start reading this and decide it’s not for you because it’s too involved and it would take too much of your time to figure all this out, then I understand.
Now is the time for me to be brutally honest and blunt. No pulling punches or worrying if I’m going to hurt someone’s feelings. If you want to be lazy or don’t want to spend time to really figure out how to figure your cost of building a project and how to price it from there, then I can’t help you from here. Now it’s time to treat your woodworking like a business or don’t bother worrying about how you price things, let’s worry about how much it cost you to build it first!.
There are 5 major factors you need to take into consideration to know exactly what it cost you to build a project and how you use that to price your work.
1. Your fixed overhead to run your business (part time or full time , whether doing it at home or in a commercial setting).
2. Your administrative or non-productive overhead to run your business
3. What you would like to pay yourself.
4. What do you expect as a profit?
5. What is your material cost?
I’m talking as a one person shop, so I won’t be talking about employees at this time.
You noticed I put material cost last; that’s because the first four can add more to the cost of building a project then you might think. So, let’s start with #1.
Fixed overhead; Yes I know, as a hobby we let our household budget pay for everything like the mortgage (or rent), lights, water, phone, heat, cooling, insurances, taxes and anything else it takes to run the shop, but you need to change your way of thinking if you are going to treat your woodworking as a business. It’s always difficult to separate a business from personal when you operate a business from home.
But even so, you should consider at least a small percentage of your total overhead at home for your business overhead.
I would guess 75% of small businesses run from home are probably not set-up as a legitimate business anyway, so how you handle that is up to you, I’m just saying; if you want to know all the cost in figuring what it cost you to build a project then you should take your overhead into account. If you’re a full time woodworker then you already know about overhead.
I’m going to talk about working part time for now, but you still use the same principles when doing this full time.
Just for giggle and grins, let’s say your total household overhead is $3,000 a month (including the mortgage, electric, phone, insurances, taxes, internet, etc.) and you only consider 5% of that for business purposes (which is a very modest percentage). That alone is $150 a month. Now let’s say you only spend 5 or 6 hours a week working in your shop building things to sell. That’s spending about 20 to 25 hours a month working in your shop.
You can do the math, but if you divide 20 or 25 hours you work per month into the $150, you’re looking at around $6 – $7/hr. for every hour you’re in your shop just to pay that small of an amount towards the overhead. You should be considering that it cost you that much to operate your business from home.
You can run the numbers up and down the flag pole all you want, but the facts are, it cost you something every month to run a business from your house and you should have some kind of a quess-timent what that is! (I know, that’s not really a word, but it sounded right).
It’s difficult to know exactly what % of your total electric, heat, cooling, phone, etc that you use each month for business purposes when your total utilities are wrapped up in your household budget. Personally, I would ask a CPA what % is allowed as far as tax purposes and figure from there.
As far as a full time woodworker goes, the same principle applies except you have to take your total overhead cost and divide that by the total number of hours you work on the average each month in your business. If you’re running a full time woodworking business from home,(160 hours or more a month), you can bet your bottom dollar you are using a lot more than 5% of your total household budget for business purposes.
Again, you should check with a CPA to see what’s allowed.
But let’s move to the next part; Administrative overhead. This is all cost to operate a business that’s not considered fixed overhead.
This changes from month to month and would be things like all your office supplies, computer, marketing and advertising cost, legal and accounting fees, expenses to operate and maintain vehicles and equipment for the business.
This list can go on and on and it’s really difficult to put hard numbers to it because it changes constantly. Example; some of your advertising and/or marketing may be done on a monthly basis; like hosting for a web-site and then you may have marketing expenses that come along every now a then, like doing a show or advertising something on e-bay or having business cards printed. You can see how this could change on a monthly basis.
I don’t know of a magic number to put to all of those expenses, but I found over the years of operating a full time woodworking business, my administrative expenses ran about 20 % of my fixed overhead.
Let’s come back to that in a couple minutes.
Next; what would you like to pay yourself! Let’s be honest here, you wouldn’t want to work at a regular job having no idea what you would be paid, so why would you want to build something for someone and have no idea what you will get paid?
Pick a number, any number. Would you like to make minimum wage? Would you rather make $10 or $20/hr. or maybe more? That’s totally up to you. One important thing to remember here, it’s one thing to make an hourly wage working for a company and it’s all together different making that same hourly wage working for yourself and no benefits are included. No taxes taken out, no vacation time, no sick time, no health care benefits etc.
But it is like any other job as far as; you may not pay yourself as much per hour to start with but as you gain experience and get better at what you do, you can raise your pay (give yourself a pay raise!)
Moving on; Profit! Every business needs to operate with a profit. If not, a company can not grow or even survive. If you try to do woodworking without figuring a profit then one of two things will happen.
You will never be able to grow or buy a new tool, or upgrade what you have if you don’t make a profit in your business. You will be doing exactly the same thing tomorrow as you did today. You will be doing the same thing next year as you are doing today and ten years from now you will still be trying to do with what you have now, or the second thing will occur and that is you will be forced out of woodworking all together.
Again, it’s totally up to you what you would like to make as a profit. Did you realize that on a nation wide basis, the average profit margin for a professional cabinet shop is about 15%? That’s not a large percentage, but then again, if you have covered all your true expenses and cost, then a clear 15% profit is pretty darn good.
Last, but not least; Materials. This is probably one area you already have covered pretty well, but I will say this; take your time when you are figuring materials for a job and double check yourself.
Don’t cut your materials too close, it’s always better to figure just a little on the high side then to find out you short changed yourself and you have to buy extra materials to finish a job after you’ve already quoted a price or even worse; you allow yourself to short change the customer because you don’t want to spend the extra money to do it right.
I told you I was going to get long winded! I’m going to stop on this one and the next series we are going to put all these numbers together and see if we can make any sense out it all.
Hope you will come back later today because I’m going to post the next part later in the day. I want this part to be fresh on your minds when I get to the next section, but I want to give you a little time to absorb this first and maybe even take a piece of paper and jot down some of your own figures as far as what you may have as Fixed overhead, Administrative overhead, what you would like to get paid per hour for working and of course profit.
Try to be honest with yourself.
-- John @ http://www.thehuffordfurnituregroup.com