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

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Blog entry by huff posted 06-02-2013 12:51 AM 3157 reads 16 times favorited 21 comments Add to Favorites Watch
« 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.

The shop labor rate is based on the first four categories we talked about in my earlier series; fixed overhead, administrative overhead, your hourly wage and profit.

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;
Fixed overhead; we used a very modest figure of 5% of your total household overhead using a fictional number of $3,000 month for your total which amounted to $150 month for your part of operating your business from the house. Again, you can run these numbers up or down depending on what you feel you use operating a business from home or if you are running a full time woodworking business in a different location then from your home, you have to figure 100% of your fixed overhead.

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!

-- John @ http://www.thehuffordfurnituregroup.com



21 comments so far

View MrFid's profile

MrFid

560 posts in 628 days


#1 posted 06-02-2013 01:09 AM

Great series! I’ll be sure to tune in tomorrow!

-- Bailey F - Eastern Mass.

View dustyal's profile

dustyal

1208 posts in 2199 days


#2 posted 06-02-2013 01:11 AM

As an accountant I can attest that you are doing a good job of explaining rate setting… and the need for it.

Some examples: Auto repair shop. You will see signs advertising their shop rate. On your bill you will also see charges for other services like hazmat recovery… and shop supplies as a percentage of the bill….

I was happy to hear you made it to the Mason Dixon Woodworkers meeting… I will enjoy catching up with you when things settle out at my house.

-- Al H. - small shop, small projects...

View Acelectric's profile

Acelectric

30 posts in 620 days


#3 posted 06-02-2013 01:35 AM

This is a well written and informative blog series. I appreciate you taking the time to share your knowledge and experience with us. It has helped me to understand why I had trouble making it in business for myself (in another unrelated trade).

The problem I have always had is estimating the number of hours it will take to complete a project. Are you going to address this issue in this series? I know it will vary considerably depending on experience, tooling, and so forth. But if there is some way to at least get close to the number of hours it will take it would be very helpful.

-- Thank goodness I don’t do this for a living, because I would surely starve.

View Monte Pittman's profile

Monte Pittman

15151 posts in 1062 days


#4 posted 06-02-2013 01:38 AM

Excellent job

-- Mother Nature created it, I just assemble it.

View Joe Lyddon's profile

Joe Lyddon

7883 posts in 2776 days


#5 posted 06-02-2013 01:48 AM

A very nice series…

Once and for all…

Thank you!

-- Have Fun! Joe Lyddon - Alta Loma, CA USA - Home: http://www.WoodworkStuff.net ... My Small Gallery: http://www.ncwoodworker.net/pp/showgallery.php?ppuser=1389&cat=500"

View jerrells's profile

jerrells

860 posts in 1608 days


#6 posted 06-02-2013 02:02 AM

Thank you for posting all of this information. I am a scrollsaw worker (do scrollsaw work) and I am trying t apply this to my work. I have used some of this type of information before and some is a little new. If you have any tweks for scrollsaw, or small crafts in general) I would love to hear from you.

Thanks again.

-- Just learning the craft my Lord and Savior Jesus Christ practiced.

View DocSavage45's profile

DocSavage45

5243 posts in 1566 days


#7 posted 06-02-2013 02:21 AM

If it’s a business it’s a business. You put it into a good argument and cite probable pitfalls. Actually when I started reading about shop efficiency and marketing of woodworking I recognized these business practices in my day job….LOL! Great stuff!

-- Cau Haus Designs, Thomas J. Tieffenbacher

View shipwright's profile

shipwright

5231 posts in 1522 days


#8 posted 06-02-2013 05:48 AM

Good blog. I’ll be watching for the wind-up.

-- Paul M ..............If God wanted us to have fiberglass boats he would have given us fiberglass trees. http://prmdesigns.com/

View huff's profile

huff

2808 posts in 2009 days


#9 posted 06-02-2013 11:45 AM

I want to thank everyone for reading and following along. I know this has been a long winded series, but there are so many things that tie into pricing our work that we just can’t use a “one liner” to have an answer.

And trust me….........I don’t have all the answers, but I’ve always taken my business seriously and I would much rather deal with facts (even if I don’t like what I hear) then just guess my way.

I could talk woodworking and business 24/7 because that’s my passion, so sometimes I have to realize I need to turn it down a notch or two. lol

I’m finishing up my summary now and will post it in a little while. My problem is; I keep thinking of things I would like to share and I have to find a stopping point!

-- John @ http://www.thehuffordfurnituregroup.com

View jonsajerk's profile

jonsajerk

34 posts in 1049 days


#10 posted 06-02-2013 03:00 PM

Thank you for sharing your knowledge! I have been full time at a cabinet shop for the last 6-7 yrs and have flirted with this idea for a long time. I always see lots of room for improvement, but I don’t know if I have the balls to take the plunge or know if I even see the full picture of the business. Thanks again for sharing, looking forward to the 5th installment.

View huff's profile

huff

2808 posts in 2009 days


#11 posted 06-02-2013 03:20 PM

Jonsajerk,

I can relate to what you say; but don’t worry, I’m not sure any of us see the full picture of business at times.

Over the years I’ve had to ask myself on numerous ocassions if this was a wise move to go into business for myself (no matter what business), but I always turned back to my business for the answer and decided I just needed to learn more.

It’s a never ending learning experience as it is in woodworking itself.

Thanks for following along and hope you can pick up a few ideas to tuck away and use later in your own business.

Good luck.

-- John @ http://www.thehuffordfurnituregroup.com

View mbs's profile

mbs

1478 posts in 1664 days


#12 posted 06-02-2013 09:53 PM

Acelectric – I’m not an expert but you can start by making a 3 point estimate. Try to figure out the best case time (everything goes right, tools are sharp, minimal interuptions…). Then the most likely time (not every goes right but most do), and the worst case (go to the store, restart some pcs, botch the finish…) Keep track of your hours and you will soon converge on the amount of time it will likely take. It will probably be close to the average time you predicted when you consider the re-do’s.

-- Sorry the reply is so long. I didn't have time to write a short reply.

View huff's profile

huff

2808 posts in 2009 days


#13 posted 06-02-2013 10:02 PM

mbs,

You make a good point; too many times we try to estimate our time way too close and don’t allow for anything to go wrong.

There will be plenty of times we will have to “eat” some of our hours, but the closer we can estimate a job correctly allowing for a few bumps in the road, we will have a good price.

I used to use time cards for a couple years, just to track every minute it took to build and finish a project. It was a real eye opener for me, but didn’t take me long to get a really good “average” time it took to do each phase.

-- John @ http://www.thehuffordfurnituregroup.com

View Roger's profile

Roger

15055 posts in 1528 days


#14 posted 06-04-2013 12:16 PM

I too appreciate your effort to educate us on this very intricate subject

-- Roger from KY. Work/Play/Travel Safe. Kentuk55@bellsouth.net

View huff's profile

huff

2808 posts in 2009 days


#15 posted 06-06-2013 11:48 AM

James101,

I have to agree with you 100%, but my entire series was trying to help woodworkers figure out their “break even point”. How to figure their pricing to cover all their cost and make a profit to see if it is even worth building a product.

From there we should be able to grow and expand. I don’t care how much “profit” a woodworker makes, but I want them to at least make a profit.

What you’re referring to in business is; “leaving money on the table” and we would all hate to do that.

That comes with time; learning your buisness, learning your market and knowing the worth of your product or service in a particular market.

We all have to have a starting point. Sales are difficult enough for the beginning woodworker, but going out and trying to price and sell your work without knowing what it cost to build it in the first place is a crap shoot at best.

We start with knowing our base line; knowing that if we price our work for less, we will be losing money and not be able to pay all the bills involved in making our products.

We have to start with the fundamentals and deal with the facts first, then as we learn to price our work to at least make a profit and get comfortable, we grow from there.

Over the years, I’ve seen far too many woodworkers start off losing money because they don’t even cover their basic cost (and continue to do so) then seeing a woodworkers start off by making a profit, but not making enough profit to please themselves. You have to make a profit first, then grow from there.

Your points are very valid and any woodworker that’s been in business very long will understand what we’re talking about, but for the beginning “seller” of his/her work, should understand the basics of pricing.

Thanks for following the series.

-- John @ http://www.thehuffordfurnituregroup.com

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