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BIG PICTURE

Perfect Pricing
A formula for determining how much to charge.

by Cheryl Strickland

I don’t think there is a more important or a more frustrating and difficult topic for the professional drapery workroom than pricing. We fear that if we are not charging properly for our services we either are gouging our customers or cheating ourselves.

We all do our best to stumble along and come up with a workable price list. Collecting price lists from others is a great method of determining what others charge, but it doesn’t tell us what we need to charge. Our costs may be different from others, and we may want to earn a different amount of income.

A few workrooms do not use a price list. Instead, they estimate how long a job will take, then multiply that by their charge per hour. I’d like to share the pricing method I teach at the Professional Drapery School. The greatest advantage of this method is that it can be used by virtually anyone to determine exactly what they should charge to earn the income they desire. It can be used by workrooms offering a set price list and by those strictly charging by the hour.

MANUFACTURERS’ PRICING TECHNIQUE

This pricing method is a technique used by all manufacturers. Now, you may be wondering how this method would help you. Well, drapery workrooms are indeed manufacturers—very unique manufacturers, but manufacturers no less. You are taking raw goods and creating a finished product.

The beauty of this pricing method is that it is not difficult to learn. The formula is very simple, but it does require considerable effort on your part to apply it to your business. But I guarantee that you will find it worth the effort. I will explain the process in great detail, but not all in this article.

The Manufacturer’s Pricing Technique is based on this simple formula:

CHARGE = HOURLY CHARGE x TIME

Here’s the simple translation: How much I charge is equal to how much I need to charge by the hour multiplied by how long it takes to make something. A simple case of common sense, isn’t it? For example, if it takes me one hour to create a swag and I need to charge $35 dollars an hour, then I need to charge $35 dollars for each swag—at a minimum.

That part is easy. The harder and more detailed part is determining how much you need to charge by the hour and how long it takes you to make something.

DETERMINING HOURLY CHARGE

There are three important considerations in determining your charge by the hour: overhead and expenses, salary or wage, and profit. Let’s analyze each of these elements.

1. Overhead and expenses: From an accounting perspective, overhead and expenses are two different things. For our purposes, though, I have placed them in the same category. They both cost us money!

There are so many things that fall into expenses that it is difficult to think of them all when first trying to establish a list. I have created an extensive list of overhead and expense items, which I’m providing here as a convenience to you to help assure you do not leave out any cost. The list, through, may not be complete for every business in every situation.

Also, note that several categories are very general, such as employees. I place any employee expense into that category including wages, taxes, insurance, vacation, etc.

• Calculate your expenses for an entire year. One reason for doing this is because several individual expenses are based on a yearly schedule, such as leases and insurance. Another reason is that some expenses fluctuate month by month, such as heating or cooling. Using a year as a timeframe will assure that your results will be as accurate as possible.

Some of you may be wondering how in the world you can do this when you have not even been in business for a year. Well, the best advice I can give you is to guess. Make the best estimate you can, and in a year from now you will repeat this entire process and determine how accurate you were. Also, at that time you will have a year’s worth of data to use to prepare a precise expense list.

• Determine how many hours were worked in the year. Again, if you do not yet have a year’s worth of data, make the best educated guess you can. A typical 40-hour work week with the typical two-week vacation per year adds up to 2,000 hours per year, per person.

If you have employees working for you, include all of their hours. For example, if you have one half-time and two full-time employees that’s 6,000 hours for the three of you plus 1,000 hours for the half-time employee for a total of 7,000 hours. If you find that a portion of your time is strictly management, you must only include the hours worked, the hours you spent fabricating. The time you spent in management is considered a liability; the other employees have to produce enough work to pay for your non-producing time.

• Divide the total yearly expenses by the total number of hours worked in the year. This determines exactly how much must be produced in an hour just to meet your expenses. Let’s say your total expenses for a year were $105,000. Divided by the 7,000 hours worked in our example, each person would need to produce $15 worth of products an hour.

This step is a very eye-opening experience. It will help keep you and your employees on track instead of wasting time when you know exactly how much each hour of shop time costs. Even if no one is fabricating, these expenses still keep coming out of your pocket, hour by hour.

2. Salary or wage: You need to determine how much your own personal salary or wage will be. How much do you want to pay yourself by the hour? You will decided this amount, but let’s use $20 an hour for our example.

Let me clarify that this category will be used differently if you are a sole proprietor/partnership or a corporation, If you are a corporation, you are an employee with all the same taxes, benefits, etc. and you would be included in the employee category in the list of expenses. In that case this salary and wage category would be empty. If you are a sole proprietor or partnership you are not considered an employee and you should list your desired income here. Remember, this is gross income (total expense for your wage) not net income.

3. Profit: This is the most important element of all. Almost all small businesses don’t realize that profit and your salary/wage are two different things!

Most of us think what we earn is our profit. Actually, the healthiest way to think of it, from a professional business perspective, is to pay yourself first and what’s left over is profit. I find this the easiest to understand using two comparisons. First, I visualize myself working for someone else. Would I not expect a set wage? And would not the owner of the company expect to earn a profit off my work? Of course. On the other hand, if I invested in a company but did not work there, would I not expect to see a return on my investment? Or course I would, or I would put my money elsewhere.

As with any investment, you can’t guarantee a set return or profit, but if we don’t place a projected profit into his formula as a goal will it ever happen? Probably not. Let’s say we are going to try to produce only a $2 per hour for profit. With 7,000 hours worked, that would produce a profit of $14,000 per year above and beyond your set wage. And that’s at only $2 extra an hour! Sound good? Well, it can happen when you plan for it in your formula, but it probably won’t if you don’t.

Next, add together all three elements of the formula to determine how much we are going to charge by the hour: overhead and expenses = $15/hour; your salary = $20/hour; and profit = $2/hour for a total of $37/hour for every hour of shop time. This is the minimum you would charge to meet your goal. You may charge any amount higher than this that you wish, as long as your local market will bear it. If you do charge more, which of the three elements of our formula will change? The profit.