What do I charge? What is fair for both my customer and myself? How do I know how much to charge for each treatment? How do I know if I am making money on each treatment or service I offer? How do I charge for something I've never made before? There are so many questions. We do our best to stumble along and come up with a workable price list in any way we can.
Collecting price lists from others is a great method of determining what others charge, but it doesn't tell us exactly what we need to charge. Our cost bases may be different from theirs 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 with you 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 she or he should charge to earn the income they desire. It can be used both by workrooms offering a set price list and those strictly charging by the hour.
This pricing method is a technique used by all manufacturers. Now, you may wonder how this method would help you, a drapery workroom. Well, drapery workrooms are manufacturers—very unique manufacturers, but manufacturers no less. You are taking raw goods and creating a finished product. Due to the creative nature of our industry, the biggest challenge you have is that every week you are faced with making something you've never made before.
The beauty of this pricing method is that it is not difficult to learn or apply. The formula is very simple, but it requires considerable effort on your part to apply it to your business. But, I guarantee you will find it worth the effort to get the answers to all those nagging questions. I will explain the process in great detail, which will require splitting the information over three articles. If, however, you have other pricing issues that this formula doesn't cover, please give me a call and we'll undertake them in an upcoming issue.
The Manufacturer's Pricing Technique is based on this simple formula:
Hourly Charge x Time = Charge
I know that sounds rather funny and complicated, but here's the simple translation: 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? If I know how much I need to charge by the hour, and if I know how long it takes me to make something, I simply multiply the two. For example, if it takes me one hour to create a swag and I need to charge $35 an hour, then I need to charge $35 for each swag (at a minimum).
That part is easy. The more detailed part is determining how much to charge by the hour and how long it takes to make something. We'll take a detailed look at how to determine each of these two important factors, focusing on the hourly charge first and following that in next month's article with how long it takes to make a given treatment.
There are three important considerations in determining your charge by the hour:
1. Overhead and expenses
2. Your salary/wage
Let's analyze each of these elements in detail.
From an accounting perspective, overhead and expenses are two different things. For our purposes, though, I have placed them in the same category: expenses. They both cost us money! There are so many expense areas it is difficult to think of them all when first trying to establish a list of expenses.
Through teaching this pricing method in seminars, I have created an extensive list of overhead and expenses with the help of attendees. I'm providing it here (on page 50) as a convenience to you to help assure that you do not leave out any costs. Note that several categories are very general, such as employees. I place any employee expense into that one category including wages, taxes, insurance, vacation, etc.
Calculate your expenses for an entire year. One reason for doing this is because several individual expenses, such as leases and insurance, are based on a year. Another reason is that other expenses, such as heating or cooling, fluctuate month by month. Using a year as a time frame will assure that our results will be as accurate as possible.
Some of you may wonder how in the world you can do this when you have not been in business for even a year. The best advice I can give you is to guess. Make the best guess you can, and in a year 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 new, precise expense list.
The next step is determining 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 workweek, with two weeks of 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 two full-time and one half-time employee that works out to 6,000 hours for the three of you and an additional
1, 000 hours for the half-time employee for a total of 7,000 hours. If you find that part of your time is strictly given to management duties, you must include only the time you were actually fabricating in the number of hours worked. The time you spent managing is considered a liability; the other employees have to produce enough to pay for your non-producing time.
Next, you must 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.
Using our example, let's say your total expenses for a year were $105,000. Divided by 7,000 hours, you would determine that each person needs to produce $15 worth of products an hour to meet expenses only. This process 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 you.
Now, we need to determine what our own personal salary or wage will be. How much do we want to pay ourselves by the hour? You will have to decide this amount for yourself, but for our example let's use $20 per hour.
Let me clarify that this figure 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. as your other employees and your salary already would be included in the list of expenses. In this case, your salary is not considered separately.
If you are a sole proprietor or partnership, you are not considered an employee and you will need to consider your salary now. Remember that this is gross, the total expense for your wage.
And now, on to the most important element of all: profit. Nearly all small business owners (me, included) often fail to realize that profit and the owner's salary or wage are two different things. Most of us think that 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 easier to understand using 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 of my work? Of course to both questions. 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? Of course I would, or I would sell the company and put my money elsewhere, into stocks, for instance.
As with any investment, you can't guarantee a set return or profit, but if we don't place a projected profit into our pricing formula as a goal, will we ever achieve it? Probably not.
Let's say we are going to try to produce only an extra $2 per hour. With 7,000 worked hours, 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.
THE ANSWER IS . . .
Now, we add together all three elements of our formula to determine how much we are going to charge by the hour.
Overhead and expenses ($15/hour) + Owner's salary ($20/hour) +
Profit ($2/hour) = $37/hour for every hour of shop time.
Now that we've determined what we need to charge by the hour, we next must analyze what we can accomplish in that hour. And that will be the subject of our next article.
Cheryl Strickland is owner of Professional Drapery School, Swannanoa, NC, and is an internationally acclaimed speaker with 20 years experience in the window coverings industry. She is the publisher and editor of Sew WHAT?, an international monthly newsletter for professional drapery workrooms. Strickland also is the author of A Practical Guide to Soft Window Coverings and the Designer's Sketch Pad, which are available through Draperies & Window Coverings magazine.