Wednesday, May 13, 2015

Pricing: How Much Should I Charge?

A while ago, a young embroiderer called me, and very excitedly told me about a job she had just taken on. “It’s for 78 motorcycle jackets for a local club. With the design on the back, the rockers and a left chest, it’s over 135,000 stitches per jacket. And I’m supplying the jackets!”

“That’s great”, I said. “Are you going to make any money?”

The loud silence coming from the other end told me that she didn’t have a clue!

And I think a lot of small embroiderers have a real problem with pricing. Charge too little and you won’t be able to cover your expenses. Quote too much and you won’t get the job. Remember, the objective is to charge as much as you can and still get the work. But if you can’t make a profit, let the embroiderer down the street take the job and lose their money. Of course, if this is a hobby, none of this is important and you can stop reading and do something for fun. But if it’s your business, you need to know how to arrive at a “fair” price.

In order to do this, you will need to know two things. First, what is the average cost to operate your business on an hourly basis, your “fixed costs” (these are the costs you have whether there is any work to do or not). Second, what is your estimation of what it will take, in time and effort, plus the cost of any special materials, to complete the job?

Hourly Rate X Hours Required + Special Materials = Price $.

To make money you have to pass ALL your costs along to the customer, plus add a profit margin. To do this reasonably, you need to do a little book work.

This is what I advised that embroiderer:

Take out your checkbook register and go back six months. List every check amount for business-related costs. For instance:

· Machine payments (consult your accountant about depreciation, whatever that is)
· Rent (easy if you have a separate facility; if you operate out of your house use the 

  amount you are claiming on your tax return -- very carefully)· Utilities (see Rent, above)
· Labor cost (what you pay yourself + any employees)
· Health insurance (if you pay it on your business)
· Bank charges and business insurance
· Office supplies + equipment + business cards + flyers
· Embroidery supplies (top thread, bobbins, stabilizer, etc. all of which you 
  can get from Madeira USA)
· Phone + mobile phone
· Advertising (Yellow pages + print ads)
· Internet (Web site host + Web maintenance)
· Other overhead: waste removal, cleaning (even the occasional pizza)

So you add that all up and it comes to $40,000 (for 6 months of operation)

In six months of operation there are 26 weeks; each week X 40 hours = 1,040 hours which is reduced by 40 hours to account for holidays. Therefore, dividing the Operating Costs of $40,000 by the Hours of Operation, 1000 hours = $40 cost per operating hour.

So if you average $40 per hour for the 2000 hours per year that you operate your business, you will break even. Now if you want to take a vacation between Christmas and New Year’s, possibly to Aruba, now that you’re the President of a Company, you’ll have to add about $2 per hour under overhead (a little more if you’re taking me with you). And you should add some for savings to buy the next piece of equipment and the rainy day when you don’t have enough work for the full day.

And don't forget setup times, machine maintenance, giving out samples, tweaking the digitizing your customer brought you, running stitch-outs, etc.

Put together everything you spend to produce an item -- any item. Make sure that what you charge the customer covers everything, and then add your profit. If you don't do it in a way similar to this, then you don't have a business, you have a hobby.

You must learn to estimate run times closely. If you’re new to this, you will need to set up some basic guidelines. Try not to guess on something as important as price! If you need your machine to make $25 an hour to pay for itself and you pay yourself $15 and hour, and your other costs (electricity, rent, office supplies, coffee, accountant, etc., etc., etc.) amount to $5 an hour, then you have to charge $50 an hour for your work. If the embroidery job takes 30 minutes to run, then your estimate should be $25 plus your markup and any cost for goods. Don't forget the markup on goods! The standard markup is called "keystone," and is double the price of the goods.

As you will see, each job has its own particular set of problems to solve. That's what customers are hiring you for.

Usually industry trade publications, like Stitches, Impressions and Printwear, have articles on pricing, and so does the library. Check out some other methods which may be more scientific.