One of the things that we're constantly asked as software providers to custom fabricators is, "What should the price be for what I sell?" My canned response is always, "Well what do YOU think it should be?" No one likes a question answered with a question but in this case it's important for YOU to not only know but for YOU to decide what your products are worth. Pricing is a science but selling is an art. In this post we'll discuss 5 considerations to follow when instituting an estimating system.
Consideration one - Identify what you sell or will sell.In order to determine the basis for pricing you will need to identify what it is you sell. Sounds simple really doesn’t it? Identify whether these items require you to fabricate something as part of this product or if this item is simply bought and resold. Are these items a combination of the two such as an A-frame that needs printed graphics and panels? Great. If the product you are selling requires your shop to fabricate it you’ll also need to know, what type of labors were involved to get that made. These labors are usually associated to someone in the shop to produce and assemble the product, design rates as well as any associated installation rates. Identify the product and list the bill of materials (BOM) involved on a spreadsheet or paper. Don’t be afraid to list all options that may be part of price. Here’s an example: - 2’ x 3’ A-frame: (frame can be sold blank or with components below)
2’ x 3’ signicade
(2) 2’ x 3’ sign panels (of any kind applicable to the frame)
Vinyl (6 sqft each side)
Ink (6 sqft each side)
laminate (optional) 6 sqft each side
labor to make it
labor to design it (optional)
Shipping/delivery charge (optional)
Rush fee (optional)
Once you have these things written down on a piece of paper or in a spreadsheet you are ready to start building a system of data for costing and mark-ups.
Consideration 2 - Knowing your material costs Costs in this case are the aspects required by a job that you pay for to produce a finished good. In this step the idea is to identify what does it cost you for the previously detailed BOM. The items you order from a catalog such as the frame itself are very easy to identify. Other aspects such as the vinyl and labor may require you to do some basic calculations. (i.e Roll cost/total sqft in roll to determine per sqft cost) Let’s use the previous list as an example. - 2’ x 3’ A-frame: (frame can be sold blank or with components below)
2’ x 3’ signicade
(2) 2’ x 3’ sign panels (of any kind applicable to the frame)
Vinyl (6sq ft each side)
Ink (6 sqft each side)
laminate (optional) 6 sqft each side
labor to make it
labor to design it (optional)
Shipping/delivery charge (optional)
Rush fee (optional)
Below you can see that we’ve identified as much of the scenario as possible. The example also shows notes that relate to how you may want to determine a certain price. The exercise clearly demonstrates where to start pricing your product by outlining all aspects and materials involved. Identifying each BOM in the product will help you control costs and fatten the bottom line. Failing to identify all aspects involved will only eat into your profits.With the above list itemized and detailed with cost and quantities, you can then begin to set standards for mark-ups. Starting with a 2x or 3x mark-up on per unit cost is a good place to start as a rule of thumb. A consistent mark-up on all materials is a good way to know how you got to a certain price. As time goes on you will either adjust up or down based on your market's demands. In addition to material costs it is important to understand how to determine hourly rates for your shop and machines. This is one area often overlooked and a classic example of why no two shops are alike.
Consideration Three - Identify your hourly ratesIn a custom fabrication shop there’s always one constant that makes a product semi or completely custom and that’s the people and machines involved. Labor is a critical aspect of determining the price for your custom goods. The key is knowing what should be included and how to determine what to charge. Though each person’s shop is a bit different in what they pay out, if set up properly hourly rates should be fairly similar. Use an overhead calculator to help you do this easily. Hourly shop rates should consider all expenses you have to pay on a monthly basis. The initial cost is determined by how many billable production hours you generate. Each hour of each staff, including you, that is spent in production on an average day should be considered as the total daily time. Enter your estimated taxes and desired profit to help ensure that each hour charged covers it all. If you don't know how to build a calculator in Excel here is a sample you can mimic.This example is assuming payroll and machine leases are part of total overhead. If you purchased machines out right you should determine an hourly machine charge a little differently.
Consideration four - Machines you own. What to charge?When you have purchased a machine, the machine rate is based upon the life expectancy of the machine within your business. The formula is: (machine purchase cost + expected lifetime maintenance cost) / expected hours of operating life. You can choose to do this per machine or an average of all machines. I'd recommend per machine as a $15,000 printer can have a lesser life span than a $6000 vinyl plotter. Just like your shop hourly rate don't forget to add a factor for estimated taxes and your desired profit. Don't forget to put the operators hourly rate as part of the selling price for the machine. After all, the machine might look pricey up front but over time is much cheaper than the person operating it. That is where the bulk of the cost is.If you aren't certain how to build an excel file you can use the sample here as an exampleOne of the nice things about these machines is that they typically last longer than expect making them an even greater investment. The key is just making sure they keep running! ABS....Always Be Selling...and software is part of that equation.
As we near the end of this, the key is to get this info out to your customer accurately, professionally and quickly. A software package can help you do this.
Consideration five - Pricing software ties it all together.Over the past half hour of so, we've identified what is important in setting up our prices. The next consideration and the final aspect is getting this data out to your clients. The software should do a variety of things including but not limited to:
Allow you to enter itemized costs for your materials with a variety of formulas to consider
Allow you to enter itemized hourly rates for machines and people
Show an itemized report of estimated cost versus selling price
Ask specific questions to get this data in a friendly interface.
Generate a printable report that you can give to your client. Ideally it would email it for you.
Allow you to turn the estimate into a work order and invoice to avoid double entry.
Check out how shopVOX, a completely customizable estimating solution for custom manufacturers, looks as you price with it after entering the information we've been discussing.
Build your drop down menu of options.
Add the constant BOM for a one time setup when estimating. (notice custom multipliers to accommodate situations such as an A-frame...everything that is needed can easily be updated to a situation of X2)
Build custom fields to make nice and pretty quotes and eventually work orders.
Easily estimate
Did you make money?
Present nicely to a client! :)
Pay attention to the details, update your pricing at least twice a year or at least check to see if it needs to be, and create a system that allows you to generate professional estimates with your BOM and desired markups. If you can do those things, my guess is you'd create more estimates in less time and close more profitable sales. Good luck and close those deals! Email sales@shopvox.com if you have questions or take a webinar to learn more.