Operations: Pricing Your Products & Services
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Perhaps the least understood and most controversial issue in engraving is pricing. No two engravers will do it exactly the same. Almost any approach may work. Engraving is not unlike other service or manufacturing businesses and effective pricing is just as big a challenge here as in any business. Pricing, however, does not need to be a mystery, and a scheme can be worked out that suits your individual business needs. It's important to remember that it is the market, and not your costs that will determine the price of your products and services, although cost must be considered in any pricing plan. The law of supply and demand determines market prices and to be successful you need to work within those rules.
How are prices computed? The entrepreneur generally needs more than the simple arithmetic of costs and profits to set prices. The easiest formula to use is:
Price = cost + fair profits
Unfortunately this will not actually guarantee the entrepreneur a profit. Why? Because cost and profit estimate hinge on volumes, and volumes hinge on the right price among other things.
Pricing by strict accounting methods as well as traditional sales and marketing methods will yield a pretty sound strategy. Of course, if the engraving company down the street has absolutely no clue about such things and underbids a job, he will probably get the order. He may win the order today but tomorrow could turn out to be a different story. If he continually under prices, he may be out of business before very long and you may find yourself taking orders from his old customers.
The objective in pricing is to make a reasonable profit on all of your engraving activities. In fact, there's no reason not to make a healthy profit. The question is, "By what method will I price my products and services to achieve this goal?"
Before a retail price can be established, there are things that must be taken into consideration. First, you must determine if you want to maximize your total sales or your total profits. Having high volumes with little return on each transaction may not suit your operation. Maximizing your return on a few transactions may be better. Remember that it's not how much you earn that's important, it's how much you keep that really counts.
GENERAL PRICING ISSUES TO CONSIDER
Pricing far and away is the most difficult decision most business owners are faced with. On the surface, engraving appears to be just a "product" and many of us only consider the material costs and our overhead expenses when calculating prices. We forget that we bring an artistic element to the work we do and this is what sets us apart from others. Collectively, we tend to under value and then ultimately under price our work. We may be better off pricing first as artist and secondly as business owners. Some of us may actually make more money at the end of the day. As business owners we are taught to consider the cost of materials, staff, direct labor and overhead expenses such as rent and utilities. We are even told to consider competitive price levels when creating our pricing scheme. What we forget to add into our algorithm is the true value of our experience as engravers. The things that you bring to the process are many, including your skill, artistic eye and craftsmanship. Don't under value this when setting prices. You've earned the right to ask a fair price for your work.
You may not feel that these items warrant charging the customer a premium. Maybe you've forgotten that they couldn't select the font style for the job and decided to leave the decision to you. What about your suggestion to do a monogram letter instead of just three initials? How do you charge for the time you spent, selecting the correct color combination of materials? Never underestimate the experience you bring to the job.
Since you are adding real value to the work, let’s take into consideration your time. When an artist, sculptor or painter accepts a commission to do work, he must consider the amount of time he will spend on the project. His material cost may be minimal but his time may be weeks or months to complete this custom work. If you agree to do custom work (which you are every time you accept the creation of the customer's logo), you need to price accordingly. If you must source special materials or nonstandard items there will undoubtedly be purchasing cost and time involved. ALL of your costs including your time must be taken into account when setting a price. Even if you cannot easily make a calculation regarding your total cost, you can find a way to establish a price for your work.
To have a fighting chance at setting retail prices that reflect a reasonable profit after expenses, you must know your cost. If you work out of your home, you may decide to confine your analysis of costs to the materials you use and the time you spend making the products you offer. If you operate a retail store, you must know all operating cost such as rent, utilities, advertising, insurance, payroll, taxes and materials. Here's where having an accountant can be beneficial. A good accountant will try to understand your business process and make recommendations on changes that limit your tax liability as well as improve your operating profit. Your accountant may also be able to recommend an appropriate business software package that will help you manage these details as well as make his or her life easier. Regardless, having a grip on your cost is essential.
For most shops there are three significant cost factors. The first two, your labor (in the case of a sole proprietorship) and the cost of materials are easily calculated. The third, "overhead", is perhaps the most difficult because it takes into account several different cost elements. Overhead, sometimes referred to as your operating expense, is the cost of running your operation. It is all of the general expenses such as utilities, administrative, insurance etc. that must be applied to each job. Overhead can be broken down into two categories, fixed and variable. Fixed expenses are those that do not change from month to month such as rent, business insurance, lease payments (like those for engraving equipment), magazine subscriptions, trash collection fees, building security and certain taxes. Variable expenses will include those that fluctuate or expenses that may be seasonal or unpredictable in nature. Examples include utilities such as water, electric, and gas, as well as advertising, equipment maintenance and phone. If you have historical records they can be invaluable when budgeting for variable expenses.
It's important to remember that all of your revenues must cover all of your expenses including your desired profits. I recommend listing all of the overhead expenses in detail and then dividing these among all of the expected monthly sales. You will soon discover that these costs can be greater per order than that of the materials consumed and the labor portion of the job. Most people will take all of the overhead expenses and determine a “per hour" overhead cost to running their operation. This is a beneficial way of remembering that you must get a certain amount of money on each order. If your overhead expense is $2000.00 per month with an average 173 hours (40 hours/week or 2080/yr divided by 12 months) in each month, then your overhead rate is $11.56 per hour.
Even a simple plaque that only takes you 1/2 hour to complete must carry an additional cost of $5.78 in addition to the labor, material costs and profit.
There are several ways to approach the pricing of a product. We'll look at them from the least to the most complex.
Pricing needs to reflect your time as well as your artistic efforts. More important than all of the other costs is your desire to meet your financial needs. A combination of strategies may be the most effective approach given the range of products you may offer and your desire to achieve some minimal profit even on the simplest of engraving jobs. Here's a formula that will help you to "back into" the correct pricing numbers for most shops. This is the most simplistic approach and I recommend it to all new shop owners.
PRICING BY THE HOUR
- Determine the amount of money you wish to make each year. This number should be exclusive of all other costs including expenses and overhead. Each of us has our own needs and this number will vary from person to person.
- Once you have determined the number, divide it by 2080 (the average number of work hours in a year).
Example: Income $75,000.00, Divided by 2080 hours = $36.05 per hour.
Any service you perform or product you manufacture that utilizes your time needs to have this number applied. Therefore, you would add the hours to the material and overhead cost for that particular job to determine the total cost. If you applied two hours to a project you would add $72.10 to the costs to cover your time and desired profit margin.
On the surface this is a pretty simplistic view. When you have no better method or formula, this may be the best fall back approach available to you. There are plenty of other more sophisticated methods of determining pricing, however; I've never found a way that gives me the comfort that I'm charging enough to survive. In the end you'd like to be paid for your time and your talent. Most of us do not have enough time and we surely don't want to undervalue it.
PRICING BY THE LETTER
When I first entered the industry I thought this was a great way to charge for my work. How could I go wrong, all I need to be able to do is add? Counting characters is easy. Not very creative, but easy. It's also easy for the customer to understand and that's why I think it survives as a method of calculating the price. To the outsider, engraving is often a black art. They have no idea the amount of work involved. You may be able to create the finished job in 2 minutes or in 2 hours. As long as your price appears reasonable and logical they will agree with it. Counting characters does work for some companies and is still used by many engravers. I think that this method originated a long time ago during the early years of manual engraving. Pricing typically ranges from 7-1/2 cents to 50 cents per character. With this variation in prices how can anyone say that there is a scientific approach to this?
I presume that the charge per character comes from manual engravers determining how many characters they could cut in an hour and dividing their cost and profit by that number. In my own surveys I've seen a more moderate 15 cents to 30 cents per letter. A lot of your calculation will depend on the object to be engraved. If you are supplying a plaque with 200 characters at .25 each you will be charging $50.00. This would not include the cost of the plaque itself. A $75.00 plaque with a significant amount of text may warrant this price.
Retailers and wholesalers commonly use a method called mark-up pricing. Mark-up is simply the difference between selling price and purchase cost.
Mark-up = selling price - purchase cost
Mark-up percentages vary widely and are dependent on the product as well as market. Paperback books may only be marked up 20% over cost while perfume may be 100%.
This method may be used if you are simply passing an item through your shop. A good example may be a gift item such as a key ring or money clip that may be sold without any engraving or any additional costs attached. Perhaps the customer did not have a particular message in mind when they purchased the item. You can simply take the cost of the item and add a mark-up percentage to the goods. If as an example a key ring costs $4.00 and you wanted to achieve a 25% mark-up, then the price should be $5.00. This is the simplest approach to determining a retail price for an item. This does not, however, consider any of your costs including purchasing costs, freight, your time etc. You can add these items together with the material costs and arrive at a more accurate price if this method suits your plan.
When you leave your employees in charge of the shop, you will want to know that they will not give away the farm. This is a great way to ensure that a minimum amount of profit is achieved when they need to make a decision in your absence. I recommend between a 50-100% mark-up when passing an item through the shop.
MARK-UP PERCENT METHOD
This is the same as the above method but shown in a more technically correct way. The mark-up percent method is used to achieve a desired target profit, which is expressed as a percentage of gross sales. If your goal is to reach an average margin of 40% on sales, then this formula will help you establish a minimum retail price. Again, your cost should include material, freight and overhead expenses.
This method will not yield the same results as our "simple markup" method. This is a true percentage based mark-up. You can check the results of the above example by taking the $110.00 retail price and deduct 40%. You will yield a cost of $66.00. If you were to use the other method you would only have a retail of $92.40 ($66.00X40 % =$26.40). When added together, the cost plus the percentage of the cost only equal $92.40.
Which is right you ask? Both, for they each yield some profit over cost. In the scheme of things it's not the percentage that makes us money but the absolute dollars. The dollars pay the bills so don't get hung up on percentages. The reason I have chosen to include more than one method is to give you the option of selecting something that is easy for you to calculate and apply.
This is certainly one of the most creative approaches to pricing. Rather than getting caught up in calculating the price by each character or some long and difficult approach, just give the engraving fee away. This can be effective for those companies that do a very limited amount of engraving on each object such as trophy shops. The objective here is to sell the trophy, make a reasonable profit and hide or bury the cost of engraving in the product. This can be an attractive sales approach. It may also be effective for shops that sell a considerable amount of gift items. The sale of the object is more important than the profit gained on the sale of a three-letter monogram. For unusual jobs with more characters a premium can be charged. Again, the customers feel that they are getting a much greater value by not having to pay for the engraving portion. This is a good promotional strategy to move seasonal items such as Christmas ornaments, pens, lighters, Mother's Day gifts, etc.