The Art & Science of Pricing Your Work
Every seller knows the precarious job of pricing. We imagine there is a special, magic number out there for each product that perfectly balances a seller’s desire for profit with a buyer’s desire for a good deal. But how do we find that magic number?
The unfortunate reality is that there is no magic number. Sure, there are mathematical formulas you can use to find a good rough estimate of a price (which we will describe later on). But the reality is that the ‘perfect’ price is different for each customer, and even then it changes depending on trends, tastes, overall economic health, and personal economic situations.
There is no simple mathematical way to determine the perfect price for anything; pricing is not just a science, it’s also an art. You will need to adjust your prices all the time to make them reasonable. You will have to use your calculator AND your common sense to set a price.
That said, let’s break down some factors that go into the art and science of pricing.
ECONOMIC FACTORS TO PRICING
Did you take an economics class in high school or college? Do the concepts of elasticity and oligopolies still give you nightmares? We’ll admit: we broke into a sweat just typing those words.
But economics is just a fact of life for businesses big and small. Let’s quickly review some important ideas that will help you begin to set a good price.
- Supply: This is the amount of a product that is available in the entire market.
- If you’re selling plain, rectangular serving boards, for instance, the supply is enormous. You’re competing with Walmart, Target, IKEA, At Home, etc. When supply is high, prices are typically low.
- But if you’re selling custom serving boards, with unique woods, colors, and designs, the supply is much lower! And it makes sense that when a product is more scarce, the price is typically high.
- Demand: This is the overall desire for a product by consumers in the market.
- Your big dining room tables may be gorgeous and well-crafted, but if you’re selling in the city where people live in small apartments, there is going to be low demand for big, bulky furniture. Low demand means low prices, and less profit.
- Small bistro tables will be more desired, and increase demand. High demand means higher prices because people are willing to pay more. That means more profit!
- Price as a Signal: The price of something is not simply just the amount of money a person needs to pay to acquire a product. It tells so much more about the quality, rarity, and desirability of that product!
- It makes sense that a price set too high is a bad thing. People get priced out, sure, but if your hexagonal wall shelves are priced too high, customers may begin to think your business is generally out of their price range (or overvalues its products) and stop shopping there altogether.
- A price can also be too low. If your wall shelves are priced too good to be true, customers will sense that, and avoid them. Or they may undervalue the work you put into them, believing your business to be a bargain shop. If you want your products and business to be known for higher quality than competitors, don’t be nervous to charge the same or even more than your competitors.
- Sales Strategy: Your price needs to reflect your overall sales strategy, too. If you want to market your projects as higher quality, a higher price is not enough. You need to sell that higher quality to your customer with context: language on your website, professional pictures, styling, staging, narratives, and of course, talking it out face-to-face.
- If a customer thinks a price is too high at first, you can still persuade them to pay it if you explain the work you put into it, the special materials it’s made out of, or how it was transformed from or inspired by another piece. Customers might pay more to have that narrative to share with their guests when your piece is sitting in their homes.
7 TANGIBLE FACTORS TO PRICING
Okay, that was pretty abstract. Economics usually is. Let’s look at some tangible factors that will help you determine a price.
- How much money did you spend on the wood, screws, nails, glue, etc. to construct your product? Keep your receipts from the hardware store and lumber yards. If you can, keep track of the costs on a spreadsheet or in a notebook.
- Beyond the actual construction materials, what other costs do you pay to keep your shop and business operating? Consider the following:
- Rent, utilities, and loan payments for your shop (or home)
- Gas money for trips to the store, extra materials purchased, shipping costs for materials you had to order
- Disposable supplies like sandpaper, shop rags, vinyl gloves, PPE and other supplies you buy to keep the shop in working order
- Marketing and advertisements costs, website hosting costs, and cell phone bills that you pay to communicate with your customers
- These costs may not be a part of the product, but they were instrumental to constructing and selling that product. So factor these costs into the price.
- Now, it may be impossible to add up all these miscellaneous costs and divide them up by the number of products you will sell this year or this month. But consider adding a base percentage to the costs of your materials, like 10% or 15% to help cover the overhead costs.
- How valuable is your time, your skills, your labor? Be realistic. It’s common to advertise charging $50 an hour for your work, but be willing to raise or lower the prices of pieces that are calculated just based on hourly rates.
- Still, keep track of the hours spent or even specific tasks completed in constructing your work. You may add a line or two in your invoice that details your labor hours or even specific, labor-intensive tasks that explains the cost.
- Who is your target market? Where do they live, what are their values, how much disposable income do they have, how budget sensitive are they, do they value status symbols or convenience more?
- You can change your prices to accommodate your customers’ needs and desires.
- Do some market research: What do comparable products sell for from other businesses? Be aware, though, that if you are researching businesses in other states or regions, they may have different costs for materials or labor.
- What makes your products different from your competitors’ products? Does that difference justify a higher price? Maybe your product is higher quality or comes with extra services, like a free installation.
- Ultimately, profit is what keeps you in business. Profit is more capital to grow your business. It’s essential. Make sure you are getting more money when you sell a product than what you spent to make it!
- Even if you are just a woodworking hobbyist, profit is what sustains your passion and hobby! You may not need or even desire as much profit as you can extract from your customers, but woodworking can quickly become an expensive hobby if you undersell yourself.
- If you are trying to sell many units of a particular product, then you can earn profit through volume by charging less per unit. The profit per product may be small, but it adds up as you sell more and more products.
- Make sure products you intend to sell in high volume are easy and cheaper to construct, since the profit margin is thin for each unit. The profit doesn’t add up if you sell each one at a loss.
USING PRICES IN YOUR WORKFLOW
We mentioned earlier how prices can be a signal to your customer to tell them about how well-crafted it is, how it is custom-built, or how it has an interesting story attached to it. But the prices that customers are willing to pay can also help you organize your work and prioritize certain projects.
Knowing how much to charge for your work means you can tackle the larger-ticket items relatively first and see more cash flow early. This early profit could be the path to quicker growth as a business and allow you the money and time to make other cheaper, high-volume products. And on top of that, that early profit may give you the room to work on passion projects that may not generate as much money, but make you excited to get to work.
In addition, knowing what your typical family, friend, community, or church discount is right away allows you to settle plans and specifics for projects quicker. You may find these details unclear if you find it impolite to talk about prices with friends until after the project is already done. No one wants to argue with their customers, especially when you have a personal relationship with them outside the business. But you cannot sell products at a loss to all your friends and family and expect to stay in business long. Having a pricing strategy can help you give an estimate upfront. That awkwardness upfront can save a lot of awkwardness later on.
Here are a few examples of some rough formulas you can use to figure out a good price for your products. But while they may help you avoid dramatically over-pricing or under-pricing your products, remember that pricing is more than just a science or formula. It’s an art, too, and may require a “common sense” adjustment.
In the example above, you simply multiply the costs of materials by 1.10 to factor in your overhead costs (at a rate of 10%). Then you add the value of your labor.
In this next example, you first add the costs of your materials to the cost of your labor. Then you multiply that sum by 1.15 to factor in your overhead costs (at a rate of 15%). Then you multiply that by 1.10 to add in a 10% profit margin to your price.
In this final example, you take your materials costs (plus your overhead costs at a rate of 15%) and add it to the cost of your labor. Then you multiple by 1.10 to include a 10% profit margin into your price. Finally, you add or subtract however much you think it takes to get to a reasonable price for your market and your customer base, based on supply and demand.
Of course, these are just examples. You should construct your own formula to generate prices that work well for your business. But we think a market adjustment variable in your formula will serve very nicely to make sure your prices are always realistic and competitive.
Pricing is difficult. You cannot perfectly predict that magic number the customer is willing to pay to maximize your profit without forfeiting their willingness to pay in the first place.
But in the absence of mind-reading abilities, figuring out a good price comes down to calculating how much you spent, how much you worked, and what a good profit margin is. Easier said than done, however, since there are many factors to consider in what you spent money on, what a good profit margin is, and how much your labor is worth. But it’s not impossible.
Pricing is an ongoing process, so don’t be afraid to change based on new information you get from customers, new costs you incur, or different messages you want to communicate to your market. Prices are signals. You have to know your worth and convey that to customers!
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Check out georgesupplyco.com for more resources for growing your maker business!
Scott Chervitz is owner of George Supply Company, dedicated to helping woodshops build their brand. See more at GeorgeSupplyCo.com. You can reach him at Scott@GeorgeSupplyCo.com or on Instagram at @GeorgeSupplyCompany
Brian Chervitz, M.S., is an Associate Instructional Designer at the University of Wisconsin Extended Campus.
Excellent article. Best one I’ve read yet summarizing how and why to price products.
Thanks for all the work you do!