Complex factors drive pricing variances

The pricing conundrum returns in this 11th annual Small Shop Pricing Survey, and the questions remain as to why there continues to be such a wide range of prices reported for the same projects all over the country. Unfortunately, there aren't a lot of easy answers, but there is plenty in the survey to help you better analyze your own prices.

This year's survey probes a variety of common issues that people have pointed to in the past as possible contributors to pricing variances. Those include shop experience, whether shops use computer software for estimating or CNC machining for production. It also probes regional differences and gives some indication of overhead costs through the shop rate numbers.

How the survey works

Before you try to analyze the results, you first need to understand how the survey works. Each year we obtain original bidding specifications from real projects done by real shops. We ask for volunteer shops around the country to bid on the projects as if they were real jobs in their shops. They are told to price the projects using their standard pricing methods, but for comparison, we also ask that they supply breakdowns for such items as materials costs, shop rate, construction hours and so on. What appears on these pages is the itemized results of that survey.

Despite all attempts to make the survey an "apples to apples" comparison, not all shops provide all the same data. Some don't provide itemized categories because they price by the foot. Some bid the jobs making changes to materials or leaving something out, such as countertops. Where that is the case, there are explanatory notes.

Back to the future

This year's survey featured a somewhat unusual kitchen that sports a "retro" look, resembling the kinds of kitchens many Baby Boomers grew up with. Of course, the look is only skin deep, as the kitchen features modern conveniences, such as soft-closing drawer hardware and under-cabinet lighting.

The two dozen bidders who submitted prices illustrate how prices can range so widely even when many factors are consistent. Overall, the highest price submitted ($24,533) is more than five times the lowest price ($4,425). The actual price charged for the real kitchen ($20,783) is still thousands more than the average of all the bids ($14,371).

If we look closer, can we see the wide range in pricing is related to region, experience, equipment or some other factor? Unfortunately, the answer is not that easy. For example, while the highest bid was turned in by a shop with more than 25 years experience, so was the third-lowest bid. In fact, it seems the number of years in business has little to do with where the prices will fall. Similarly, software users appear evenly distributed throughout the bids from high to low.

Overhead factors

We know from past surveys, anecdotal evidence and many reports from readers that calculating overhead costs is often a problem for small shops. They frequently overlook costs or underestimate. This contributes to artificially low shop rates that can lead to lower prices and lower profits.

The only way to get a hint of this from the survey is to take a good look at what shops report as their shop rates. In last year's survey, reported shop rates averaged about $54, and that's largely unchanged this year. But within that average is a range of rates as wide as the prices on complete jobs. There are reported shop rates as low as $35 an hour and as high as $85 per hour.

So, if we look at shop rates as an indication of overhead, shouldn't we see the shops with high shop rates posting higher prices? Not exactly. To some degree that is true, but there are a number of cases of high-dollar shop rates showing up with mid-range bids.

Regional differences

Inevitably, shop owners will suggest the wide differences are the result of regional forces at play on both costs and market price. There is not enough statistical response in the survey to draw scientific conclusions on this. For example, several California shops responded to the survey, but shops responding represent different parts of the state, and their prices fall in different ranges.

Markets and mistakes

The real issues in pricing (note the word is "pricing" not "estimating") come down to markets and mistakes. Shops pricing for markets willing to pay more will charge more. And in recent years, we've seen a growing trend of shops marketing outside of their home region to attract higher prices and profits. That certainly affects the prices seen in the survey.

For example, if a shop in rural Maine is actually building a kitchen to be installed in an upscale home in Massachusetts, the price ought to reflect a combination of the shop's lower overhead plus the high market price. Compare that to the same project done by a shop in South Dakota and intended for a South Dakota market. Lower overhead combines with lower market demand to create lower prices.

Finally, we get to what may really be the crux of pricing variances: simple mistakes. Take a look at the hours and materials numbers in the survey. Is there really that much variance in materials costs? Certainly there are some regional differences, but as more shops order materials from farther away and as distribution channels are consolidated, there should be less variance in materials. Similarly, differences in shop efficiency and equipment (CNC) may contribute to differences in production hours, but they shouldn't range as widely as reported here, especially when automated shops are often showing up with much higher reported hours than shops with conventional equipment.

This all suggests that mistakes in estimating costs are still one of the biggest contributing factors to variances in pricing. Several readers have suggested the survey should include something that is more of an estimating test than a pricing survey. For example, a project that is simply one standard base cabinet with very detailed specifications and no wiggle room to vary the specs. We may try to include such a project in the future if readers think it will help them figure out the puzzle that continues to be pricing in the small shop.

To download the .PDF file of the Results Graphs, please click here.


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About the author
William Sampson

William Sampson is a lifelong woodworker, and he has been an advocate for small-scale entrepreneurs and lean manufacturing since the 1980s. He was the editor of Fine Woodworking magazine in the early 1990s and founded WoodshopBusiness magazine, which he eventually sold and merged with CabinetMaker magazine. He helped found the Cabinet Makers Association in 1998 and was its first executive director. Today, as editorial director of Woodworking Network and FDMC magazine he has more than 20 years experience covering the professional woodworking industry. His popular "In the Shop" tool reviews and videos appear monthly in FDMC.