This issue marks the 12th time we've run the Small Shop Pricing Survey, but after a dozen years, I'm still not sure that shop owners really get the message. The survey always prompts discussion and head shaking. How can those prices be so different and cover such a wide range? How can that guy with the low price possibly do that job for that? How can that guy with the high price expect to sell that job for that kind of money?

All the questions and discussions point to three key pricing streams that all need to be part of any shop's pricing equation. But a surprising number of shops leave out one or more of these elements. Let's look at all three.

Costing

The first step in pricing a job is costing.  This is the fundamental process of determining what it will actually cost you to do the work. Costing requires good record keeping and updating so that you know you are working with current numbers for the cost of your materials and labor. It also requires delving deep into your overhead costs to make sure you are not leaving something out that will cut into your profit margin.

Costing is the way a lot of shop owners look at pricing work, and it is essential. Without good costing, you have no idea if you can make a profit on a job. But there are other factors affecting what you can charge for work that have nothing to do with your costs.

Pricing

Market forces are a major factor in determining what you can charge for work.  It is not uncommon in today's market to find customers who aren't willing to pay what you need to charge just to cover your costs. Frequently these are customers who don't understand the difference between quality custom work and the cabinets or furniture they can pick up at a discount store.

There's also pressure at many shops to price jobs quickly. That leads to popular strategies such as pricing by the linear foot, even if costs haven't been accurately and recently figured into the equation.

Shops have to cost jobs first to determine what they need to make, but then they need to price the job for what they can get in the marketplace. Market forces may have no relation to what it costs you to do a job. And those same market forces are just as likely to hurt or help you in adding to your bottom line. Fear of market pressure is what leads too many shops to underprice work. That's because they don't have a solid grasp of the third piece of the pricing puzzle.

Value

It is essential that you learn the truth that value has nothing to do with cost. Value is what is seen in the customer's eyes. Perceived value is what makes the new fashion essential and expensive while the old fashion is cheap and unwanted. It is also essential that you learn that what you value in your work may not be what your customer values or why your customer buys.

If you value craftsmanship, but don't take the time to educate your customer about that value, the customer likely won't see it. This especially is true because the typical customer is making a decision based more on style, lifestyle and personal motivation unrelated to any work method.

Perceived value can be the most powerful tool in your shop when it comes to building profit. Cost first, price second, but always respond to and build perceived value. Then you'll get the most return on your work.