Material costs can reasonably be well established as long as they are calculated by the job and allow for waste. While labor costs can be readily seen as a percentage of sales over a given period, knowing those costs specifically by the job is somewhat more daunting. Knowing the labor costs prior to pricing the job is where the problem lies. To make things worse it must also be ascertained as to what percentage of sales our overhead is.
Once we know all that, we can decide how much profit we wish to make only to find that the customer does not want to pay the price asked.
Old formulas don't work
Historically I am talking several decades ago pricing used to follow the rule of a third for material, a third for labor and a third for profit. This profit, being gross profit, is comprised of both overhead costs and profit. The benefit of such a ratio between the various cost factors is that it provides us with a benchmark as to what our industry is doing.
For reasons of computerization, automation and others, this formulation no longer applies, but needs to be updated. Another reason is that our market is far more complex than several decades ago. The question then becomes: Can we establish benchmarks for our market today taking into account this new paradigm?
Today's pricing paradigm
To go back to our initial statement as to how to price, let us be cognizant of the fact that the price for goods sold is a reflection of the perceived value the customer has of the goods. The cost to provide this value is ours, and it is real. As such, the relationship between cost and price is purely based on perceptions and not on anything "real." This, in essence, is the difficulty in establishing a price for many goods sold in today's marketplace.
My experience with the custom cabinet industry is such that many of you sell yourselves short by not understanding this new paradigm. The selection of what to sell and to whom to sell it is the determination to be made for a successful business. To decide what value the customer is looking for is the task to be undertaken.
In addition to the above, the costs of each custom job must be known, if not before then certainly after the event, so that these costs can be examined. It is not good enough, even if the effort seams futile and described as "water under the bridge," to avoid checking the costs of work done. The learning from such a task is of great value for the continuous health of any business.
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