|CWB June 2001
Taking a Profit
Now that you are confident of your tangible costs, how much should you charge for the intangibles?
By Anthony Noel
One of the more thought-provoking books I have ever read is called "Zen and the Art of Motorcycle Maintenance." Within the context of a cross-country motorcycle trip, author Robert M. Pirsig expertly weaves an examination of Quality (with a capital "Q"): What it is, how to recognize it, whether it can be taught and what it means.
Pirsig's treatise looks at Quality through philosophical eyes, yet manages to make it real, and our understanding of it important. So, in wrapping up our five-part series on becoming more profitable, I couldn't help thinking about Pirsig's book as I considered the subject at hand: Taking a profit on our work.
Thus far, we have looked quite thoroughly at how to account for, and factor into our pricing, costs such as direct labor, indirect labor and overhead. We have seen that by carefully tracking these costs and distributing them equitably across all the work that comes through the shop in a given year, we can be confident about covering our costs and payroll obligations.
Everything we have dealt with thus far has been tangible; these costs are real, generally easy to identify and account for, and relatively simple to justify. But that is not the case with profit. Profit is in many ways the ultimate intangible. Deciding how much of a profit to take is nothing less than the practice of putting a price on Quality, the same Quality Pirsig speaks of in such lofty terms in his book.
Nothing I say here will point you toward a definitive answer about exactly how much profit to factor into your pricing. Though I suppose there are some who assign the same profit margin to every job they do, I don't subscribe to that approach. I believe the job itself, along with a few other key factors, plays a large a role in determining the margin. I have described these factors below, and as you look at them, remember: The more consideration you give each one, the better you will feel about the percentage you finally decide to charge on any given job.
* Type of job: It all starts here, and the reason is simple: You simply can't expect the same profit in, say, a public-sector, competitive-bid situation that you would on a job for a private, high-end residence.
Similarly, you can take a bigger profit on a private job for which you have been recommended by a satisfied customer than you would on another private job, where the client saw your ad in the newspaper or phone book. Once you have impressed this customer and he is recommending you to friends, you can ratchet up your margin a bit.
* Size of job: I am a firm believer that the bigger the job - the longer it's ensuring that your shop is busy - the lower your margin should be. Call it a reward for the customer, in appreciation for his trust and confidence in you, and for the high visibility that is often part and parcel with big projects. These factors will repay you tenfold in future referrals.
* Shop capabilities: Even when you have been recommended by a satisfied client - public, private or whatever - bear in mind that you might still be in a competitive bid situation. (Even if you are not, such thinking keeps you from getting too greedy.)
If you are competing against other shops, your knowledge of how your capabilities stack up against others in your area for this particular type of job can be priceless. Don't think only in terms of how up-to-date your equipment is. Equally important is the technical expertise of your people. If you know that you can get the work done more efficiently, be a little bolder in factoring in your profit. If not, pull back a bit to be assured that you will be in the running when comparisons are made.
* Turnaround time: This is a biggie, and one that is too often overlooked. When someone approaches you with a tight-deadline job that "we really want you to do," one of your first questions should be, "Are you really willing to pay for it?"
Of course, how hard you push that button has much to do with how busy you already are. But assuming you are not starved for work, quick-turnaround jobs are - and should be contracted as - excellent opportunities to make a good profit.
For those who feel that this constitutes taking unfair advantage of the customer, remember three things: First, I do not advocate gouging anyone. Second, consider the disruption that a quick turnaround job generally wreaks on your production schedule. And finally, one of my favorite truisms: "A lack of planning on your (the customer's) part does not constitute an emergency on my (the woodworker's) part."
It is fine for somebody to want something quickly, but only if he is willing to pay for the chaos it causes.
* Design involvement: This is one that you sort of need to develop a sixth sense about, and that only comes from experience. But train yourself to recognize jobs where the design is nebulous at best and on which you will be making serious contributions to the final aesthetic.
What you are striving to learn is how to recognize when a design is not as finalized as the client might like you to think it is. Once you become attuned to such situations, you will smell them a mile away (sometimes even during the initial phone call). You should price your work to allow for the input you will contribute. And don't be afraid, if your price is questioned, to tell the client why (tactfully, of course): "It looks like you are counting on me to resolve a lot of the design issues on this, and that takes time."
* Market: This is somewhat related to the already-covered "Type of job," but it goes deeper. After all, even public-sector, competitive bid jobs can have a wild degree of variance in terms of specifications. What we are talking about here is understanding that.
I'm saying that a high-end job in a middle-class neighborhood is very different from one in a neighborhood where homes start in the seven figures. So know your market, and charge what it will bear.
* Economic conditions: Just as a lack of planning on the customer's part does not constitute an emergency on your part, a sluggish economy is not your doing. But that is where the similarity ends. In difficult economic times, people expect to pay less for everything than they do in robust economies. My guiding principle for margins during difficult times is this: "They are doing this job in tough times, and they are helping to keep you busy in the bargain. Cut 'em some slack."
* Quality of the work: And so we come to the biggest intangible of all. How do you put a price on your quality, compare your quality and justify your conclusions?
Put simply, you don't. The best advice here is to sell quality from the very start. This practice alone will save you untold hours of pricing work for people who can't afford you. Which is not to suggest you should be pompous or condescending - remember, these people may one day be potential customers. But if you are forthright in telling people about the high priority you place on quality, from the selection of materials to cleaning up thoroughly after your work is installed, they will often sense that you may be out of their price range.
Similarly, regular chanting of these same mantras will help you find your niche. And careful consideration of all the foregoing will help you determine how profitable that niche might be.
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