Determining pricing
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Finding a balance between fair and greedy pricing. June 5, 2002
Q.
We are a small manufacturing firm that does all types of millwork from flooring, moldings, trim and paneling to restoration projects, etc. We do all of our own marketing. Are there any particular profit margins you want to attain after materials costs?
Forum Responses
How long have you been doing all you currently do?
From the original questioner:
About 1 1/2 years. We are trying to find a balance for a fair price vs. a greedy price.
Best way I know of is seeing what's out there in your area. Take a job you have already done. You know what your costs on this job were. Give it to a friend or relative and have them shop it around. This is done a lot in my area. It gets done to me several times a year, and I in turn do the same. Get three if you can. Don't just raise or lower your prices to meet or beat them. Keep in mind your overhead. And sometimes, especially in today's market, it's not charging more that reaps you the profits. It's doing the same work in less time, without giving up quality that will make the money. I try for 10-15% above my overhead. If it feels like a greedy price, then it most likely is.
You want to charge as much as the market will bear. At the same time, you want to charge little enough that you attract new customers. I think in the end you want to make new customers by giving deals and keep old customers by giving them deals, too. But most people in the construction business are less concerned with cost and more concerned with on-time delivery, consistent products or service, willingness to make something work, maybe some freebees or marginal material thrown in at no charge, standing by your word and schedule and charging enough so you will be in business next week. I see many small businesses learn too late how much being self-employed costs or having a small business costs and way undercharge. Most of the time when you have, say, a 50% profit margin, you think that is a lot. After you consider health insurance, truck, tools, maintenance, down days, sick days, accounting, taxes, insurance, losses, delays, bad debt, rainy days… you aren't making much at all. Don't feel greedy. It's hard work and you need to get paid for it.
1 1/2 years is not long. Over the years we have established formulas for producing moldings that are competitive yet can make money. I agree that good service and fair pricing will earn customers for life. However, I also think the stigma of being too high priced can be just as detrimental as being too low. The customer may use you for a while, but when they think you have treated them unfairly they won't come back. You do need to know your realistic costs of doing business.
From the original questioner:
Knowing what to charge in different geographic markets based on a raw product (wood) that changes daily is a nightmare in pricing, not to mention what type of profile you may be running (flooring, moldings, trim, paneling, etc.)
We charge more per foot of lumber than any other mill within 100 miles, but we give the best service, also. We get the order done right in the time we say we can and many times quicker. Not that we don't stub our toes now and then, but it is our top priority to get the customer what they want when they want it.
I have given bargains to customers, but I can not remember them being happy about that the next time they came back. They wanted to know why the price went up. When we give especially good service, we hear about it from other people who heard about us by word of mouth. When anyone tells me they can buy it cheaper at a competitor's, I simply reply that they know the quality of their lumber and price accordingly. We are selling more than lumber. We do not want to be in the commodities market. Profit is not a dirty word. If you are priced too high, your lack of customers will let you know.
The above response is a breath of fresh air in the wood manufacturing industry. I would like to use it in my value-added seminars as support for the approach that I teach! (A survey by Virginia Tech showed 83% of the buyers of hardwood lumber looked at quality and delivery before price. You can bet that the other 17% are the ones that complain when nothing is wrong - nitpicking penny pinchers?)
I am preparing a document that was commissioned by Wood Mizer on value-added, including sawmilling, drying and subsequent manufacturing of S4S, flooring, molding, etc.
Gene Wengert, forum technical advisor
