The Only Pricing Formula You’ll Ever Need!

in today's video I'm going to show you how to never lose money again woodworking so we recently made a docking station documentary on how one of my products did over two and a half million dollars in sales and we've gotten tons of questions and comments of how we ended up with the price for that product and how much profit we've made from it so in today's video I'm going to go over all the different stages of how we price all of our products in my company and how you can apply them to your company as well so you never lose money again woodworking let's go thank you so the first step to make sure you never lose money woodworking is knowing what the minimum you can charge is in the first place and that's called a break even because why would you want to waste your time on a project you can't make money on anyways that's why I've made a formula this right here is the only formula that I've ever used for my business to sell my products and it's guaranteed me to never lose money and actually be profitable in my woodworking company what this formula entails is labor plus materials plus machine Cost Plus overhead plus fees equals break even and that is on a per unit basis starting with labor when I first started in my woodworking Journey it was just me charging for my time with whatever I wanted to make an hour and then as The Woodworking business grew I was able to hire one two three four five employees and that helped my business grow and now I have over 40 employees spread out across two companies check out friocoolers.com I've learned how to manage employees how to handle them how to leverage them it even have a little playful banter with them so let's go talk to one of them right now [Music] Brian's office now foreign [Music] you've been doing a damn good job here man and we decided to give you a raise really no not at all no I I was joking the entire time but you should have seen the look on your face so how we calculate labor is time times the wage equals labor now what is involved in time it's typically The Hours worked and when I calculate this time it's the hours worked at a normal Pace not a frantic Pace at a very normal Pace then I multiply that times a slack time potty breaks people tying their shoes people doing other things beside working on the thing they're supposed to be working on and trust me 25 is probably low but we like to do 25 slack time then you multiply that times the wage the wage is simple it's your hourly rate you're either charging for your time or you're paying somebody else times the unforeseen cost and that unforeseen cost is typically about 30 for most businesses what that 30 is is your holiday pay your breaks any of the time off all your taxes you have to pay because you employ people your taxes you're going to pay at the end of the year that's why we have that 30 there I've talked to a lot of people in the industry trust me it's 30 so that means if you are paying somebody ten dollars an hour they really cost thirteen dollars an hour because of that thirty percent so for the man stand it took us 45 minutes which is 0.75 hours to fully router sand stain and ship out that product our wage we were roughly paying is 14.60 an hour so that 1460 in wage is accounting for that 30 unforeseen cost because these were W-2 employees that I had to pay taxes on stuff like that so that's why it's 14.60 though our hourly rate per employee was actually lower than that it was around 12 an hour something like that and with all of that accounting for the labor on the man stand is 11 and next is materials [Music] so this is the material right here that we use to make the man stand and it's very important to calculate your material cost and any project that you're making whether it's plywood hardwood you're using a lot of epoxy it's very important that you get those costs and know them now what's not important and something I would not stress over is like the cost of sandpaper or the cost of glue or sometimes even the cost to stain to stain some of these products those costs are so minimal it's more important for you to focus on these material costs and know them and work on getting them lower because for instance this thing right here used to cost me like thirty dollars a sheet and now you can't find it for under a hundred dollars a sheet crazy so it's more important to know how to Source material and keep that price consistent than really worrying about the cost of sandpaper and the cost of like Rags or something like that so the material cost is a relatively simple calculation it's just your cost of materials divided by the units produced from those materials so at the time we were paying thirty dollars for a sheet of plywood and we were able to produce 20 units from that sheet of plywood so material cost for that was just one dollar fifty cents per unit now this is a known cost because we already had the materials if you're ever quoting a job and you don't know exactly what that material cost is going to be I personally like to go 30 over on the material cost and some people even like to put a buffer in there because they're going to mess some stuff up or it's not going to be perfect wood Etc but I was using plywood that was perfect every time so I didn't have to have that cost buffer included in my material cost and after materials we got machine cost [Music] so whenever we talk about machine time it's the time you're using these bigger machines right here behind me because they have a high cost so therefore their hourly rate is really hot I'm not talking about stuff like this the sander technically is a very minimal cost so you're not going to have to like calculate how much it costs to use this sander right in business we call these Capital assets so you want to look at like your cost of your Capital assets so if you have a two thousand dollar CNC that would be considered a machine that you want to calculate machine time on but anything that's minimal don't worry about it it's not that necessary and so if you're just using hand tools don't have to worry about machine time but if you do have bigger machines like this a thousand dollars and up I would worry about calculating machine costs because they do have a value and you do have to buy these they do break down they do have repairs and they do consume a lot of electricity and the interesting thing about my shop since I have so many machines and they're so expensive that a lot of my product cost is in machine time now it wasn't back in the day but it is now and so I know that if these machines are running and producing product I know that the company is going to be making money and if they're sitting idle like this right now in the middle of a work day I might not be making as much money as I should be because I have so much of my costs based on these machines producing product for my company the formula for this is a little bit weird and it gets more complicated the bigger you get so let's go check it out this right here is the easiest way to calculate machine cost so you take the present value so what you bought it for you add what you think it's going to cost to replace that machine then you divide that by the useful hours you think you can use that my CNC machine I'm estimating that it's going to work for five years and I'm going to use it 2 000 hours per year so that's going to be a total of 10 000 hours right there you add those two up divided by that and you multiply it over here I like to add a little percentage for wear and tear and repairs now you don't have to worry about bit cost or if a belt ever breaks or anything ever breaks on your machine you can replace it because you're already factoring that into your hourly rate after producing the docking station and since we can produce six and a half docking stations an hour the actual machine cost is relatively low coming in at only 25 cents a docking station is our machine time so the next one that's super important is overhead so what is overhead well if you look behind me you got to make it somewhere and there's a cost to making all of those things and overhead is extremely hard to calculate because depending on what business you're in or where you're at in life or where you're at and what stage of your business it's all going to be very dependent on how you calculate that overhead for instance if you're working in your garage right now you may have very low overhead compared to me which I'm working in this giant barn right here behind me when I first started out I was working in my parents horse barn that was very low overhead even though I did pay them rent I didn't look at stuff like taxes and insurance and stuff like that that also went into overhead overhead is a very complicated thing to calculate because everybody's situation is different but you just know that this right here is not free and you have to calculate the cost of all of this into each and every product that you have despite all the complexities of overhead and exactly what overhead is this is the formula that we used at the time to calculate our overhead per unit and what overhead is for the most part is all of your unforeseen costs a lot of times which is your insurance Insurance your property taxes for your electricity your rent sometimes your salaried employees if they're not on the shop floor your Administration all of that stuff comes into factor in your overhead so how we calculated it is we added up all that and divided it by the units we are making per month to figure out how much that overhead was costing us per unit super simple super easy but there are a thousand different ways to calculate it but make sure that you know that these costs should be included in the ending cost of your product because they do matter even though you do not regularly think about them you're typically only thinking about Labor and materials so for us since we're producing over 2 000 man stands a month our overhead was only five dollars and 25 cents per man stand and last but not least is those nasty fees so the next thing you got to think about is your fees for whatever platform you're selling on some of you may have zero fees some of you may just have credit card fees which the average credit card fee is about three and a half percent at the time I was on Etsy and they were charging around five percent fees now it's around 10 percent all in all for Etsy if you're selling on there so at the time for my docking station a five percent fee based off of my in-selling price was about two dollars so whenever you add all of these together our break-even costs to make and sell this product was twenty dollars so the question becomes if I was able to make this all in for twenty dollars how was I able to sell it for forty dollars plus shipping Let's go ask some of my employees I'm also ask some people some questions all right Miranda got a question for you why do you think we can charge 40 for the man stand when it only cost us twenty dollars to make so why do you think we can charge 40 because of the product and quality of what we put into it the man hours on it how much work it goes into it let me cutting it out on the CNC costs money um running on the small CNC to engrave it costs of money I take it because all the uh work that gets put into it Manpower profit you got to make profit off your off your items don't you good answer good answer so guys this is my wife right here um so Madeline why do you think we can charge 40 for the man stand when it only cost us 20 to produce it we have different options we offer different stain colors we also offer all the personalization aspects as well that a lot of other companies don't and it's just unique and it's a good gift there you have it folks so as you can tell there's lots of different answers of why you should charge what you charge so the long and short of it is all of them are correct there's never really a Rhyme or Reason for pricing the way you are I mean Robert was probably the most correct because you want to make money but there's a lot of different factors that go into pricing whether it's branding or Prestige all of these different things come into Factor when you're pricing but as long as you make sure you're not losing money you're always in the good now that I'm running a business and I want to grow this business I have to buy new equipment and I have like ups and downs and I have 40 employees I got to take care of for my pricing strategy alone I got to make sure I'm making 20 to 30 margin on everything I'm doing or it's not even worth looking at but if you're a hobbyist and you're just doing this for fun maybe you only need to make 10 margin to pay for you know the next piece of equipment you need or maybe you don't need to make anything at all because you're just doing this for fun that's okay but make sure you're not doing it and losing money and that's why Break Even is so important whatever your pricing strategy is just make sure you're above break even that's really all I have to say because you don't want to work really really hard and lose money at the end of the day I mean nobody wants to do that so make sure you cover all of your costs now for the docking station in particular I was just told by a guy whenever I was 19 years old hey you need to just double it and so that's what I did I was making that thing for twenty dollars I figured out all my costs I literally have spreadsheets and spreadsheets and papers and papers of like how that cost is broken down like down to the penny I just doubled the price of it ended up being like 40 bucks now I tried 60 at one point just to see if I can do it and I sold almost nothing compared to what I was doing at forty dollars and then I wondered could I sell more at thirty dollars and so I moved it down to thirty dollars and I realized that I actually sold more at the 40 price point than I did at 30 and then I did at 60. so I figured 40 was a happy medium so that's the price I kept it at as my business evolved I got more sophisticated and now I got my pricing down to a pretty good pricing structure but depending on the business you're in like apple I mean they have put like 90 margins on it is there a reason why well probably because I have a monopoly on it in Android really can't compete but that's a different story so just make sure that you're charging what you think you should charge what margin you want depending on where you are in your business where you're at in life just make sure you never lose money because that's what we're here to do not lose money have fun Woodworking and grow your business so thank you guys for watching this video do not forget to like And subscribe we're trying to get to 100 000 subscribers by the end of the year by December 31st 2023 and if you're watching this video in 2024 and we haven't hit that Mark definitely be sure to like And subscribe and if we have hit it also like And subscribe it's totally helpful and it helps our Channel tremendously I hope this video left you with more knowledge than when you started thank you so much for supporting us and remember if you ain't cutting it close you ain't cutting it right [Music] that better be bloopers because that was not planned what the actual

Channel: Cutting It Close

Views: 203,630

Keywords: how to price woodworking projects, what to sell woodworking projects for, woodworking projects, woodworking, wood, woodworker, cutting it close, cuttin it close, cicworkshop, carpentry, wood business, entrepreneur, woodworking projects that sell, industry secret pricing formula, pricing formula, pricing, formula, make money woodworking, Ryan Drapela, Drapela Works, John Malecki, Black Tail, Matthew Peach, 731 woodworks, cnc router, woodworking beginner, cnc woodworking, manstand

Id: mxwggzhe_hs

Length: 13min 55sec (835 seconds)

Published: Sun Jul 16 2023