The most common question on industry forums and groups has always been, “How much should I charge for XX?” Am I charging too much? Am I leaving money on the table?
It’s a hot-button topic that usually ends with people yelling at each other over rates per square foot, material markups, and shop rates. My past research tends to agree with me — pricing your work can be difficult, but it isn’t rocket science.
Do the work upfront
Start with your desired profit
Profitable sign pricing starts with profit. As the owner, you should be taking home the profits from the business operations and a salary if you’re acting as a key employee (a lot of shop owners are).
- Dig up your past 12 months’ sales, net profits, and profit margin.
- Decide on your sales and profit targets for the next 12 months.*
*Note that this needs to be realistic. If you did $200k in sales last year, it’s unlikely you’ll do $1 million in sales this year.
Calculate your shop rate
Your shop rate is the foundation for ensuring you’re hitting that profit target. Here’s how to calculate it:
- Pull your profit and loss statement from your accounting software and total up your annual overhead expenses.
- Calculate your billable hours per day by adding together the ‘productive’ time for each employee involved in actually producing the finished product. Do not include sales reps, office staff, admins, or others that don’t actually produce signs here.
- Calculate your total billable hours per year by multiplying the number of working days per year by the number of billable hours per day.
(Annual overhead + Desired profit) / Billable hours per year
Add these up for each quote
This bit comes pretty naturally to all of us. Calculate how much of each material you’re using and how much that material costs you, then apply a markup.
Material costs x Markup
Regarding material wastage, if you don’t have a quote or order management system that calculates waste for you, it’s best to keep it simple and use a simple multiplier. Try starting with a 10-20% increase and tweaking from there.
I’ve worked with many shop owners that put too much value on materials and not enough value on their time to produce a job. The biggest cost center in almost every job is your time, not materials. Calculate how long it will take you to complete the job and multiply that by your shop rate from above.
Hours needed to complete job x Shop hourly rate
Err on the side of overestimating your time to produce a job because, as humans, we’re generally terrible about estimating how long something will take. For example, if you think it will take two hours, pad that by at least 30 minutes.
The job complexity
In an industry where every job is custom, pricing is both science and art. So you need to factor the differences between each job into your quote. I like to account for complexity as a multiplier.
Subtotal x Complexity multiplier
Is the customer picky about color? Multiply the subtotal by 1.20 to account for the extra time and test prints.
Super simple job for a budget-conscious customer that provides good art? Drop the complexity multiplier back to 0.90 to be a little more friendly on price.
And lastly, don’t forget to include sales commissions in your price quote. Many owners that don’t currently have commissioned sales reps forget to include them in pricing. They end up shooting themselves in the foot when they do hire a rep because that commission ends up coming out of their profits.
This simple example shows how much you lose by not including sales commissions in your price:
|Commission not included
|$1000 + 10% ($100) = $1100 Price
|– $300 Cost
|– $300 Cost
|– 10% ($100) Commission
|– 10% ($100) Commission
The business (you) shouldn’t be making less profit just because a sales rep sold the job.
Add them all up, and you’ve got your price for a project. Follow the steps above, and you’ll be well on your way to ensuring that every quote you email to customers is profitable for your shop.