Aside from having pricing worries and understanding your goals and costs, you must determine which pricing method is best for you. In addition to the keystone pricing method, the time-and-materials method, as well as the price-to-market method are two options to keep in mind.
Time and materials billing has long been used in the commercial construction industry. It represents an agreement between the customer or end user and the company producing the product. In the apparel business, it’s typically used for larger custom jobs when you are unsure what the end price should be. For jobs with so many variables, it makes sense to protect yourself from doing too much work for too little.
For example, you might choose to use a time-and-materials approach to price 100 high-end leather jackets with multiple unique placements, or perhaps 5000 custom polos whereby you don’t yet how big the design will be or all your costs for the job.
Business Tip: If you have no idea whatsoever of the final costs for a specific type of job, try a time-and-materials approach.
As the shop owner, you’ll negotiate with your customer for them to pay for all the materials and cost of goods used in the making of the product. Also, they pay for the time it takes to produce the job. Sometimes there is an additional agreed upon markup for profit margin added. However, often all the fixed costs and the profit is included in the per-hour price for the work. For instance, say your fixed costs are $1,450 per month and your shop is open for 40 hours a week. That works out to about 173 hours per month or $8.38 per hour for fixed expenses.
Using this time-and-materials approach, you may decide that you intend to make $25 per hour for your pay, plus another $7 per hour in profit for future business growth.
The fixed costs added to your pay plus your profits is $8.38 + 25 + 7 = $40.38 per hour. This figure then becomes the agreed to per-hour price for your work, not including the costs. You can see how adding an extra head or two or four to your production can help your per-hour profits skyrocket.
Drawbacks to time-and-materials
This method ensures that you get the pay you deserve for the work you do. In the case of a complex or a very large job, it makes sure you get paid enough. It also makes sure you don’t pay too high a price for not estimating embroidery cost correctly.
However, every hour the machines are not busy reduces your amount of pay per hour. So, you must balance your need to get paid and what you’re worth against keeping the machines busy. If the machines aren’t busy, then you are paying for the fixed costs out of your pocket. It’s always better to keep your machines moving. It’s possible to win the battle by having the “highest price in town” but lose the war when the bills come in at the end of the month.
To keep your hourly rate to a maximum, you need high-profit work. But keeping your machines busy is the way to keep all those high profits you earn on the jobs you do.
Price-to-market method | working locally
It’s always recommended to know your costs and to make a considerable effort to add up all the costs that go into the work you are getting paid to do. However, in the beginning, it can be a daunting task. This can often be a sticking point. So, another method that works very well is pricing to the market.
There are all sorts of complicated ways to gather data, and you can spend a ridiculous amount of time trying to examine every possible market influence in your local area, but the best way to get a snapshot of what the market will bear is to simply walk in and politely talk with others in your industry. If you don’t feel comfortable meeting other business owners in your town, make a trip just outside your area and meet others who do what you do.
Business Tip: The most successful shops often have great attitudes about helping others or occasionally subcontracting when they have too much work.
Ask your customers. The people who will be paying for your work are often already educated about what they are willing to pay for embroidery prices.
Pricing to market can be as simple as asking for price lists just outside your area and asking your potential customers what the going rates for various jobs are. If another business remains successful, chances are they are already charging a price that sustains their business. So, it’s a fair assumption that with the same equipment and suppliers, your business can succeed at those prices as well.
Get what you’re worth
It’s sometimes an uphill battle to get an existing customer to agree to pay a higher price for items or jobs they have bought for many years. When in doubt, there is nothing wrong with using the going rates for work in your area as a starting point. Show and tell your customer how they’ve been getting a great price all along and be prepared to talk about how your costs have increased, etc.
However, keep your eyes open for an opportunity to add value to your offerings. Perhaps you are the only company in town that will individually bag and invoice your work. To the right customer, (frazzled PTA moms, other business owners, etc.) that kind of service is well worth the higher price.
It’s important that you only compare prices with other companies in your area that offer the same level of service and product as you do. For instance, if you consistently provide a more expensive type of T-shirt than the normal for your area, then it’s important to make sure you price according to the extra value that you bring to the local market.
Pricing on a per-thousand-stitches basis
It has long been a standard in the embroidery industry to price jobs on a per-thousand-stitches basis.
I have witnessed some fierce online discussions about the question of what the right price per thousand is. Industry software has been designed to help and can calculate literally every single meter of thread that goes into a specific job if you want to know that. The theories and calculations and arguments can get quite intense. How much of my fixed costs go into each stitch anyway? Are all stitches considered equal? Does each machine produce the same results? What about if I have a four-head or six-head machine when another business only has a single-head? Should I then charge less? On and on the questions go….
To begin with, it is very hard if not impossible for industry experts to guess up front from a picture how many thousand stitches a design will end up with.
Business Tip: It’s not unusual for experts to be off by 15-20 percent or more from the actual count when the job is finished.
Also, keep in mind that some jobs and designs cause more problems than others. Sometimes a design looks so simple to the customer, but it can represent a very large amount of time spent on an embroidery machine. Sometimes a design has a low stitch count, but it’s on a material that causes thread breaks four or five times more often than other fabrics. These issues are hard to judge upfront.
Pricing per-thousand stitches can leave your customer feeling like their price is always a moving target. It also doesn’t give you an effective way to differentiate yourself or make your work unique. Customers looking for the lowest cost per thousand will often leave you for someone with a lower cost.
However, if this method is your go-to method, it’s important to realize is that the per-thousand-stitches method is essentially a time-and-materials method. At its core, it’s an attempt to break down the overall fixed costs and variable cost and reduce them down to an amount you intend to get paid for every thousand stitches your machine produces.
The bottom line is to keep this method in perspective with your other methods and use it to compare one model to another. You may find that this method is most reliable for certain jobs (typical left-chest logos on polos) but lacking for other jobs.