When selling your wood projects, what you charge for your final product is an important aspect of your woodworking business. If your prices are too high, you will lose customers, but if your prices are too low you risk the ability of having a profitable business that will provide you with the necessary income. This is a challenge that faces many woodworkers when starting a new woodworking business.
A good formula for determining a good price point for any specific product is to calculate the costs of materials, shop supplies, shop expenses and any subcontractor fees.
The total of these expenses is multiplied by whatever number that gives you a product price that is equal to your anticipated profit and your costs combined. Although this is pretty basic, it can be a little tricky.
Here’s a simple way to calculate all of the cost factors involved.
First, base your material costs on the price of the wood used and add 15% for waste. Add in any cost of fasteners, hardware and shop supplies like sandpaper, thinners, solvents, etc.
The next step is to come up with an overall hourly rate for your shop. The best way to do this is to combine your shop expenses with what you want to charge for your own time and labor.
Start by calculating all your woodworking business shop expenses like rent or mortgage, utilities, machinery maintenance, advertising and any other shop related costs. The easiest way to come up with an hourly figure for your own time is to determine how much you would be earning if you worked for somebody else.
An average month has 4.33 weeks, and if you plan on a 40 hour week that comes out to about 175 hours a month. Add up all of your shop expenses and divide that total by 175. Now take that number and add it to what you want to charge for personal labor and you now have your shop’s hourly rate.
You now have a basic outline of how to calculate prices for any of your products. Here is a simple example:
Let’s keep the numbers simple and assume that your shop expenses are $875.00 each month. That would come out to $5.00 an hour for a 175 hour month.
Now add you’re your personal labor charge. Let’s use $20.00/hour for this example.
So the shop’s hourly labor rate would be:
$5.00 + $20.00 = $25.00
The materials for this project cost $300.00 and the time spent was 30 hours. Your price for the project should be:
($25.00 x 30) + $300.00 = $1050.00
At this point, you need to determine whether or not you are going to add in any amount for your profit margin. This is important to any woodworking business and should be added. The industry standard is 15%.
For this example the profit margin would be 15% of $1050.00 or $157.50 and you would add this to come up with a final price.
$1050.00 + 157.50 = $1207.50 Final Price
This is a pretty basic approach to calculating product costs based on your overall expenses and it is effective. Of course, if your expenses are very low your prices will also be lower and more affordable. On the other hand, high expenses have the opposite effect. A good reputation is very important to your woodworking business, so be fair and give good quality for the money.