The Only Pricing Formula You’ll Ever Need!
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- Опубликовано: 8 июн 2024
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Learn how to price your projects! We dive into the equation to never lose money in woodworking and reveal the method behind pricing our projects. By combining labor, materials, machine time, overhead, and fees, we explore the crucial concept of breaking even. Discover the secrets to accurately calculating costs and setting prices that ensure profitability. Don't miss out on this essential knowledge for woodworkers looking to thrive in their craft and build a sustainable business.
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Let me know what other videos or topics you would like us to cover for you!
Brilliant video, I'm starting my own small woodworking business in Ireland, using recycled wood and my DIY CNC. Personally id love to see the marketing side such as making the etsy ad and that sort of thing.
Any advice you have for tracking all these numbers? Especially costs that change and shift like overhead and the different price points you were trying, and the factors that can change costs. And anything you've found to be helpful in decision making after you've tracked the numbers. Maybe too nitty gritty for a video but I'm a bit lost about making a comprehensible history of costs and sales that can be useful for growth.
Thanks for being so transparent. You're a great source of both education and inspiration. Would love to see you do a video on what goes into shop maintenance and especially curious about material waste. What do you do with all of your wood scraps and sawdust. You must produce a ton of sawdust. Where does it all go!?!
Hey Dude! Love these videos. I think a major problem in the wood working community is marketing. A lot of the older dudes (also younger dudes) have a lot of good stuff to sell, but they give up because they don't know how to brand or market themselves. Would love to see a video on marketing wood working products!
Would it be possible to make a video where you calculate the breakeven cost for an item that is a "one off" for a customer? When you made your first Man Stand, did you utilize this very same formula, or did you have a different approach to calculating the break-even cost back then?
This is probably the only video on breaking down pricing woodworking project I had ever watched and made accounting sense. Thanks for sharing your hardworking pricing model. I truly appreciate it!
Glad it was helpful!
In a world of rambling explanations and "magic" results, you've cut through the clutter and given an excellent explanation using facts and math.
As an old friend used to say "If you can't put a number on it, it's B.S."
Great Job!
Every product has a perceived value. If $40 is accepted by customers and the production cost of the product is $20, then it's not a problem. The margin is then 100%. This sounds like a lot, but it is necessary to cover growth, innovation, unsold products and ultimately net profit. Running a business requires taking significant risks and investing time and money. The net profit should cover this and is the reward for it all.
Also need to cover possible recalls or warranty issues, not cheap if there is a problem you didnt find before shipping
One of the best, most accurate, most honest videos to the business side of this industry. Well done.
Thank you!
Man, little bro- thanks so much for letting us all into your shop, head, life, and beezwax! That was so helpful to so many - this will get to viral. Oh and very well done. (But skip the light color markers.)
Realized it after we filmed that the markers were light and I couldn’t get a another take in time. Thanks for the comment, much appreciated!!
My favorite video you've made so far. If people want to sell stuff and actually make a living from it, this stuff is vital. Hoping and "working hard" isn't good enough.
Double your cost is quite common and sensible if you're selling it on your own (assuming the market is willing to pay, but if it isn't, you should really look for another product to sell). If your item is sold in large chains around the country/world, your costs need to be about 10% of what the end user pays at the store as there are so many middle men that take their cut.
But really in the end the price is what the market will bear. If you can't sell for more than 4% of breaking even, no amount of sweat or tears will make the same product sell more (yes, marketing etc but you get the idea). But if you're really lucky and you can sell a 10 dollar cost per product for 457 dollars then you're most likely going to do that. Not saying it's fair, but that's just what tends to happen, especially with posh brands that have an image where if they sell you garbage with their logo on it, people will throw 10k at it. I literally yesterday heard Dior is selling an old Finnish summer party game called Mölkky at 1000 euros when you can get that same wooden block game at 10 euros. But chances are, you're not a hot big name brand that's worth over a billion dollars so double your costs per unit is a reasonable goal so you can keep growing your business. 2% profit will take a long time to pay for that 100k CNC you're eyeing.
I’m basically a hobbyist that makes a few bucks here and there. This is the best advice I have heard about pricing your product. 👍
One of the undergraduate classes I teach is Managerial Accounting. I am going to assign watching this video to my students. While there are some things I would say differently, on the whole this is very informative and helpful.
One thing people need to know is that being a skilled woodworker and running a woodworking business are two completely different animals. The skills needed to run the business will not be developed in the shop.
Thanks for posting a very practical set of information.
Glad it was helpful!
This is incredible helpful. Thank you for your transparency and willingness to teach others.
It always amazes me how wise you are for such a young man and how easy you make it all sound - keep doing what you do!!!
Best explanation on RUclips on price breakdown for a tangible product. Appreciate you taking the time to share this with us. Helps you know if your breaking even (wasting time) or being profitable. At the end the day its all about growth and creating new opportunities. Keep cutting it CLOSE! lol
Wow, that was one of the most real videos i have seen in a long time!! Actually does what it says on the tin and not taking you off to a website to download another pile of bs before you get even close to what you are looking for!! Very good video and very helpful to a lot of people 🤙👍
This is a great video! I'm just starting out, so knowing what I'm getting myself into and how to price things is hugely helpful! Thank you so much for your clear explanation!
Brilliant breakdown of how to cost things and remembering that your own time isn't free when starting off on your own loved your formula's no nonsense nice and simply put and transferable to any business or venture.
Of all the videos I watch, this is the first channel that I have subscribed to. Information I need and understand, you don't bore us with unneeded mundane details and you keep the video moving. I will check out the other vids as I go along. If you haven't done it already, keeping production aligned with documentation and coordination of shipping labeling etc.
I appreciate that!
Once again!.. so much valuable information! Broken down in the "real".. I appreciate you.
I subscribed, because of the value added in the video. Thank you! The breakdown was really interesting, informative, and overall eye opening.
Bin looking for a cnc machine to work from home and after watching you you have given me the kick up the ass to start my new business and given up landscaping, then I can look at my so called brother inlaw and look at him like shit like he does to me ,he's got money and he thinks he can run all over me but not now I'll have the last laugh, thanks again you deserve to be were you are through working hard ,respect from uk
Thank you for giving and explaining details.
Good video, great breakdown of costs. Seen a lot of these lately and yours was definitely one of the better ones particularly with how you approach costs most people don't consider. I actually tried your formula and it wasn't far off from the costing calculations I do(mine was a tad higher for sale price) but for anyone looking to not loose their shirt your formula is aces. Keep up the good work!
Glad you enjoyed!
I will say, I was expecting (don’t ask me why) a very bad video on calculating this stuff. I’m actually impressed and think you did a really great job explaining this and calculating your costs. Very well done!
I am that hobby woodworker that you speak of. Mostly I make gifts for friends and family. Stainless steel coffee mugs, cutting boards, walking sticks and canes for veterans... I am also a retired postal employee so time is on my side. (Apologies to the Stones). Your videos are inspiring so I just subscribed. Keep it up. Oh, and thanks.
Extremely useful. Thank you.
Great information! Break even did leave out yours and probably others countless hours of planning, strategy, design, packaging, getting best pricing and so much more. My brothers and I spent countless hours on our box for packaging and even more on instructions. Like your employees, most will never image the hours behind just coming up with a product let alone manufacture and sales. BTW! I saved this for later, repeated, access at home.
Legend. This is great content! Thank you for sharing
Thanks for the informative videos as they are always educational. I haves a small woodworking business and the videos will definitely give me the knowledge that will help make my business successful.
That’s great to hear! Is there any topics you would like me to cover in the future?
I found that really insightful. Thank you for sharing!! Keep up the good work!
Glad you enjoyed it!
A little small business class applicable to nearly every business. Although the reason that thing was worth $40 is that people were willing to pay $40 for it. Ultimately it's the consumer that sets the price as you illustrated towards the end when you ran through your tests with pricing at different levels.
No, not in each and every case the price ultimately gets set by the consumer. Monopolies work a bit differently, in that case the seller can set the price - at least up to a certain point. But basically you're right of course.
@@j.h.4570 Even in a monopoly people have alternate uses for their resources and alternate ways to solve a problem.
Thanks for sharing your formula, I appreciate it.
My pleasure!
One word describes the video. EXCELLENT!
Great presentation. Thx for posting it.
Very good information! Thanks for sharing!
what a great story!
great video, awesome content. keep it up man. congrats
Another good primer there, Ryan
Actually when it comes to pricing I had two things in mind labour and machine cost but today you have just given me a pro tip. And as matter fact I don’t have a CNC yet coz I can’t afford it and it’s been three years now since I got know the CNC world, and I said men this is it and I meant it I never stoped you and many others and I know am gonna make it thanks to you Cutting it close, your story is amazing and it has always left me with no choice but to keep pushing till the day I buy a CNC machine.
I learned some of this the hard way: I charged only for materials on my first few jobs, just because I didn’t have a ton of confidence in my skills. I sold all my stuff (desks, noodle boards, blanket ladders, and the like) which should have been a clue that I was doing something right, and ended up short of my next project. Stupid me.
Very good thank you.
Very simple and useful, thanks.
You're welcome!
New subscriber here, this video was very insiteful as ive just started my own woodworking business with a recently aquired CNC. I found all of the contigencies very helpful and something i hadnt considered before. Keep up the good work mate, very inspiring 😊
Thank you for subscribing! is there anything else you would like to see?
This video was very helpful. Thanks
You're welcome!
Most the answers indicate the employees don't understand the price analysis themselves since they were mostly just listing factors you already accounted for in the $20 cost. "Profit"guy was right on. Also, setting price = double the cost is called keystoning and it's a pretty common way to do it.
A business man told me when I was a teenager, " if you can't double your money on it, it's probably not worth it "
@@forafreeamerica767I got the same advice from a mentor in the cabinet shop!
Great stuff guys...
I would love to have a video how you motivate yourself and the staff.
Seen so many businesses get burn out and lose their company to shareholder control
Nice explanation!
Thanks for the video! Your formula, ideas and advice can be applied towards any business including mine. Thank you sir.
Very welcome!
Great video for an MBA class!
Great vid bro
This is very helpful information thank you
Glad it was helpful!
Thank you, goog video
great job
I'm not sure why this came up on my feed, but its a great video!
Very good video. Good information to have.
Glad you think so!
This is a great video, thank you for this!
Glad you enjoyed it!
new subscriber. thanks for the tips etc..
Thanks for the sub!
Thanks for the helpful video. As far as being lucky goes I believe that luck is simply being prepared for the opportunity when it arrives. Congratulations on your success and thanks again.
I can remember making a really cool item with my cnc machine, but it required a lot of hand work afterwards to complete it.
I tried selling it on etsy and after quite some time, found that people just weren't looking to spend enough to make it worth my time.
As a bit of an artist, that was a blow, because it really was cool. People gave lots of compliments.
But that is the reality of business. I had probably over 100 ideas that friends gave. (free ideas is not a bad thing, so be careful about discouraging this). But what broke most of the "i wish something like this existed" ideas was asking "if it existed, how much would _you_ pay for it?"
Most of the ideas cost 2-3x to make vs what they'd be willing to buy them for.
Great video!
Thanks!
Excellent video. On the question of why you can charge 2x break-even, I think the best reason is the years of skills acquisition (on your part and your team) that let's you make it at that price. I sure wouldn't be able to do that!
My field is IT technical training and when I look at the cost of the training I've delivered through the years, it seems astonishing to me. But my students get the benefit of my nearly 30 years of expanding knowledge in the industry.
Yeah..Good One
So how/where do you account for marketing costs? And do you break that down between brand marketing and product marketing? Or do you not even have those expenses?
Don’t erase this video. I’m saving it to my favorites! 👍
Thank you for your vieo series. I might be wrong but I think that you might be under estimating your labor and overhead costs. As a practical matter, your wages are about half of what they need to be.
Your welcome and the cost was just an example of labor cost, not what is actually paid out.
Wonderful explanation, ❤ thank you much. FYI in time 6:45 whiteboard has written “Future Value” ... I like your oral description “Replacement Value” better.
Overhead should be devided dollars of income rather than units of product. This creates a factor that you then multiply buy a specific product cost. The net result of this factorization is that you have a percentage anchor to the value of the product.
To expand on your topic, what business accounting solutions do you use to keep track of all the expenses and earnings? I love your business model and I’m interested in what the most cost effective accounting system would be for a business similar to yours.
Why my whole life when I ask anyone who knows business they have always been an A** about this question then some guy I do not know from Adam is here on YT answering all my questions? I feel like I have been held back. Thank you for the video.
Do you always calculate per single item for cost? Seems your size Company wold base off cost / 1000. Or a multiple of your choosing.
Hey Dude, Just watched your videos on your startup, what sells, what doesn't, and this one. You seem like a pretty switched on young fella, and my take from this is I should make coasters (just kidding) bet your heart just sank for a second. I play around in the shed just for fun but your story is so cool hope other people who want to do something, whether with wood or any business see this. Best of luck to you and your employees, doing a great job, now have to see what all the guff was about with those coolers you kept dropping hints about, really who makes a RUclips video and puts in there own commercials.
Where can I learn about this topic more in depth?
Great video!! Do you markup the box to ship as well as the actual shipping cost? What about the labor to box and label?
Depending on how exact you want to calculate, you will also include those. Otherwise it reduces your margin. Actually you even do the same when calculating material costs that go into your product. Those should include shipping, handling etc that you had to pay when buying the material. There's even a special term for that, it's called procurement costs.
thanks for the advice@@j.h.4570
Let the next video about your imployees 😊
Hi, enjoyed the video, very informative. Just wanted to check with you about the numbers you put up on the screen. They appear to show that for that $2.8 mil you had to charge $68 a piece for them, not the $40 you posted, did I miss something in your numbers. Loved the video though.
So we did the 2.8 million and our average charge was $40 per product, some were engraved, some were not and we did over 50,000 of them, some were made in the larger shop so I did not include those numbers in the documentary because I didn’t really do them out of the small shop, it was at the larger shop.
What software does your company use to quote and invoice your customers?
New to the channel 🎉❤
Nice Video. For anyone who thinks that a company pays taxes, this is a good example of how the taxes a company pays are passed on to the consumer.
Hi, how and where do you sell. Do you have a website. How do you test what will sell. Do you separate the different things you sell or sell all from one site?
My problem atm is sales.
in case anyone took his labor formula verbatim as he wrote it on the board it is actually more like =PRODUCT(SUM(C3,PRODUCT(C3,L3)),SUM(D3,PRODUCT(D3,M3))) OR (Hours+(Hours x .25)) X (Time+(Time x .3))
For anyone who is complaining about him doubling his profit to help grow his business, just remember the pharmaceutical companies (especially when they sell in America) are often producing a product for around $3 to $50 a packet, and then selling it for anywhere from $600 to $3000.
Even though in that case it's not only about growing the business but also about keeping shareholders satisfied and interested. Eploit your employees, so some rich person can make a profit by doing next to nothing seems to be the creed some of those companies are run by ;-)
@@j.h.4570 But sadly employee exploitation is one of the key things that so many companies live by these days.
@klay5779 Unfortunately I can't argue about that
How do you guesstimate what a future replacement machine might cost? Is there a general percentage increase you would use?
Yeah I'm wondering the same thing
Excellent woodworking accounting video. You should do more like this.
Thanks, will do!
Great instruction and breakdown of the different costs associated with the production of an item. My only concern with this formula is that it is more tailored towards when you are producing an item or product on a regular basis, and in a large quantity. What if you are a small shop owner who makes a variety of items...signs, serving trays, plaques, tables, etc., and these are not made every month on a consistent basis? It will be a little difficult to calculate a price for these different items based on your formula. Reason being that the items made in a small workshop are "one off" items as such and are not being produced every month in large or a stipulated amount. Other than that, as I said earlier GREAT video, and I always look at what you are directing your time at as it has always been very helpful and insightful.
Thank you for the comment! My question back to that point is how do you know what you should charge for that item? All you have to really do is put this formula in a spreadsheet and take times when you work on that project, stick it in the formula and then you’ll have your breakeven. So if you make a sign and use a 2 board foot of maple, use the CNC for 20 minutes and it consumed 60 minutes of your time to make it, you should be able to quickly get that breakeven. And if you have a small shop, maybe you only do a couple bucks for overhead on every project you make. It should work for smaller shops, but you are correct, it works better for larger shops, but getting the correct times is extremely hard for larger shops.
@@cutting-it-close thanks for your reply. I already utilise a formula, and it seems to work pretty good. What I’ll do is to set yours out in a spread sheet and compare one formula to the other utilising the same measurements, time, etc., and see what the outcome is. Never the less, yours was a much better in-depth look at how to price your item than the one I have.
" What if you are a small shop owner who makes a variety of items...signs, serving trays, plaques, tables, etc., and these are not made every month on a consistent basis?"
If you are this guy, then you don't need a formula. These are common items. You need just go to a store or google and see what everyone else charges. That's the best you can do. Then run the formula to see if it pencils out. Can you make money?
you can try to make your product stand out. That's called "value adding". Personalization, unique patterns or wood, even promoting yourself as an artist. They are then buying a piece of you. You are not "selling" your work at the craft fair. You are "displaying" your work at a gallery. You don't have a "woodshop". You have a "studio". Create a back story about your ancestor Johnny Appleseed and how your stuff has bits of those very apple trees.
Profit is a balance between your costs and the value for the dollar for the customer. The restaurant model is to charge 3 times your cost to recoup materials, labor, and overhead. Sometimes you'll make a little less, sometimes more. There's no sure fire answer. Which is why retail always bothered me: employees get reprimanded for not making a sale when the door counter is the metric for those sales.
Very good man, thatnk you, I struggle with that. Now.... Give a raise to ur workers 😂
After I figure out the break even price like you did, I then think how much I need to make from it to be worth it for me and still enjoy making it. 🤷
That 30% markup number stuck with me for about 30 years.
Didn’t know what to think until I saw that A&M degree. TAGE
Thanks for this big picture view on producing products profitably, pal.
Any time!
Do you have a spreadsheet or other documentation that spells out your formula and breakdown?
cool
One conundrum I see is your slowest worker becomes your most profitable employee and your best/fastest is a burden. How do you incentivise quality work and efficiency?
For custom work or big jobs you would quote the work before you do it, then you have to make sure your labor stays within that quote, so quickness is still incentivized. On projects that get made over and over again, I have a standard time that we have to reach. If it takes 20 minutes to sand something and that is the cost I am charging the customer per product, and I have an employee that beats that standard let’s say 15 minutes. I can either charge less for the product, pay that employee more, or make more profit. A slower sanding time than the standard set would result in no employment. Small example, but I hope that explains it. Getting that standard time for mass produced products could be a video in itself, as well as, estimating/quoting.
More or less and besides slightly different terminilogy the same that I learnt in school in the mid 90s when I was like 17 or so. What you call "overhead" is actually called "common costs" but of course that's only different words. Depending on how big a company gets, it gets more difficult. And you might even start doing cost center accounting and all the other mumbo jumbo ;-)
Back then already we also used around 25% margin when calculating a price. After all you have to keep your business running and hopefully growing too.
Btw - what you explained at the end, when testing out your prices, more or less can be seen as market research. Once you have your cost per piece (unit cost accounting), you see if there are competitors and for how much they sell a similar product. Or do a poll, or simply test how far you can go. With a smaller business testing prices is less hard, imagine Budweiser going up and down with their prices - they would surely anger their consumers ;-)
What an insightful comment, thank you.
Great overview. Selling yourself in a job interview adds value = more $$. Yet under selling yourself means it just an unsatisfied job taking home a number/amount and living week by week.
Most start-up businesses price on... labour + materials and maybe a little power etc. Think about how you'd make money if you weren't applying margins to everything - basically you'll end up paying your workers without making any end of year profits to ensure you stay afloat because your income will be paying for uour workers leaving nothing for yourself
If your not adding margins and overheads as shown here and only charging for basic labour. You've brought yourself a non proffit hobby which certainly wont be making money. Therefore you'd be better of working for basic wages without the extra hassles of everchanging pricing, marketing, phones, machinery repairs, vehicle costs etc, etc.
Cheap pricing drives down woodworkers pricing to compete with one another, sensible businesses sell on value, Not price. In fact studies show customers see price for products sit around 7-8 out of 10 - (1 being cheapest & 10 meaning product purchase on value Not based price). I huge number of people get mixed up between cost of product and sellable value of product which allows them to continue and have a nice little profitable nest egg for when you need it, ie repairs, machinery replacement etc.
Schools really need to be teaching students basic things such as budgeting, profits etc. This sort of advice allows people to get onto the like of housing etc because they're of value rather than just another unsatisfied worker.
This video is one of the best examples I've seen. Unfortunately most people won't take this advice causing them to fail from their own destiny of low paid wages for the time and effort they put in.
I would love if you did an excell template 🙏🏻😜
thanks for sharing this with us man. But I'm a bit confused on how the slack time works. Say for example an employee works for 7 hours, 7x0.25=1.75 hours which doesn't sound right? So, for 7 hours of work, slack time actually makes it 1.75 hours that employee has worked?
I do believe he means to add that slack time. 7*1.25=8.75 hours. So if an employee works for 7 hours on said unit, he is accounting for 8.75 hours.
who knew the quadratic equation would come in handy for woodworking?
🤣
2x your cost is a VERY good palce to start. The "right" price is where you make the most money overall, per sale is irrelevant unless you get into logistical problems.
For people doing 10% and thinking they are very smart, thats 1 unforseen expence away from a loss.
Always start out higher than you think you need, never hard to decrease prices if its to high. This is EXACTLY what Apple have do, push the upper limit as far as they can and when sales drop they release a "new model" slightly cheaper
How often should you calculate this? Yearly? With each materials purchase?
It depends, it’s whenever prices of whatever variable within the formula changes enough up or down for you to check to make sure your breakeven is still accurate enough to make a good profit:)
Great video - I used to work as a management accountant so I found interesting how you did your maths.
However, your overhead formula only truly works if you are only making a single product line.
It seems you have a large margin for error in your industry if you can simply double your break even to get you selling cost.
Most companies selling through normal stores also have Delivery costs, Shipping costs (international import duties etc) , storage costs advertisement costs.
In his calculations he also included those in the form of "fees", didn't he? And he didn't double the calculated break even to get selling "costs". Don't mix up costs and prices, both are something different. He doubled his costs and made that his price, simply because market allowed him to. He might have also ended up cancelling the product, if competitors from sell it for less than his costs.