Of all of the skills necessary to start and grow any embroidery business, the one that most people have trouble with is establishing the right pricing for their embroidery services.
What is it about pricing that puts fear and sometimes panic into the hearts and minds of most small business owners and entrepreneurs? Here are some common answers to that question:
- If I charge too much I won’t get any business
- If I charge too much my main competitor will take my customers
- If I don’t charge enough I won’t make any money
- I’ll never be able to raise pricing on embroidery products, there’s too much competition
- It’s embarrassing to ask for money
But most of the time, it’s just a lack of knowledge about pricing or lack of direct experience in figuring prices that foster these feelings.
Whatever the reason, pricing your product is not that difficult and should not cause anxiety. To the contrary, prices can be figured in a simple fashion and delivered with ease and confidence. Let’s explore some of the mechanics involved in determining a selling price as well as some techniques used by professionals to quote prices without anxiety.
There are many ways to develop pricing and several standard models to choose from, but fundamentally, businesses price their products in just one of two ways that we will call Cost Plus and Market Down.
When you stop to think about it, a selling price is a somewhat arbitrary number. It does, however, reflect several key items such as the costs associated with doing business, a desired profit margin, the perceived value of your product and your competitor’s selling price. By looking at each of these items, we can show you how to both conceptually and practically set a selling price for your work.
Cost Plus Pricing Method
One of the most fundamental business rules states that selling price is the sum of the cost of doing business plus a profit margin. This rule (Price = Cost + Profit) implies that in order to establish a price, we have to know the cost of doing business. Costing your work is not as difficult as it sounds.
You do this by simply totaling all of your business expenses, such as rent, machine lease payments (or depreciation if purchased), labor costs (include matching F.I.C.A., workman’s compensation and unemployment insurance contributions), raw material costs, phone, postage, office supplies, etc.
Do not include garment costs in this total since we are only figuring supply costs at this time. Garment costs can be marked up separately and added to the derived selling prices. Next, divide this total cost figure (less garments) by the number of hours contained in the time period you used to calculate your costs. For instance, if you totaled costs on an annual basis, divide this total by the number of work hours in a year — 40 hrs. x 52 weeks = 2,080 hours.
If you are a startup business and you do all of the production yourself, you should still allocate a direct labor cost— even if you do not receive a regular paycheck. It is important to build this into your operating cost so that your selling price reflects labor expense. As you grow the business and add employees, the labor cost calculations will increase appropriately, adding revenue to cover the additional outlays while still maintaining a profitable margin in your pricing.
After you have added all your costs and divided this total by the hours worked, you now have a cost of doing business per hour. For example, if you operate one single head machine and annual costs total $41,600, you should divide that by 2,080 hours per year, and you see that your cost per hour is $20.
How Do I Determine My Costs Per Unit?
The next step is to translate this figure into a cost per unit. First you have to select a unit of measure that best represents the cost and effort invested. One of the easiest and most common units to use is stitch count, since stitches measure output in an accurate fashion.
If we use a single head machine , the SWF 1501C is by far the most popular single head for small businesses, it should produce anywhere from 18,000 to 30,000 stitches per hour (300 to 500 stitches per minute).
Using the cost figure calculated above, our cost per thousand stitches could range anywhere from $0.67 to $1.11, depending upon your own unique stitching output.
Sewing at 30,000 stitches per hour produces units at $0.67 per hour, while a machine sewing at 18,000 stitches per hour produces units at $1.11 per hour. So you would ADD this to the $20/hour cost of running your business in the example we used above and arrive at your real cost per unit.
Cost Plus Embroidery Business Pricing Model
Profit margin is the additional money added to the unit cost in order to make a profit. If you are a one-person shop operating one single head embroidery machine, or multi-head embroidery machine for that matter, this is the growth money earned for running your business above the hourly wage calculated in your operating cost figure.
Remember, you are starting or running an embroidery BUSINESS, so the profit of that business is the difference between working for hourly wage and creating a business that will grow.
This COST PLUS method starts with how much profit you want to make and working backwards to figure out what you need to charge to get there.
The amount of profit that you add to the cost base can be calculated by first setting a target dollar that you wish to earn in your business per year. If you divide that figure by the capacity of your equipment, you can then amortize the profit over your production target.
For example, if you want to clear $60,000 using a single head machine, divide that by the number of working hours in a year (2,080) and divide that number by your machine’s average stitch capacity to determine the per-unit margin you would have to add to your selling price.
If we divide $60,000 by 2,080, and then divide that by 18,000 stitches per hour, we come up with a figure of $1.60. Since we know our cost per unit in our example at 18,000 stitches per hour is $1.11, we have to get an average unit price of $2.71 ($1.11 + $1.60) to generate a profit margin of $60,000 for a year.
This selling price could work. Many embroiderers sell (and mark up) the garment as well in order to keep the price per stitch down while still realizing a sizable margin off the finished product. The garment could be 30% of your profit or markup on the entire project, depending on the size of the order.
So now your calculations could include the cost of the garment and what profits you might make on that as well.
You can maximize every opportunity by offering more than one decorating method. This will not only expand your potential customer base, but add some real profitability to your start up embroidery business.
Market Down Embroidery Pricing
The “Market Down” approach to embroidery pricing is really a way to project how much profit your business will generate, and how to price your work, by uncovering what the market price is as opposed to what your cost is.
After all, the customer is not buying thread from you, or machine time, or paying your rent. The customer is buying the end result, and is probably completely unaware of how much material and time goes into it.
If the design or the colors or the quality of the embroidery makes the buyer feel good about owning the product, he buys it. The purchase could be a practical buy or an impulse buy. Either way the buyer purchased the garment based upon perception, or how it made him feel, not how much it cost you to produce!
How we price our products should reflect this phenomenon. If we have developed a series of clever or beautiful designs that may appeal to a certain market, we can demand a higher price based on the popularity of those designs. The consumer is always looking for new, clever and creative ideas to embellish his wearable products. Here is where creativity can be rewarded.
If you produce amazing quality work, even simple logos, and the customer loves the result, or if you can fill his/her order especially quickly, or even if the customer just enjoys doing business with you and your company – it’s worth more!
There is another side to perceived value. There has been some controversy in our industry for some time now about how we price. Do we price the embroidery and garment separately or as a single package price? From a profitability standpoint, it doesn’t matter how you price the product as long as you include an appropriate profit for both entities.
You can sell the garment with a higher markup and include the sewing for free, or you can charge a lower markup for the garment and add an appropriate charge for the embroidery. Either way, the customer pays the same total price, and you make the same profit.
The difference comes in the perception of the value of the embroidery. Simply put, embroidery adds value to a garment. When you sell a blank garment, there is a reasonable price that you can charge for that garment. When it is embellished, on the other hand, the value of the garment may double; triple or even quadruple due solely to the addition of the embellishment from your single head embroidery machine, digitizing software and your imagination. Ironically, the cost of the embellishment is often less than the cost of the garment and yet the embellishment can add value far beyond the cost of both.
When sewing and digitizing is included in the price of the end product, or when the digitizing is included in the price we create the perception that design and digitizing have no value. We condition the consumer to buy the garment and expect the embroidery for free. No matter whether it is a simple left-chest design or a full jacket back with both front-chest designs, we condition the customer to expect either for the same low price.
As you can see, pricing does not have to be a difficultprocess. It may take a little bit of time to calculate your costs, but the process is not difficult. Once your prices have been established, and you have published your price list, constantly check to see that you are using the most proficient and effective tools and methods to do your work. This will contribute to lower prices and higher profit margins.
Our goal at Stitch It International, whether you’re buying an SWF Embroidery Machine or just trying to improve your existing embroidery business, is to provide you with the information you need to succeed!
Other Things To Consider – Home Embroidery Business Expenses
When you operate out of your home, do not omit the cost of rent. If you do, your total costs figure will be too low. This not only will pass along an unrealistically low price to your customer, but it also will lock you into working in your home permanently. If you someday hope to move your business into a commercial location, your prices should reflect that cost of doing business as well. When figuring a fair rent price, use a “replacement rule” value. This is the real cost to rent comparable space in a commercial location.
You MAY use the lower overhead to keep your pricing low to break into a particular market, but if you plan on growing you’ll need to understand that when you do, your prices will go up accordingly. Make sure you’re not locked into be the lowest cost provider.
Competitor Pricing Issues
Your selling price obviously has to be competitive, but what exactly does competitive mean? Competitive does not mean that your prices have to be the lowest. Competitive means that your prices should be in line with others in your area. You can still be the most expensive in your area and remain competitive.
If your prices are in line with your quality and service, only use your competitor’s prices to temper yours, not to dictate them. If your competitor’s prices are lower than yours and his quality and/or service is better, he must be doing something differently. This is when it would be time to re-examine your methods of doing business and take corrective actions to improve your operation.
Embroidery Pricing Tips
Your actual selling price is established by considering all four of the above items. As you develop your pricing structure, consider the following techniques to make pricing easier:
Build a price sheet to establish credibility in your pricing. A published price sheet establishes credibility on pricing with your customers, so they don’t think you’re making up prices on the spot. Customers are less likely to negotiate with published prices than those quoted verbally off the top of your head. And it makes customers feel like they’re really getting a deal if you discount from there.
Deliver the price with confidence. How you deliver a price can also convey fairness in your prices. Making eye contact when delivering a price to your customer, and speaking clearly, conveys your confidence in your pricing structure. Likewise, avoiding eye contact and mumbling a price can convey uncertainty and invite unwanted haggling.
Offer options, not just one price. If a customer is not happy with a quoted price, offer options that compromise the amount of work to be performed rather than discount prices and reduce your profit margin. For example, suggest doing the embroidery with fewer stitches by shrinking the size or removing background colors before you drop your price.
Do not leave the price at the end of a sentence. The price should never be the focal point of any transaction. One common technique that removes the focus from price is where you put the price number in your conversation.
Don’t say, “This item will only cost you $50.” Instead, say something like this: “This item will only cost you $50, it comes in two colors, and we can have it ready for you on Thursday.” You could also say, “This item will only cost you $50. Would you like it in navy or ash?” Either way, the emphasis is off price and placed on other terms involved in the sale.
Discounting and sales are tools to be used sparingly. Selling at cost and offering “loss leaders” are effective only if used on a short-term basis to attract attention. Use these techniques correctly to sell other products along with the sale items. This can attract first-time buyers, as well as revive some lost customers.