How good is your business at pricing custom work?
If you don’t have a way of pricing custom work that consistently accounts for your costs and labor, how do you know if you’re making any profit on these deals? How would it feel to find that you’re losing money on half your custom work?
Do you have a spreadsheet or software program to help? If not, do you have some other formulaic means of pricing work?
If you read the May 12 New York Times “You’re The Boss” piece by the owner of Paul Downs Cabinetmakers, you’ll learn that these guys are fortunate enough to have a formulaic method to determine the price of a custom item.
That they have this formula puts them ahead of most businesses that do custom work. However, the trouble starts when they discuss what’s going on behind the scenes as there are a number of things going on that conspire to cause problems when reality and the pricing formula meet on the shop floor.
The failure points
Downs mentions that the spreadsheet’s material prices haven’t been updated in over 6 years, that material use and overages are not tracked, that tool use and labor methods have changed and that the info in the spreadsheet is sometimes entered wrong and fails to match the reality of the work actually being done.
As you read about all the possible failure points of this spreadsheet and how they’ve allowed it to become outdated and stale compared to their business reality, you can’t help but wonder how they got to that point.
Here’s the thing… this type of situation is pretty common.
Our tendency to think we’re too busy to address these critical, but tiny (at the time) maintenance issues has a way of giving us permission to postpone giving them attention. We think we’ll take care of them someday since some other thing seems more important right now.
It doesn’t seem to work that way, despite the best of intentions.
What usually happens is that the business lets these little things get out of sync an hour at a time, a day at a time, a week at a time and so on until we find that our internal systems look like they were designed to run some other business (or none at all).
At some point, things will have crept so far out of line that you’ll have no choice (like Downs) but to address them. Not only has the job you face become massive, your strategic advantage of having accurate, formula-driven custom pricing will have become the exact opposite.
Why does it matter?
The trouble with getting your business into this situation is that it severely damages your ability to see trends, know if you have enough (or too much) raw material or labor to deliver upon your work commitments.
If you’re already stuck, you have to consider the cost of continuing with a broken pricing model, assuming you have one.
If you aren’t sure you’re turning a profit on custom work – the showpiece work of your business – this merits immediate attention.
This is your best work. It’s the work that generates the reputation that earns your bread and butter work. It’s the work that you use to get your best, most profitable clients.
And yet you aren’t sure exactly how much profit you make on it?
If a close friend was in that situation, you know how you’d react. You’d go out of your way to make the situation clear to them, helping them if possible.
Why not do the same for yourself?
Should this take six months?
No, it shouldn’t. While Downs says his expert worked on this for six months, I suspect what he really means is that it took six months from start to finish – not that his expert worked on it eight hours a day, five days a week for six months.
The important thing to remember is that this doesn’t have to be perfect the first time.
Start with the highest impact item you can wrap your head around. and implement it. Tweak and add pricing components one at a time to improve accuracy.
This allows you to see results and adjust for accuracy and additional information without allowing any single change to be so complex that you have no way to assess its worth, much less its accuracy.
Get to work!
Want to learn more about Mark or ask him to write about a strategic, operations or marketing problem? See Mark’s site, contact him on Twitter, or email him at [email protected].