Marketing and pricing woodturning skillsPart 3Pricing WoodturningIntroductionIn the first two sections of this series of articles I looked at the activities which woodturners must engage in to sell their skills successfully. In this article I look at the factors which must be taken into account when fixing price levels. The limits to prices To any maker there is a band of selling prices in which they can operate. The lowest price at which they can sell (if they wish to stay in business) is determined by the costs of production. In brief these are the cost of materials, overheads, and wages. The highest price at which they can sell is that price which will result in the maximum level of turnover. This is often referred to as “the price the market will bear“. It may be that the price the market will bear is lower than the costs of production. In this case there is no opportunity for a viable business. Many would-be entrepreneurs find this out too late. This is why a pricing policy should be an integral of a marketing plan. If the sums do not match-up, ie if projected costs exceed projected revenue then it may be possible to adjust the product (and the associated costs), modify the marketing strategy, or do both of these things. The ticket we put on an item also sends out a message. It not only tells the customer the price but also the value that I attach to the piece. Some years ago Gerald Ratner became infamous when he publicly described the cheap jewellery he sold as “crap”. This was also the message his price labels were giving out. If I put too low a price on my turnings I will be giving out the same message. I will also be helping to devalue the market for wood and woodturning as a whole. At the top end of the market the price ticket puts out a very different message. A high price says: “I‘m very exclusive. Only people who have great taste and a high income will own me‘. Unfortunately only a very few woodturners who have established A NAME for themselves with collectors will be able to price on that basis. Most woodturners will need to position themselves somewhere between these two extremes. Exactly where will depend on what they see as their market. Once a decision has been made on the range of products to make there are a number of methods I can use to determine the appropriate price levels. One is to look at what other turners are charging for similar work. Another is to look at the prices of other goods in the chosen sales outlets. Another way might be to set up a small “focus group“ by gathering together a number of friends or relations and asking them how they value my work and what they think would be reasonable prices. A method used by many businesses is “cost-plus“ pricing. This is described below. By using such methods I should be able to get a “feel“ for the “right“ level of prices. This will be refined with experience. Cost-plus pricing The relationship between price and demand has to be such as to give a sufficient volume of sales to achieve the ‘break-even’ point by the end of the relevant financial period. The break-even point is where sales revenue is equal to the costs of production plus wages. Therefore I need to know what is the absolute minimum that I should charge for my products if I am going to make a living. This is done by dividing the total costs incurred in making, and selling one’s products, by the total number of hours worked. This gives the hourly rate that is then multiplied by the time taken to make an individual piece. The result is the minimum unit price. If I cannot clear all my stock at this price then I am in trouble. If, on the other hand, I have difficulty in keeping up with demand and I have a growing order book the implication is that my prices are below what the market will bear and that I should increase prices. As it is not easy to make a living as a woodturner I may well find that the minimum unit price is the price I have to sell at to get a sufficient volume of sales. Financial costs For the one-man band turning is a form of piecework so, basically, a turner is selling time. But as well as the cost of the turner’s time the price of the piece must include an element that will cover other costs incurred in its production. These costs take two forms. On the one hand, there are costs that are unique to that piece and can be identified as such. Such costs may include those of wood and bought in items such as pepper mill mechanisms, pen and pencil parts, knife blades, and box lids. On the other hand, there are costs, such as that of electricity, that are difficult to allocate to individual items. These are usually treated as overheads and are averaged out over the output. Productive and non-productive time When looking at the time that goes into making and selling a product it will be seen that some aspects are similar to those in the financial area. Notice the emphasis on selling. When a turner is self-employed every minute of time taken to get a product into the hands of a customer has to be accounted for. It is convenient to divide a turner’s time into two elements: ‘productive’ time and ‘non-productive’ time. Productive time is that which can readily be allocated to a particular piece. In the following calculations it is taken as the time spent making the piece; this is the time taken in turning plus other post-lathe time required to complete it, such as the fitting and assembly of parts, decoration, and finishing operations. Non-productive time is that which cannot be tied to any particular item. Although the term ‘non-productive’ time has negative connotations it is an essential element of business activity and must be built into the price structure. It is essential to keep track of this time because it is often more than many makers realise. Financial overheads The precise composition of financial overheads will depend on the nature of the business. Nevertheless, some of the most common costs incurred can be outlined, as shown in Box 1. In addition to these the cost of some consumables, such as tools, abrasives and finishing materials, are difficult to allocate to individual pieces, and are best averaged out over the range of products.
Non-productive time overheads To some extent the non-productive time overheads mirror the financial overheads. For example, attendance at a seminar may not only incur a fee but it will take up a significant amount of time. Like financial overheads time overheads will differ according to the nature of the business. Some of the time consuming activities that are likely to be relevant to a professional turner are shown in Box 2.
The hourly rate Now it is necessary to translate these factors into a pricing policy that will provide a decent wage. (Do not forget that this is the minimum price, it may be possible to charge more, depending on what the market will bear.) The most convenient way of doing this for a craftsperson is to base prices on an hourly rate. Many professionals in the service sector use this method. I suggest a woodturner should formulate his hourly rate on the basis of how much time is taken on the lathe to make the piece plus any post-lathe operations (such as those mentioned earlier) as this time relatively easy to measure. So the price will be calculated as the time taken, multiplied by the hourly rate, plus the cost of the materials unique to that piece. The most convenient way of showing how the hourly rate is determined is by means of a hypothetical example: First we need to know the required level of turnover:
We can now see how this might be applied to an actual piece: a nutcracker bowl. (This is a bowl with a mechanism for cracking nuts fixed in the centre.) I have taken the prices of the parts from the current Craft Supplies (UK) catalogue. The bowl is made from an ash blank 12 ins. x 1 1/2 ins. Let‘s say, just for the purposes of illustration, that it takes an hour to turn and finish. It will take some time to fit the nutcracker to the bowl. So, this time, say 6 minutes, should be included. The price is calculated as follows: The hourly rate multiplied by the time spent making it:
Conclusion Some experienced professional bowl turners have been known to use a simple formula, based on the dimensions of the bowl, as a means of setting prices. This may be as simple as the following: Price = Diameter of bowl x Height of bowl x C x The hourly rate + The price of the wood This does not mean that their method is different in any essentials from that which I have outlined above. It is simply that they know from experience that the size of the bowl is a good indicator of the time required to make it. The value C is a constant which is used to convert the volume of the bowl into a time in minutes. Another way of putting this is that HxDxC is a proxy for the time required to turn the bowl. It is possible, too, that if they were asked, they would deny having calculated the hourly rate in the way I have described. It may just be a figure they know works for them. Nevertheless, I would suggest that however their figure has been arrived at it must cover the type of costs identified in this article. |
