Of all of the skills necessary to start and grow any embroidery business, the one that most people have trouble with is establishing equitable pricing for their services.

What is it about pricing that puts fear and sometimes panic into the minds of some embroiderers? Is it the fear of charging too much and not making a sale, or losing all your business to an under-priced competitor? Could it be the fear of charging too little and not being able to make a profit, or not being able to raise your prices at a later date? Maybe it’s just a lack of knowledge about pricing or lack of direct experience in figuring prices that fosters these feelings.

Of all of the skills necessary to start and grow any embroidery business, the one that most people have trouble with is establishing equitable pricing for their services.

What is it about pricing that puts fear and sometimes panic into the minds of some embroiderers? Is it the fear of charging too much and not making a sale, or losing all your business to an under-priced competitor? Could it be the fear of charging too little and not being able to make a profit, or not being able to raise your prices at a later date? Maybe it’s just a lack of knowledge about pricing or lack of direct experience in figuring prices that fosters 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 both ease and confidence. Let’s explore some of the mechanics involved in determining a selling price as well as some tricks used by the pros to deliver prices without anxiety.

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 OF DOING BUSINESS

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 embroidery costs at this time. Garment costs can be marked up separately and added to the derived embroidery 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.

HOME RULES

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.

If you are a small startup business and you operate without additional help, you should allocate a direct labor cost for yourself — 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 line item in your 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 singlehead 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.

UNIT COST

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 units to use is stitch count, since stitches measure output in an accurate fashion. If we use a singlehead embroidery machine properly, 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. At an operating cost of $20 per hour, 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.

COMFORT ZONE

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 singlehead machine, this is the bonus money earned for running your business well above the hourly wage calculated in your operating cost figure.

Profit is your purpose for being in business. If you are not in business to make a profit, then you are simply doing embroidery as a hobby.

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 the machine, you can then amortize the profit over your production target.

For example, if you want to clear $60,000 on a singlehead 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 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 be doable. Many embroiderers sell (and mark up) the garment as well in order to soften the embroidery price while still realizing a sizable margin off the finished product. The garment could be 30% of a keystone (a.k.a., 100%) markup on the entire project, depending on the size of the order.

PERCEIVED VALUE

Perception is a large portion of reality, and a lot of the value of embroidery is perceived value. The customer is not buying thread from you, nor is he buying machine time. He is actually buying a look or a concept. This is a perception in the buyer’s mind.

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.

How we price our products should reflect this phenomenon. If we have developed a series of clever or comical 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.

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 embroidery 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 the embroiderer makes 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. 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 embroidery is included in the price of the embroidered garment, or when the digitizing is included in the price of the garment, we create the perception that embroidery 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.

COMPETITOR’S PRICING

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.

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 tips and tricks to make pricing easier:

• Build a price sheet to establish credibility in your pricing. A well-organized, published price sheet carries a lot of weight. It conveys the perception of being well thought out, firm and fair. Customers are less likely to negotiate with published prices than those quoted verbally off the top of your head.

• Deliver the price with confidence. How you deliver a price also can 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 instance, suggest doing the embroidery with fewer stitches by shrinking the size or removing background colors. This eliminates stitches and reduces costs.

• Do not leave the price at the end of a sentence. The price should never be the focal point of any sales transaction. There is an old trick that takes the focal point away from the price of any product or service and makes it easier to deliver the price to the customer. 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.

As you can see, pricing does not have to be a difficult process. It may take a little bit of time to calculate your costs, but the process is not difficult. Once your prices have been established, 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.