All businesses have to figure out what to charge for their product, but that seems to be especially challenging for woodworking operations. Will Sampson, editor of FDMC and Woodworking Network, discusses how to determine what something is worth. He then concludes his interview with Amanda Conger, executive director of the Cabinet Makers Association, talking about costs and compensation in the small to medium size shop.
This episode of the Woodworking Network Podcast was sponsored by the Executive Briefing Conference, being held November 8-10, 2020, at The Broadmoor in Colorado Springs, CO.
Woodworking Network is a home for professional woodworkers, presenting technology, supplies, education, inspiration, and community, from small business entrepreneurs to corporate managers at large automated plants.
The Cabinet Makers Association was formed in 1998 by a group of custom cabinetmakers who saw a need for a professional organization to serve small- to mid-size woodworking shops in the United States and Canada.
Intro music courtesy of Anthony Monson.
Welcome to the Woodworking Network Podcast where we explore the business of woodworking and what it takes to succeed. I’m Will Sampson.
This episode is sponsored by the Executive Briefing Conference.
Today, my guest is Amanda Conger from the Cabinet Makers Association with more survey data on small to medium size professional shops. But before we get to Amanda, I want to start off talking about “What’s it worth.”
When woodworkers change from making things for fun to making things to sell and make money, the fundamental question they have to ask is “What’s it worth?” Unfortunately, a heck of a lot of woodworkers have no clue how to answer that question.
The first thing they have to resolve is how much the product takes to produce, and very few woodworkers do what it takes to really enumerate all of the costs. That’s partly because they just don’t know. Oh, sure, they know the cost of wood and other materials they used, but they rarely consider the true cost of sourcing those materials. They also rarely account for waste. If they actually keep time and labor records, they might know how much production labor went into a product or project, but too often, they don’t keep track and just guess. They guess in advance, underestimating the time required, and they don’t record the actual time it took for a reality check after the work is done.
So, we’ve already got the materials and labor wrong, what else can we get wrong? That brings us to perhaps the most challenging part of figuring your costs, and that’s overhead. What’s overhead? Well, it’s the cost of everything that it takes to keep your business running except for costs associated directly to a product’s labor and materials. That means overhead includes obvious things like your building rent, utilities, and waste management expenses. But it also means insurance, non-production staff such as sales and administration. It should include all of your marketing costs, such as maintaining a website and physical showroom, Internet costs, attendance as an exhibitor at any trade shows you might do. Overhead also includes employee benefits, which typically add more than 30 percent to the cost of wages for employees.
There are also a lot things that could be included in production, but might be more convenient to just lump into your overhead calculations. These include consumables such as glue and abrasives, machine maintenance parts and labor, tooling and sharpening expenses, safety equipment, training and hiring expenses, clothing and uniforms, if you provide those.
Then there are overhead expenses that you should be making to protect your future. Are you investing in research and development of new products or ways of making them? Do you have a budget for machine replacement? Do you have a rainy day fund for unforeseen expenses?
So, now you have a rough idea of all the COSTS to consider, but that still doesn’t answer, “What’s it worth?” Some shops ignore the costs and price their work to be competitive with similar work in their market. In essence they are just pricing for the market and just hoping they can make a profit at that level. This can go really wrong.
Let me tell you a story.
A hardware salesman in Southern California told me how he once had visited a small shop. At one point in the conversation, it came up that the shop owner was charging only $50 a linear foot for his cabinets. Granted this was years ago, but it was still a ridiculously low price even then. Flabbergasted, the salesman asked the shop owner if he was sure that was the right price for his cabinets. The shop owner replied that he knew it was right because it was the same price as the guy up the street charged.
Well, now the salesman was really flummoxed, so he cold-called on the guy up the street just to satisfy his morbid curiosity. The guy up the street seemed competent, and the salesman maneuvered the conversation around to the price of cabinets. He said, “Say, is it really true that you charge only $50 a foot for your cabinets?” The shop owner looked at the salesman kind of funny and replied, “Well, yeah, for the uppers.” In other words, the first shop owner was blindly giving away his base cabinets.
In today’s market, custom kitchen cabinets can easily run more than $500 per foot or even past $1,000 per foot. (And, by the way, don’t get caught pricing by the foot, but that’s a talk for another day.) The difference in the price of cabinets is rarely just in materials and labor.
This is where we start to get to the heart of the question “What’s it worth?” The trick is that the only person who can answer that question is the buyer. The only value that counts is value as seen from the buyer’s viewpoint. It doesn’t matter what value you bring to the project if the customer does not appreciate or understand that value. This is where time you invest in educating customers can pay off big in their willingness to pay more. It’s where your reputation for quality and service can add to the bottom line. It’s where your knowledge of the market can help put your products in the profitability range.
In the final analysis, the question really isn’t “What’s it worth.” The question is “What are you worth to your customers?”
While we are talking about value, one thing I’ve seen that helps shops add value is when they discover the power of information and networking. As mentioned before, our sponsor today is the Executive Briefing Conference, which is a superior opportunity to learn, be inspired, and have face-to-face interchanges with top leaders in the industry. This year’s EBC will be held at the spectacular Broadmoor in Colorado Springs. In addition to top speakers and presentations, there also will be tours of Concepts in Millwork and The MiLL woodworking training facility. It’s an unparalleled opportunity to obtain business intelligence to improve your enterprise. Learn more at executive-briefing-conference-dot-com.
Continuing the discussion of costs and what you and your products are worth, I’d like to bring back Amanda Conger, executive director of the Cabinet Makers Association, with more information from the annual CMA Benchmark Survey.