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What formula do you use to quote a job?
- Thread starter Lau Designs
- Start date
Lau Designs
New Member
Thanks for moving the thread Fred. I will try am pay more attention to where I post.
Fred Weiss
Merchant Member
Partial Reply #1 - Calculating Your Shop Rate
In order to come up with a "formula", you must first come to an understanding of the components that go into the formula and make some policy decisions about each of them, as well as your overall policy as to what you are going to achieve. It will be affected by lots of things but at its core will always be: Time, materials and market price.
So the first thing you need to do is to figure out your shop rate. This is how much you are going to charge for your time to perform a given task. It may vary based on other considerations if the task is to be performed by an employee and can also have variations even if it is a task you will be performing. You might have a rate of $50 an hour for apprentice tasks; $75 an hour for journeyman tasks; and $125 an hour for skilled tasks such as design. The whole notion of a shop rate though is that it provides a return on your time that is sufficient to pay your overhead, pay your desired salary and benefits, and provide a profit as a return on investment and to fund your growth.
It can get complicated and one of the most important aspects of it is in being honest and realistic as to how many billable hours a day you are able to reasonably expect. So, for simplicity, lets say you are a small shop with no employees and you are able to reasonably expect that you can bill 4 hours per day for your time.
Annual overhead = $30K
Desired salary and benefits = $60K
Desired profit = $10K
Total = $100K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $100,000 / 1040 = $96.15
Too high for your market you say. Okay, let's add in your estimated profit from materials markup based on a projection of $100K in sales volume. Now I'm talking about items you order in for resale as well as items like vinyl, media, inks, substrates etc. In my pricing strategy, I charge a 100% markup on all materials. And I know, historically in my business that this category represents a cost factor of about 15% on average. So let's try again:
Annual overhead = $30K
Desired salary and benefits = $60K
Desired profit = $10K
Less markup on materials = $15K
Total = $85K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $85,000 / 1040 = $81.73
Still too high you say! Well your remedies are:
Annual overhead = $30K
Desired salary and benefits = $50K
Desired profit = $5K
Less markup on materials = $15K
Total = $60K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $60,000 / 1040 = $57.69
So we're getting close now. let's settle into a working number of $60 an hour for our shop rate.
More later.
In order to come up with a "formula", you must first come to an understanding of the components that go into the formula and make some policy decisions about each of them, as well as your overall policy as to what you are going to achieve. It will be affected by lots of things but at its core will always be: Time, materials and market price.
So the first thing you need to do is to figure out your shop rate. This is how much you are going to charge for your time to perform a given task. It may vary based on other considerations if the task is to be performed by an employee and can also have variations even if it is a task you will be performing. You might have a rate of $50 an hour for apprentice tasks; $75 an hour for journeyman tasks; and $125 an hour for skilled tasks such as design. The whole notion of a shop rate though is that it provides a return on your time that is sufficient to pay your overhead, pay your desired salary and benefits, and provide a profit as a return on investment and to fund your growth.
It can get complicated and one of the most important aspects of it is in being honest and realistic as to how many billable hours a day you are able to reasonably expect. So, for simplicity, lets say you are a small shop with no employees and you are able to reasonably expect that you can bill 4 hours per day for your time.
Annual overhead = $30K
Desired salary and benefits = $60K
Desired profit = $10K
Total = $100K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $100,000 / 1040 = $96.15
Too high for your market you say. Okay, let's add in your estimated profit from materials markup based on a projection of $100K in sales volume. Now I'm talking about items you order in for resale as well as items like vinyl, media, inks, substrates etc. In my pricing strategy, I charge a 100% markup on all materials. And I know, historically in my business that this category represents a cost factor of about 15% on average. So let's try again:
Annual overhead = $30K
Desired salary and benefits = $60K
Desired profit = $10K
Less markup on materials = $15K
Total = $85K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $85,000 / 1040 = $81.73
Still too high you say! Well your remedies are:
- Find a way to increase your billable hours.
- Find a way to reduce your overhead.
- Work for less salary and/or profit.
Annual overhead = $30K
Desired salary and benefits = $50K
Desired profit = $5K
Less markup on materials = $15K
Total = $60K
Billable hours per year (sorry ...you can't afford a vacation.): 52 x 20 = 1,040
Shop rate = $60,000 / 1040 = $57.69
So we're getting close now. let's settle into a working number of $60 an hour for our shop rate.
More later.
Fred Weiss
Merchant Member
Partial Reply #2 - Material Markups
I use a markup of 100% on my consumables, which is to say I double my cost. If an 18" x 24" H frame costs me $10, I charge my customer $20 for it. If a customer wants a 3' x 6' substrate that I will cut down from a 4' x 8', I charge him for a 4' x 6' because I can still use the remaining 2' x 4' but the one foot strip is, to me, wasted. I will separately figure in my time at my shop rate to make two cuts in processing the board to the desired size. Please note that I am not charging a square foot rate on the finished sign in this manner. If I price the graphics production by the square foot, it is based on a 3' x 6' size.
More later.
I use a markup of 100% on my consumables, which is to say I double my cost. If an 18" x 24" H frame costs me $10, I charge my customer $20 for it. If a customer wants a 3' x 6' substrate that I will cut down from a 4' x 8', I charge him for a 4' x 6' because I can still use the remaining 2' x 4' but the one foot strip is, to me, wasted. I will separately figure in my time at my shop rate to make two cuts in processing the board to the desired size. Please note that I am not charging a square foot rate on the finished sign in this manner. If I price the graphics production by the square foot, it is based on a 3' x 6' size.
More later.
Lau Designs
New Member
WOW! Thanks Fred for taking the time to break it all down. At the moment it's My wife and I and we are just starting out. We have done a fair amount of business on ebay and have recently opened a booth at a local market place where we sell our services (vinyl graphics, Signs, Banners and etc.) We bring our cutter with us and cut on demand as well as take orders for more involved jobs. But I have always struggled with what to charge for our services.
I think that it's time to take a more calculated approach to estimating jobs. Since I would like to make this more of a legitimate business rather than a hobby that I can make a few dollars at. I have always had an eye for design and even went to school for it. For now I work full time as an engineer but would like to build what I have into a career at some point.
There is alot to learn and I appreciate all the help from everyone!
I think that it's time to take a more calculated approach to estimating jobs. Since I would like to make this more of a legitimate business rather than a hobby that I can make a few dollars at. I have always had an eye for design and even went to school for it. For now I work full time as an engineer but would like to build what I have into a career at some point.
There is alot to learn and I appreciate all the help from everyone!
SignManiac
New Member
Not to sound cynical, but I thought most engineers made good money already? For many, the sign business would be a step backwards.
But not to get sidetracked. Fred has done a great job with his explanation and I'm still amazed he can find the time he does to help so many.
But not to get sidetracked. Fred has done a great job with his explanation and I'm still amazed he can find the time he does to help so many.
Fred Weiss
Merchant Member
Partial Reply #3 - Other Pricing Considerations
There are other pricing considerations that will challenge formula pricing.
Bottom line. How well you do at estimating your time correctly is in direct proportion to the hours you are billing each day. Start tracking your time in all the things you do to get a handle on where your billable hours are being lost.
More later.
There are other pricing considerations that will challenge formula pricing.
- Time spent selling the job and in handling the billing and accounting.
- Time spent designing, laying out, preparing for production, presenting the job for approval and modifying the job.
- Any other considerations that will add to your time needed to complete the job.
Bottom line. How well you do at estimating your time correctly is in direct proportion to the hours you are billing each day. Start tracking your time in all the things you do to get a handle on where your billable hours are being lost.
More later.
Fred Weiss
Merchant Member
Partial Reply #4 - Properly Applying Formula Pricing
Formula pricing can be an incredibly valuable time saver but it is never to be trusted. It is a constant necessity to double check our quickly arrived at quotes with a fuller, more detailed quote based on actual time and materials.
Sure you can check pricing on the last ten banners you did and come up with $8 a square foot as a quick pricing method. But things change and red flags may not be noticed on some jobs that will cost you more time or materials. It is just good common sense to periodically go back an review your current profitability on various job types that you do frequently.
Constant evaluation and reevaluation from research of current activities will prove invaluable if you will take the time to do it.
More later.
Formula pricing can be an incredibly valuable time saver but it is never to be trusted. It is a constant necessity to double check our quickly arrived at quotes with a fuller, more detailed quote based on actual time and materials.
Sure you can check pricing on the last ten banners you did and come up with $8 a square foot as a quick pricing method. But things change and red flags may not be noticed on some jobs that will cost you more time or materials. It is just good common sense to periodically go back an review your current profitability on various job types that you do frequently.
Constant evaluation and reevaluation from research of current activities will prove invaluable if you will take the time to do it.
More later.
Lau Designs
New Member
SignManiac, Engineers can make good money and I do okay in my eyes. But there is a certian satisfaction in working for your self. My father said that "if you do somthing that you love you will never work a day in your life." Now I know that owning a business is not all roses and is alot of work but if you have a passion for what you do it can make going to work each and every day more enjoyable. Also I make a salary at my job and no matter how hard I work I take home the same income. In working for yourself your the one who determines how much money you make to an extent. Ofcourse there are many factors that contribute to how sucessful you are. But I believe that if you have a passion, drive and desire that you can be sucessful. Yeah some years I may make less and some years more and mabey I will never make what I make as an engineer but I will never know unless I try and life is too short not to try.
Sorry to get off track here on this thread I just thaught that this comment warranted a reply.
Last edited by a moderator:
FatCat
New Member
By chance, you're not making and selling decals/stickers and signs with logos on them like...oh I don't know, Harley Davidson, Chevy, Ford...or other stuff like that are you?
Fred Weiss
Merchant Member
Partial Reply #5 - Competitive Pricing
My theory of doing business is
I am a firm believer in getting the most the market will bear for my services while considering at what point my results will begin to fall off. Why would I constantly sell a type of work for $8 a foot if I could be getting $10 a foot and never lose a job or have a client feel overcharged?
That has worked for me for 27 years.
Having said that, I will share how I arrive at my determination of what the local market price is for what I am interested in selling. It takes a few weeks but does not involve wasting the time of my competitors and it also takes into account the things no formula can touch such as location, reputation and efficiency.
It works like this:
Make your quotes at a given rate for the variable within it and track the results in terms of closed sales. When you have enough results to make a reasonable statistical sampling ... let's say 20 or more quotes, go back and count how many turned into completed sales. The bigger the sample the better.
I personally use a figure of 70% as the optimum closing rate for me and that particular kind of job. Less than that and I am too high. More and I am too low. Based on that I will reevaluate my pricing formula and will either
More later.
My theory of doing business is
- I am in the business of supplying custom made products. I am not a retailer.
- I have a finite amount of time and I want to spend my time where it returns the highest rate of compensation.
I am a firm believer in getting the most the market will bear for my services while considering at what point my results will begin to fall off. Why would I constantly sell a type of work for $8 a foot if I could be getting $10 a foot and never lose a job or have a client feel overcharged?
That has worked for me for 27 years.
Having said that, I will share how I arrive at my determination of what the local market price is for what I am interested in selling. It takes a few weeks but does not involve wasting the time of my competitors and it also takes into account the things no formula can touch such as location, reputation and efficiency.
It works like this:
Make your quotes at a given rate for the variable within it and track the results in terms of closed sales. When you have enough results to make a reasonable statistical sampling ... let's say 20 or more quotes, go back and count how many turned into completed sales. The bigger the sample the better.
I personally use a figure of 70% as the optimum closing rate for me and that particular kind of job. Less than that and I am too high. More and I am too low. Based on that I will reevaluate my pricing formula and will either
- Raise my rates if my closing rate is higher than 70%.
- Lower my rates if my closing rate is less than 70%.
- Stop offering the product type because it isn't profitable enough.
- Find a way to provide the product more efficiently so that I maintain my desired level of profitability and closing rate while lowering the price.
More later.
UFB Fabrication
New Member
When reading threads like this why do I see so many responses at how to undercut the competitions price ? Why Cant folks try do do something to improve in comparison what the competition is doing and increase the price. What if Joe Blow down the street is a idiot and sells his stuff at a loss and will be out of business in a few months. Is undercutting him really a good thing ? How about when the idiot is gone and the customer comes to you and said I used to but it for XX.XX why are you so high. I was talking to a customer a few weeks ago he had just lost a big job. Him and 3 other bidders were around 95 thousand. The 4th bidder was 58 thousand. I doubt that the 3 other experienced shops were gouging the customer as they all new they had to bid it tight hence the 4 bids.
Lau Designs
New Member
FatCat, I do not sell any trade marked logos or things of that nature. I sell custom lettering and designs that are not trade makred. Shoot that's the fastest way to ensure that I never make it and lose everything. Totaly not worth it. I know that I am new to the forum and new to this business but I am 34 years old with a good head on my shoulders. I may not be the most experianced with this stuff but with the help of everyone here I will be.
FatCat
New Member
Lol, no problem - and no insult intended.
You would be surprised (or maybe not) how many new folks introduce themselves and admit they are selling that stuff. Sounds like you're heading in the right direction.
Lau Designs
New Member
Lol, no problem - and no insult intended.
You would be surprised (or maybe not) how many new folks introduce themselves and admit they are selling that stuff. Sounds like you're heading in the right direction.
No insult taken. But I can see where your coming. I have seen some people on here inadvertantly advertise that they are selling trademarked items. I prefer the custom stuff. Things that I can use my artistic talent with.
grafixemporium
New Member
Geez Fred... I was reading through this thread excitedly trying to come up with the wittiest and most sarcastic response to the OP as I could. Then you had to come along and provide a solid, clear breakdown of what a logical and effective business model should look like. Thanks a lot!
Fred Weiss
Merchant Member
Si Allen
New Member
My pricing method is very simple ... and has worked very well for the past 43 years!
1. Calculate your material costs.
2. Estimate the time required.
3. Quote the highest price that you can say without laughing!
4. If the customer doesn't run away ... then say plus install!
Why work for peanuts?
You do plan to semi retire, someday, don't you?
1. Calculate your material costs.
2. Estimate the time required.
3. Quote the highest price that you can say without laughing!
4. If the customer doesn't run away ... then say plus install!
Why work for peanuts?
You do plan to semi retire, someday, don't you?
sjm
New Member
SignManiac, Engineers can make good money and I do okay in my eyes. But there is a certian satisfaction in working for your self. My father said that "if you do somthing that you love you will never work a day in your life." Now I know that owning a business is not all roses and is alot of work but if you have a passion for what you do it can make going to work each and every day more enjoyable. Also I make a salary at my job and no matter how hard I work I take home the same income. In working for yourself your the one who determines how much money you make to an extent. Ofcourse there are many factors that contribute to how sucessful you are. But I believe that if you have a passion, drive and desire that you can be sucessful. Yeah some years I may make less and some years more and mabey I will never make what I make as an engineer but I will never know unless I try and life is too short not to try.
Sorry to get off track here on this thread I just thaught that this comment warranted a reply.
True then keep in mind the long hours you'll put in to earn that buck while other things take a back seat.
You are entering a mature market and while spending a buck to earn a buck 42 is acceptable in other markets, the variables you will experience and the steep learning curve that lies ahead is just the beginning.
My advice, sell on value not price and you will be successful.