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Pricing Embroidery for Profit
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.
COST OF DOING BUSINESSOne 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 RULESWhen 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 embroidery 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 embroidery 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 single head 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 COSTThe 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 single head 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 ZONEProfit 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 single head 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 single head embroidery 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.
Perception is a large portion of reality, and a lot of the value of embroidery is perceived value. The customer is not buying Embroidery 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 PRICINGYour 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 TIPSYour 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:
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.
This information is just the tip of the iceberg however we hope it helps to get you started. In an effort to provide as much information as we can to help you in your business, please check out our "Learn more about Embroidery equipment and the Embroidery Industry" pages and the "Learn more about DTG Garment Printers and the Garment Printing Industry" Pages.