Market Down Embroidery Pricing

The “Market Down” approach to embroidery pricing is really a way to project how much profit your business will generate, and how to price your work, by uncovering what the market price is as opposed to what your cost is.

After all, the customer is not buying thread from you, or machine time, or paying your rent. The customer is buying the end result, and is probably completely unaware of how much material and time goes into it.

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, not how much it cost you to produce!

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

If you produce amazing quality work, even simple logos, and the customer loves the result, or if you can fill his/her order especially quickly, or even if the customer just enjoys doing business with you and your company – it’s worth more!

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 sewing 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 you make 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 from your single head embroidery machine, digitizing software and your imagination. 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 sewing and digitizing is included in the price of the end product, or when the digitizing is included in the price we create the perception that design 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.

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,  and you have published your price list, 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.

Our goal at Stitch It International, whether you’re buying an SWF Embroidery Machine or just trying to improve your existing embroidery business, is to provide you with the information you need to succeed! Please sign  up for our newsletter at the bottom of the page for more great information,  specials and business tips from your SWF Embroidery Machine dealer of choice!

Other Things To Consider – Home Embroidery Business Expenses

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.

Embroidery 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 techniques to make pricing easier:

Build a price sheet to establish credibility in your pricing. A published price sheet establishes credibility on pricing with your customers, so they don’t think you’re making up prices on the spot. Customers are less likely to negotiate with published prices than those quoted verbally off the top of your head. And it makes customers feel like they’re really getting a deal if you discount from there.

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 example, suggest doing the embroidery with fewer stitches by shrinking the size or removing background colors before you drop your price.

Do not leave the price at the end of a sentence. The price should never be the focal point of any transaction.  One common technique that removes the focus from price is where you put the price number in your conversation.

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.

How to Price Embroidery Work

Of all of the skills necessary to start and grow any embroidery business, the one that most people have trouble with is establishing the right pricing for their embroidery services. What is it about pricing that puts fear and sometimes panic into the hearts and minds of most small business owners and entrepreneurs? Here are some common answers to that question:

• If I charge too much I won’t get any business
• If I charge too much my main competitor will take my customers
• If I don’t charge enough I won’t make any money
• I’ll never be able to raise pricing on embroidery products, there’s too much competition
• It’s embarrassing to ask for money

But most of the time, it’s just a lack of knowledge about pricing or lack of direct experience in figuring prices that foster 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 ease and confidence. Let’s explore some of the mechanics involved in determining a selling price as well as some techniques used by professionals to quote prices without anxiety.

There are many ways to develop pricing and several standard models to choose from, but fundamentally, businesses price their products in just one of 2 ways that we will call Cost Plus and Market Down.
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 Plus Pricing Method

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

If you are a startup business and you do all of the production yourself, you should still allocate a direct labor cost— 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 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.

HOW DO I DETERMINE MY COSTS PER UNIT?

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 and most common units to use is stitch count, since stitches measure output in an accurate fashion.

If we use a single head machine , the SWF 1501C is by far the most popular single head for small businesses, 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.

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 per hour. So you would ADD this to the $20/hour cost of running your business in the example we used above and arrive at your real cost per unit.

COST PLUS EMBROIDERY BUSINESS PRICING MODEL

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 single head embroidery machine,  or multi head embroidery machine for that matter, this is the growth money earned for running your business above the hourly wage calculated in your operating cost figure.

Remember, you are starting or running an embroidery BUSINESS, so the profit of that business is the difference between working for hourly wage and creating a business that will grow.

This COST PLUS method starts with how much profit you want to make and working backwards to figure out what you need to charge to get there.

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

For example, if you want to clear $60,000  using a  single head 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 in our example 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 work. Many embroiderers sell (and mark up) the garment as well in order to keep the price per stitch down while still realizing a sizable margin off the finished product. The garment could be 30% of your profit or markup on the entire project, depending on the size of the order.

So now your calculations could include the cost of the garment and what profits you might make on that as well.

You can maximize every opportunity by offering more than one decorating method. This will not only expand your potential customer base, but add some real profitability to your start up embroidery business.

 

 

 

Pricing Embroidery for Profit: Calculating Costs & Determining Markup

Pricing for profit is an important task for many start-up or novice business owners. Successfully balancing fair, equitable and profitable pricing for embroidery services will set you on the path to generating consistent profit margins. Often times, start-up businesses will use competitor’s prices as a foundation for their own pricing schedules. Use caution with this approach, as you are assuming that your competitors have done their homework AND their prices are profitable. Competitors may be hoping that their low prices will attract more business, while in reality, it’s undermining their profits and putting their business at risk.

Conversely, competitor pricing will likely have some influence on your pricing model. However it should not be a primary controlling factor. When researching your competition, be aware of the following, and you will be well-equipped to make wise choices for YOUR business:

• Competitor prices are a reflection of their product quality, service and delivery.
• There will always be someone out there who is willing to do poor quality work, very fast and deliver it cheaper than anyone else.

Eventually these vendors will run their course and a correction will be inevitable.

Your business is unique, with a number of variables that will be different from your competition. Knowing that, it is important to create price lists tailored to your business. Developing your pricing lists is an easy task if you follow these steps:

1. First calculate the cost of doing business.
2. Next calculate production output.
3. Divide stitches into cost to arrive at a cost per “production unit”.

This gives you a cost factor, enabling you to determine a competitive mark-up and final selling price. Let’s explore each of these steps in more detail:

1. Calculate the Cost of Doing Business –

All businesses have two major costs, a) Fixed costs and b) variable costs.

Fixed costs are those costs that are the same month after month, such as rent, machine payments and depreciation.

Variable costs change depending on the amount of units sold, direct labor and raw materials. As production increases, you have to hire more people and you consume more raw materials.

In order to run a successful business, you need to capture, analyze and respond to pertinent business information. This is facilitated by maintaining books on our business. Track assets, liabilities, inventories, cash flow, sales and of course expenditures. Quick Books (link is external) is very helpful bookkeeping software to help track and analyze this important data, providing you with the information necessary to establish our costs on a monthly basis.

Determine an average sum of daily expenditures. Use accounting software to accomplish this task. In addition to all of your expenses generated by writing checks, there are two items that I would like to mention; overhead and depreciation.

Overhead

Home based business may be able to deduct certain expenses due to the use of your home. See IRS Form 8829 (link is external) for more information. If you do not include this overhead figure in your cost basis, your cost may be lower now (offering you a competitive edge in your pricing) but will jump substantially if and when you have to move the business out of the home.

Depreciation

Since you don’t sit down and write a check each month for depreciation, you may not think of it as an expense. It is however, a very real expense. As your machinery ages, it loses value. Depreciation allows you to get a tax break on your major machinery purchases over time. When you include depreciation in your costing, you pass on the cost of your equipment to your customers.

Calculate expenses on a daily basis and total them for a month, then move on to the next step.

2. Calculating Production Output

We now have to establish a measurable unit of measure to track. Since designs are digitized in stitches, let’s use 1,000 stitches (1KSt.) as our production unit.

In order to get the most accurate production figures, it is best to track your production with a “Production Log”. In lieu of a production log, you can estimate your figures by using the following formula: Output stitches equals 50% of your machine speed. For example; if your stitching speed is 1,200 stitches per minute, 50% of that is 600 stitches per minute. This means that during an 8 hour day of production, you should be able to generate 36,000 stitches per hour (288,000 stitches per day) working full time.

Keep in mind that these output figures reflect full time production (8 hours per day). If you are a start-up business, you may not have enough production volume initially, to keep your machine running full time. By projecting full time production, you will derive a realistic and competitive cost. Even with your profit margin included you may operate under a loss for the first few months of business. You need to cover that loss with enough start-up capital to keep your business going until you are able to generate enough sales to achieve full time production status.

3. How to Figure Cost Per Unit (1KSt)

Divide your daily production output into your daily cost of doing business. For example: If your production cost per day works out to be $18 per hour ($144 per day, $4,380 per month) and your adjusted production output was 600 stitches per minute (SPM), which becomes 36,000 stitches per hour (SPH), your cost per thousand stitches would be $18/36 = $0.50 per thousand stitches.

4. Competitive Markup and Selling Price

The FTC prohibits this blog from telling WHAT to charge. That is up to you. However, there are some guidelines to help you make that decision. Let’s use two different business models as an example. The first embroidery shop has chosen to only provide embroidery services oncustomer’s own goods, while the second shop sells wearables as well as the embroidery. By nature, embellishment will usually command tight profit margins. Even though the embroidery often creates the perceived value of the garment, the customer is still buying the garment, not the embroidery. By following this first business model, in order to make a reasonable income, you will have to do a lot of volume and own a lot of production machines to make a decent profit.

If you follow the second model, you can easily make most of your margin on the garment and show a reduced margin on the embellishment. When you add the two margins together, you can make a good income as a single head shop.

Let’s talk about mark-ups (this is what creates your profit margin). In the retail industry, most large stores mark-up their garments at least 100% (50% gross profit margin). This policy is known as “keystoning”. These large retailers are able to justify this high margin because they purchase volume, in bulk and are also stuck with the task of disposing of unsold merchandise at the end of the season.

Most small embroiderers are what we call “made to order” or “custom shops”. By this we mean that a typical customer might order 13 pieces in 5 different sizes, each embroidered. You will only order 13 pieces from your distributor at a wholesale price, however, not as cheap as the big retailers. The good news is that you are not stuck trying to liquidate unsold, excess merchandise. For this reason, you may not be able to get the 100% mark-up. You will probably fall between 50% to 100%. (33% to 50% gross profit margin).

The garments are easier to price since you know your cost (don’t forget to add inbound freight charges). The embellishment can be a little more complicated since you have to first figure cost based on history (above) and also charge for digitizing or lettering set up fees. The embroidery portion of the selling price will probably only get a 50% markup (33% gross profit margin). Obviously you want to try to get the highest markup possible (what the market will bear).

How to Correctly Price Embroidery Jobs – The Smart Way

You have sunk your heels deep into the world of embroidery!

Were you one of those shops that thought, “heck we are already screen printing, why not start an embroidery department?”

Or you might be an established embroider and you are looking to take your business to the next level.

Whether you have a single head machine or are running an entire fleet of embroidery machines you have chosen to tackle one of the finest decoration methods in the world of decorating.

Let’s talk about pricing.

First and foremost, as a disclaimer, this article will not give you the exact price guide you should charge for embroidery. Rather, it will outline a few key factors that should go into making your price.

You will need to do some basic calculations to ensure that you are constantly making money when your machines are running. This is calculated by figuring your overhead and labor costs divided by the time you are operating.

Rule #1: Embroidery is not Screen Printing.

Your automatic press that can print 400 shirts an hour does not exist in the world of embroidery. It is a slower process, it requires an immense amount of detail, focus, and precision. You can give massive price breaks for volume in screen printing, embroidery is different. There is a lot more manual labor involved beyond loading and unloading a shirt.

Rule #2: Every job is different

While some shops may give an approximate price for embroidery based on stitches, you should also take into account the complexity of the job and how much work needed to successfully embroider it.

Rule #3: Garments sewn on are generally more expensive

You can confidently say that raw goods to be embroidered on are generally more expensive than screen printing goods. Customers understand that embroidery is delicate, and more often than not they are so impressed by your work, they are willing to pay for it. Don’t be afraid to raise those prices a bit.  

Rule #4: Don’t skimp on the set-up or digitizing fee

Want to offer free digitizing? Fine, but you better be selling 50 garments minimum, and have simple artwork. The second you sense a picky customer, or are producing a lower amount of goods, charge for a digitizing, set up or tape fee, and set expectations with the customer.

Explain to them the intricacies of digitizing and the limitations you may have. Let them know revisions cost money, and that expense might be incurred to them if they are too picky.

Have flexible pricing for your set up fees, perhaps its rated by easy, medium, or hard.

Rule #5: Incentivize customers to cater to your business

If you have a 6 head, give better deals when quantities are ordered in multiples of 6. If you only have one single head that can do custom names, charge a premium.With more stitches, comes longer run times more thread breaks and machine error. Make sure customers know that adding more stitches causes great complexity. Your pricing should reflect that. 

Summary Basics of Pricing

1. Have set up/digitizing fees based on complexity.  (Easy, Medium, Hard)

2. Charge Per 1,000 stitches starting at 5,000 stitches (just an example). Exponentially increase prices as stitches go up since complexity goes up. ($5.00 for 5,000 stitches, 6.50 for 6,000 stitches)

3. Don’t over incentivize for quantity breaks unless you have faster production channels. Just because you are doing more pieces, doesn’t mean it will necessarily go faster.

4. Charge differently for garment types. This compensates for hooping challenges (Easy, Medium, Hard)

5. Asses pricing based on the raw cost of goods. More expensive items are more expensive to replace, so protect yourself. (Garments that cost you $5-10 cost x, $10-20 cost 1.25x etc)

Pricing table example: 

Good company in a journey makes the way seem shorter. — Izaak Walton