In a past post, I talked about how to determine your Day Rate or Hourly Rate for your work. In this post, let’s expand that thinking to determine a full shop rate. This is when our small business has grown beyond taking on more than just freelance work or work from the gig economy. We are now looking to hire employees to help us, and have return clients and steady work for our shops.
Determining your shop rate involves several factors that you need to consider to ensure that you’re charging appropriately for your goods or services. Here are 13 steps to guide you in setting up an effective shop rate:
- Understand Your Costs: Calculate all your costs associated with running your shop. This includes both direct costs (materials, supplies, labor) and indirect costs (rent, utilities, insurance, marketing). Be thorough in identifying all expenses. Refer back to my previous post on setting your hourly rate to ensure you include all the non-billable hours items and your general overhead.
- Determine Your Desired Profit Margin: Decide on the profit margin you want to achieve. This margin should provide a reasonable return on your investment and effort. A common approach is to add a certain percentage (e.g., 30-50%) to your costs to determine the selling price.
- Don’t mistake profit for your wage. What you pay yourself is not your profit margin; the profit margin you want your business make after all costs such as materials, overhead, and wages are paid. Your profit margin is money in the bank for you to invest in the future of your business.
- Research Your Competition: Investigate what your competitors are charging for similar products or services. This will help you understand the market norms and ensure that your rates are competitive.
- It is okay to be above the market rate. However, you need to make sure you add above market rate value. If you are 10% above market rate, your product should be at least 10% better than your competitor. This will give you an advantage in marketing your product as a better product to your customers.
- It is also okay to be below the market rate. This will allow you to sell in volume. It is easy to advertise lower prices to attract customers. Selling at a high volume will still allow you to make money.
- However, there is a huge pitfall with this approach. You can easily end up in a race to the bottom with your competitors where you both are trying to outprice each other with discounts and all of a sudden, you are not making any profit or volume.
- Consider Your Unique Value Proposition: If you offer something unique or of higher quality than your competitors, you might be able to command a premium price. Make sure your shop rate reflects the value you bring to your customers.
- This goes back to #3 above. Ensure you add an appropriate amount of value to justify selling at a higher rate. Market your added value to attract customers who want to buy quality.
- Calculate Your Break-Even Point: Determine how many units of your product or service you need to sell to cover your costs. This is your break-even point. Any sales beyond this point contribute to your profit.
- All your overhead: the year’s rent, the software subscription, your wages. Add all of it up to find your break-even point. You may have to work for several months before you start making a profit.
- Factor in Your Time and Skill: If your shop involves your expertise or craftsmanship, don’t forget to account for the value of your time and skill. Many people underestimate this aspect.
- This ties back into #3 and #4: market the skills you do better than your competition and charge a premium for them
- Consider Market Demand: If your products or services are in high demand, you might be able to charge a premium. Conversely, you may need to adjust your pricing strategy if there’s low demand.
- If there is low demand, you can still charge a premium by tapping into niche markets. People who want custom furniture will still pay a premium, even if the amount of those people is a fraction of the amount of people who shop at discount big box stores.
- Offer Tiered Pricing (Optional): You can consider offering different pricing tiers for different levels of service or product quality. This allows customers to choose an option that fits their budget and needs best.
- Not everyone needs soft close-drawer glides. If you are hired to build cabinets for a basic laundry room, you may be able to get away with standard drawer glides and save the fancy stuff for their kitchen build.
- Test and Iterate: It’s okay to start with a certain rate and then adjust it based on customer feedback and sales trends. Be open to tweaking your prices to find the optimal balance between profitability and customer satisfaction.
- Don’t forget to recalculate your rate each year based on last year’s performance and the coming year’s overhead calculation. Your vendors are raising their prices. Thus, you need to raise your prices as well to maintain your profit margin.
- Consider Perceived Value: Sometimes, customers are willing to pay more if they perceive a higher value in your offerings. Factors like branding, packaging, and the overall customer experience can influence this.
- This is all about marketing your skills as a craftsman. A strong marketing program can help justify a hire shop rate.
- Legal and Regulatory Considerations: Ensure that your shop rate adheres to any legal requirements, such as taxes and regulations specific to your industry.
- I have seen so many local businesses get behind on paying their local sales tax that once the local tax office caught up with them, the overdue bills and late penalties put them out of business. Keep up with your local regulations; they are always changing.
- Transparency: Clearly communicate your pricing to customers. Transparency builds trust and helps avoid misunderstandings.
- This doesn’t need to be a breakdown of all your costs but avoid hidden fees. Nobody likes seeing an ad for concert tickets for $50 and then going to buy them, and all of a sudden, the price jumps to $150 because of venue fees, booking fees, etc.
- Regular Review: Your shop rate is not set in stone. Regularly review your costs, profit margins, and market conditions to ensure your rates remain relevant and profitable.
Remember that finding the right shop rate involves a balance between covering your costs, providing value to customers, and making a reasonable profit. It’s also important to be flexible and adapt to changes in the market over time.