What is a good profit margin for woodworking?

The average markup rate in our area is about 40%. That means you would take your total cost and add 40% to give you the full price of your project. If you are a manufacturer and wanted a retail store to have them sell your product they will markup the price at least 40% more than the price you charged them.

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Setting the right price for your woodwork product requires you to know your true cost of production and understanding your customer. You'll need to know your customer's demographic information which includes age, gender, average income, a prominent source of income, and trending interests. In other words, you need to recognize the psychological impact your customers experience when contemplating to buy your product. It's that type of information that will help you achieve that fine balance between making a sale and making a profit. It's not always about giving the lowest price. Sometimes the higher-priced products will sell better with a higher profit margin than lower priced items. In the end, the ultimate goal is to have happy customers that will come back while attaining the optimum profit margin. In this article, we will discuss various strategies used by woodworkers to price an item for sale. These strategies not only work for woodworking but pretty much for any industry. We will follow up with the method we use for pricing our products so you can decide what is the best method for you. Be advised that we are not business consultants. We are merely showing some examples based on research we've done, living and working within the woodworking culture, and explaining how we currently price our products based on our own experiences.

Woodworking Pricing Myths

When it comes to pricing woodworking items the most common markup margin we've heard from the woodworker culture is to take the price of materials for the project and double it. So if it costs $20 on materials for a project you would charge the customer $40. This strategy may work well for the hobbyist wanting to cover their costs but it will not help a woodworker start and maintain a business. We say hobbyists because most will use off the shelf wood from the big box stores and will build these products during their spare time for fun. Yes, we said for fun as those using this strategy are certainly not doing it for profit, because there ain't gonna be any! We will explain in more detail about how to make a profit further down but doubling the cost of materials is likely not going to cut it. The other downfall of this doubling material pricing model is that some wood can be quite expensive. Most wood in the big box stores will range between $1.50 bf to $14 bf but if you start getting into any type of specialty woods you can look at upwards of $50 bf and many customers may not be ready to pay for products made from that wood.

How To Calculate Actual Cost

Before we start by figuring out why we need a 40%+ markup on a project, first let's start by calculating the actual cost for materials and time per project. The first thing to figure out are the amount of material you will need for a project. When it comes to materials, the easy-breezy way is to figure what approximate total board feet are needed for the project than adding about 15 to 20% on top to account for waste or a possible error in one's calculations. The problem with that method is that the error in calculation tends to happen more frequently than we would like and that means you end up underestimating the cost of the project along with possible return trips to the lumber yard.

Not fun!

The better method to figuring out how much wood is needed would be to draw up your project, create a cut list, which will need to be done anyway, and then you will know exactly how much material and hardware you will need. Then having created that sketch and list you will be ready for the next order for that piece, which in turn will save you time which equals savings in cost for higher profits.

Don't worry we will get to the profit information shortly.

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The second thing to figure out is the amount of time it will take to build and finish a project. Essentially most of our furniture projects can be broken down into 6 steps. Getting materials

Planing lumber

Cutting lumber

Assembling

Sanding

Finishing

Sometimes 2, 3, 4, 5, 6 will overlap depending on the type of furniture but those are the basic fundamentals of woodworking. Once again the easy-peasy method to estimate the time needed for a project is to break down each of the 6 steps and adding them up for a total time. The calculating time part may sound easy but in most cases, we will underestimate how much time something will take to do. I think most woodworkers are inherently naive to believe we get things done faster than it actually does. So you really need to be honest with yourself and we have a written about a time management exercise you can read about here. Now if we go back to how to calculate the materials needed where we mentioned the best way would be to sketch up a plan, that method also works well for the time. If you have your sketch and cut list and you start working through the steps you should mark down how much time it took you for each step. Then when you are asked to build the same project you will know how much time it should take you to build that table or chair. You do have to remember that the time taken to do each step will likely improve as you get better and also as you get accustomed to building from the same plan. Now that you've figured out how much time you'll need to build a project you'll need to decide how much you want to charge per hour. Part of that decision will depend on where you live. If like myself you live in North-America then it seems that a reasonable hourly rate is between $30 and $40 dollars depending on your experience. You may think that $30 to $40 is high and it may be true because of where you live. Even if you do live in North America, the cost of living and salaries for any field of work will vary by region and that is the same for woodworker's rates as well. All-in-all $30 to $40/ hour is an average that appears to be consistent across most regions of North America. To sum up the actual costs you will take the cost of materials plus your time to give you the total cost. Material Cost + (Hourly rate x Hours to complete the project) = Total Cost

Woodworking For Profit

Having the total cost doesn't mean you've figured out the final price you will charge your customer. The total cost is what you would charge if you only wanted to barely break even. If you charged at the rate of total cost only you will essentially be building furniture for free. You may argue that you are charging for your time so at least you're getting paid for your time. The reality is that you haven't accounted for many other expenses in order to run your woodworking business so all those expenses will eat up what you charged for your time. That is why you will see successful businesses will do a markup in price. The average markup rate in our area is about 40%. That means you would take your total cost and add 40% to give you the full price of your project. The best way to calculate your markup is as follows: Total Cost [Material Cost + (Hourly rate x Hours to complete project)] *(100% + 40%) Example for a project where the total cost of materials and time equals $50 and you want a 40% markup: [($50) * (100% + 40%) [($50)] * 1.4 = $70.00 If you are a manufacturer and wanted a retail store to have them sell your product they will markup the price at least 40% more than the price you charged them. Remember, you already marked up your price to them by 40%. The store owner knows they need to sell it higher than what they buy it for otherwise they can't stay in business. They have expenses to cover and still want to make a profit to please the owners or investors. The same goes for the a small woodworker business like ourselves. That 40% markup is required to cover all the associated costs to run a business. Here is a shortlist of costs that we incur from running our business: Insurance House/Shop

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House /shop portion mortgage

Heating

Electricity

Van -maintenance, fuel, insurance

Tools -maintenance and new tools to increase efficiency and quality

Replenish sand paper, screws, glue, air filters, gloves, stain, paint, etc +++

Website hosting

Payment Services (Square)

Accounting

Advertising (not currently but possible in future) That list consists of only a few associated costs you may encounter to run a business. If your business grows and you start having to hire employees, rent a store, the list will grow to be much, much longer. If your business expands you see that the number of expenditures increase and you really need to fine tune all those costs to ensure you maintain a profitable business. In our case, the number of expenses are limited and easier to calculate.

We are at a point where we should start seeing some profit.

That is to say, currently, our business is not profitable.

Why?

The reason we are currently not profitable is because of initial equipment costs and shop setup versus low production. Now that we have our workshop pretty much setup (it will never be 100% set up) we should be able to just produce and sell. That was our full intent back at the end of November into December 2019. Unfortunately, we had a huge loss in our family and we are now just starting to get back on our feet, starting to have some normalcy back in our routine. We acknowledge our lack of production and understand that we may not reach the medium length goal we spoke of in our "Work-Life Balance" blog as predicted. That doesn't mean we are giving up. If anything, our loss has demonstrated how fragile our lives are and we need to jump at every opportunity we have to make a better life for ourselves and others. So we are moving forward with our business and we predict great success with the path we are taking. We see the interest in our locally built projects and people are willing to wait for furniture that is made by small business owners like ourselves.

The important thing though is that we can't give it away.

We do need to make a profit to continue doing what we are doing by following the profit formula: Material Cost + (Hourly rate x Hours to complete the project) = Total Cost We hope you found this blog helpful. If you have any questions or comments please contact us. We love to hear from you. Click HERE to sign up for a FREE GIFT for reading all the way to the end! Cheers Paul

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