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Build Your Business: Management
The Nuts and Bolts of Embroidery PricingEffective, profitable pricing takes hard work, but is vital to the success off any decorated apparel business
Pricing one’s work effectively is critical to the profitability of any decorated apparel business. Art by iuriimotov – stock.adobe.com
Pricing your embroidery for a profit is a skill that must be developed early on when creating your decorated apparel business. However, there are steps that must be followed prior to creating a profitable price list. Far too many embroiderers pull a figure out of the air hoping it will cover all their costs and maybe give them a little profit. That is a sure way to go out of business.
You also cannot gather every other embroiderer’s price list and try to create your own using their figures. This will cost you your business as well.
So, what do you do? How can you come up with a price list that will keep you competitive in the marketplace and bring in the amount of work that you need to stay in business?
No two embroiderers have the same expenses or circumstances, and it is impossible to work with someone else’s price list and expect that you are going to make a profit. New embroiderers, and even many seasoned embroiderers, do not know where to begin when it comes to pricing their embroidery. For some reason this is a subject that is very scary, and it is easier to work with someone else’s pricing than trying to develop your own.
Whether you are just starting out or have been in business for a while and do not yet have a profitable pricing structure created, it is time to get a firm handle on the business side of your business. This in turn starts with knowing your numbers.
There is a lot to pricing, but if you stop and think about it logically, it is quite simple. You need to bring in more money at the end of the month than you are spending. I know that sounds a little too simple, but that’s pretty much it. With this in mind, I am going to go into detail on how to price your entire system. Ultimately, pricing is not only a skill, it is a process that includes finding answers to the following questions:
- How much actual time are you spending creating embroidery for your various customers?
- Are you charging by the stitch count? If so, how much time are you actually running your machine?
- Who is paying for the preparation of the embroidery?
- Who is paying for the clean up after the embroidery is completed?
- Who pays for the time you wait on the customer or do the billing? (I bet the answer is you do!)
According to most of the pricing information I have seen or read about, the majority of embroiderers charge by stitch count alone. That means the customer is only paying you when the machine is running. How can that be fair? It means you are paying for everything else, which not only eats up your profit, but costs you money. That is not the way a business is supposed to be run. You are in this to make a profit, not give your products away! With that in mind, the basic equation for pricing of each embroidered design (not including the blank garment or item itself) is as follows:
Cost of Preparation Time + Cost of Machine Time + Markup = Total Selling Price per Embroidered Design
Below is a series of steps for determining your own preparation and machine-time costs, in order to ensure your pricing reflects your actual cost of production. A link to an automated system for making these same calculations can also be found at the end of this article.
Step 1: How much is it costing you to run your business each month? Make a list of every single expense you have—and don’t forget to pay yourself. Even if you are the only person in your business, you need to be paid for your efforts. If you have employees, you will need to account for each one of them. Again, don’t forget yourself! Whether you take a salary or not, it needs to be built into the pricing structure.
Next, what about machine payments? Did you pay cash for your embroidery machine, take the money out of savings or maybe your 401K? You need to be paid back for that expense. You also need to account for another machine further down the road. Machines do not last forever, and you will need the money to either replace it or purchase another machine someday. If the money is not built into the pricing structure, you will not have it when the time comes.
Speaking of expenses, are you working out of your house? If so, you need to add for your rent, utilities, phone, internet expense, business insurance and every other expense doing so incurs. Just because you are working from home, that doesn’t mean you are running your business for free. If you do not have all these expenses built into your pricing structure and all of a sudden you find you are growing so fast you have to move out and find a retail location, you’re not going to be able to figure out what you can afford.
OK, so let’s sum that up.
- Machine payments
- Salary (or salaries)
- Payroll taxes
- Office expenses
- Car expenses for deliveries or pickups
- Banking expenses
- Manufacturing supplies
- Accounting and legal
- Building expenses
- Machine repair expense
You may have other expenses, but at the very least you need to determine figures for all the expenses on this list. Once you have all these monthly expenses added up, you will know what your breakeven point is, i.e., the money that you need to be bringing in each month to cover your costs.
Step 2: How much does each hour, minute or second of labor, or preparation time, cost you in your business? Once you figure out how much you need to run your business each month, you need to figure out how many hours you are spending running your business over that same time period. Divide your total cost by the number of hours you are running your business to determine your cost per hour. Do the same thing for minutes. Once you start thinking of your costs in terms of minutes and even seconds, you will start to see and think about your business in a whole different light.
Step 3: What are all the steps and processes you perform in a typical business each day? How much is each of the following tasks costing you in terms of your time?
- Taking an order
- Planning out the order
- Ordering the garments for each job
- Checking to see if you have all the supplies you need, including thread
- Making sure you have the right hoops
- Opening the box of goods once it arrives from the distributor and checking its contents against the packing slip to make sure the entire order is there
- Hooping the first two runs
- Running off a design and sending the sample to the customer for approval
- Cleaning up the garment, removing backing, threads, steaming it and packing it for pickup or shipping
- Creating the invoice
Each one of these tasks takes time, and you need to keep track of how long each one takes so you can accurately assess what the costs are for each of the tasks you perform when completing an order. The process starts the moment an order is taken and continues through all the steps of planning and manufacturing right up until it is billed. Each one of these steps has a time and cost associated with it. The workflow should be time studied at each stage of development to see if there is another way or movement that can be changed or incorporated to help the process be done that much more efficiently.
As a side note: I have found that in most cases not enough thought is put into the planning process before each step. This is especially important as a small embroidery business is growing and expanding into a larger organization.
Once you have completed time studies of each process or task, you can figure out what each process is costing you based on how many minutes or seconds they take multiplied by the figures generated in Step 2. Again, this is extremely important. Now you can see exactly how much money the various production tasks you’re involved in are costing you. Add them up to create the Cost of Preparation Time for each job, i.e., the first part of the equation above.
Step 4: Multiply your costs per minute by how many hours you run your business per day to get your daily breakeven point. The goal here is to determine the amount of money you need to bring in to cover your daily operating costs. It is especially important to analyze your costs this way if you are working part-time, or your hours tend to fluctuate, day by day. You now know exactly what it costs you per month, hour, minute and day to operate your business, thereby providing a rock-solid basis for all your pricing.
Step 5: Figure out how long you are running your embroidery machine per hour. Now that you’ve calculated how much to charge for each hour and minute of time spent working you need to do the same thing for your embroidery machine run times. How many minutes of each hour is your embroidery machine running? If you are only running your embroidery machine 30 minutes per hour, your breakeven point, or cost of machine time based on your overall cost of doing business as calculated in the steps above, is going to double for that same hour. If you are charging by the minute when the machine is running and not for the time that it is sitting there doing nothing, you are losing money.
If you figure out that in an eight-hour day your machine is running a total of four or six hours, you must divide your total daily breakeven point (as derived in Step 4) by the four or six hours your machine is actually running to arrive at your true breakeven cost per hour. Divide that cost up into minutes. You now have a true cost per hour of machine running time that you can use as the basis of the second part of your pricing equation.
Step 6: Figure out how long it takes to run a design on your machine by the stitch count. In the same way you determined how much time it takes to perform the various tasks that go into completing each order, you need to do the same thing for machine time. When you are timing your designs, do not forget color changes and trim times. You are figuring the total time from start to finish, not just the stitch count run time. Start timing as soon as you slide the hooped garment into the machine. Continue timing until you are ready to slide in the hooped garment for the next run. Multiply that running time (in minutes) by your business cost per minute. This is the only true way to time the running cost of the machine, or Cost of Machine Time, for each order. You now have the basis for determining the second part of the equation at the top of this story.
Step 7: Add the Cost of Machine Time as devised in Step 6 to the Cost of Preparation Time as devised in Step 3. You will now have your true cost per design for however many stitches are in your design. It should be clear now that you cannot figure your pricing on stitch count alone. It does not work that way and will not make you any money.
Step 8: Figure what you want to add for a markup. Now comes the final part of the pricing equation. Without a markup, you will not have any profits to build or grow your business with. You cannot do so just charging for your costs. After your markup, you will have the selling price of each embroidered design per stitch count. The normal markup can be between 25 percent and 200 percent. It all depends on your market and whether you are selling garments, or just selling the embroidery. Note: you will need to add more of a markup if you are only selling the embroidery and the customer is furnishing the garments.
Step 9: Create a price list for the most popular products you sell. Take the purchase price of each blank item, being sure to add the shipping cost to determine its true cost. Add a markup to this as well. This is what you would sell the blank item for without the embroidery. Add your embroidery cost (including the markup) to create your total selling price with embroidery for each item. The compete formula is as follows:
Cost of Preparation Time + Cost of Machine Time + Markup + Cost of Blank Item (including item markup) = Total Selling Price per Embroidered Item
This then is the formula I recommend you use to help you think about to figure your pricing. This formula works. Pricing your embroidery takes time, but you must take the time to do it to make a profit with your business. Without a profit, there is no point of staying in business! I know it may sound like you are going to end up with a very high price for your embroidery, but that is what you should be charging for your embroidery. Most embroiderers are not even covering their costs, let alone make a profit. Don’t make that same mistake!
Joyce Jagger, creator of The Embroidery Coach knows of what she speaks, having nearly lost her own business as a result of making the same mistakes many other embroidery entrepreneurs make. Today, in the wake of selling what ultimately proved a highly successful business she has dedicated herself to helping others succeed through personal coaching, a number of online training programs and her book, The Truth About Embroidery Business Success. Another book will be coming out later this year. For more on pricing, in particular, go to howtopriceembroidery.com.
Time, Cost and Embroidery Compensation Summarized
There’s a lot to keep track of when figuring out how best to price your work, but it’s worth it. Part of running a successful business is ensuring you are compensated fairly. For reference, the basic sequence for determining the cost per embroidered design is as follows:
Total the Cost for Preparation Time
Multiply the time spent performing all the tasks that go into creating a design or decorating an item according to you cost-per-minute, as determined by your time studies and an average of several hoopings and preparations.
Total the Cost for the Machine Time for a 10,000-stitch design with approximately five colors
Again, multiply time by cost-per-minute. Total running time for a 10,000-stitch logo should be about 36 to 38 minutes, depending on color changes, trims and the speed of the machine. Average out the time for a number of different stitch-count runs. The average design is 8,000 stitches, but many are way over that.
Add the Cost of Preparation Time and the Cost of Machine Time to determine the total design cost
Note: this is not the selling price for a decorated garment or other type of item, only your embroidered design price.
Add a Markup and the cost of the item being decorated (including a markup for the blank item) to your embroidered design price
This will be the final selling price for a decorated item.
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