October 12, 2016
Heat printing continues to grow as an apparel decoration technology. Decorators are finding the process is a viable solution for low- to mid-quantity runs, challenging fabrics, and for delivering special effects and full color.
The process encompasses a wide range of options, including heat-applied and print-and-cut films, screen-printed transfers, sublimation, rhinestones, transfer papers, spangles, appliqué transfers and more. Plus, these options can be applied with a heat press, adding to not only the allure, but also the challenge — especially when it comes to setting up a pricing model for profit.
Accomplishing this often is not as simple as setting up a pricing grid for screen printing or charging for stitch count with embroidery. However, decorators can make sense of a rather complex situation by providing an easy-to-understand price quote to the customer.
Let’s start with some assumptions and recommendations for pricing.
1. Present it in a way that leaves little room for negotiation. I recommend using the language, “The price is ‘X.’”
2. Have a pricing model that accounts for quantity breaks and is based on the popular “buy-more-save-more” consumer mentality.
3. Never present more than three pricing options. A “good-better-best” proposal is proven to simplify selection and yield more conversions.
4. Measure and focus on generating more overall revenue per customer by packaging, upselling and offering additional placements. It’s always easier to sell more to an engaged customer than to find a new one.
While your market (customers and competition) should be considered, a sound pricing model cannot be established without a basic understanding of cost. The absence of such presents substantial risk to the business as it relates to cash flow.
Sure, a business can track profitability by checking the monthly balance in the bank account, but a better way to track and control profitability is to ensure maximum, measurable results on every sale. For this reason, it’s important to ensure a firm understanding of calculating costs.
Such a calculation should include direct and indirect costs. Direct costs can be attributed to manufacturing the finished product, including labor and materials. Many apparel decorators, particularly small-business owners who often directly contribute to making the finished goods, fail to include labor as part of the cost. It’s important to capture this if you wish to be profitable. It also allows you to replace yourself one day by hiring employees to scale the business and increase production.
Indirect costs are not directly applicable to the product’s manufacturing. These costs are commonly referred to as overhead expenses and include items such as lease payments, sales wages, management fees, commission, healthcare, electricity, taxes and marketing expenses.
Many apparel decorators fail to factor overhead into the equation as part of the cost-calculation process. Overhead can be applied as a percentage rate to every sale, effectively capturing often-omitted costs.
To calculate an overhead rate for your business, take the total costs of all overhead expenses for a set period (for instance, three months) and divide it by the direct expenses for the same period. The result will equal an overhead rate, which then can be used to calculate total costs (see “Using Overhead to Calculate Costs”).
The Labor Factor
There are several pricing philosophies that you can adopt. One understanding that is paramount for your heat-printing business as you work to adopt a strategy is that this decoration method is not exponentially scalable without more labor.
Simply put, every item created requires locking down the heat press. While productivity per employee can effectively scale by 150%-200% with equipment automation, there isn’t a major change in the cost calculation compared to screen printing — where the major costs of screen setups amortizes across a larger run — or embroidery — where multihead production can significantly increase capacity by up to 10 times.
With most heat-printing jobs, there are minimal labor and material-cost savings for quantity outside of screen-printed transfers, where the screen amortization advantage comes into play when making the product. So when crafting a strategy, place a premium on using direct labor and machine capacity as profitably as possible.
The keystone method effectively doubles costs to establish selling prices. While simple to calculate, this method reduces profit margin.
Consider that a T-shirt cost added to the cost of a screen-printed or vinyl-cut transfer can equal as little as $3. The keystone method creates a markup of only $3, perhaps pricing well below market value at $6 per shirt. On the other hand, a jacket that costs $38 to print would be priced at $76 using the keystone method. While the jacket presents greater risk and waste to decorate, the reality is that each takes a similar amount of time to print in your shop. There is an imbalance in using this scale and you can fall short of profitability goals by filling capacity with T-shirt jobs.
Minimum Acceptable Gross Margin
Gross margin is the difference between revenue and cost of goods sold, divided by revenue and expressed as a percentage. Many shops create business rules based on a minimum acceptable gross margin to manage pricing negotiation and discounting.
While it’s smart to have these rules that protect overly aggressive discounting, gross margin is risky as a guiding price philosophy. Consider a business designed with a minimum acceptable gross margin percentage of 40%. That $3 T-shirt would be priced at $5, whereas the $38 jacket would be priced at $63.50.
Again, the profitability scale varies widely across items, creating an imbalance. While not mutually exclusive to gross margin, any percentage-based calculation, such as markup percentage, presents similar risk.
Minimum Acceptable Profit Per Piece
Profit per piece is a pricing philosophy that establishes a minimum profit amount that is to be added to the cost of goods sold to establish a selling price. Businesses using a profit-per-piece model typically establish a base rate that can be applied to goods.
This pricing model ensures a decorator makes a certain minimum profit amount for each application at the press, effectively marrying capacity to profitability. With a $10 profit-per-piece rule, the $3 T-shirt would cost $10 and the $38 jacket would cost $48.
Due to both the increased risk and potential profit on tougher-to-print items, different profit-per-piece rules often are applied to different product categories. For instance, performancewear may have a higher calculation than a cotton T-shirt.
While these are three cost-based pricing model calculations, it is highly recommended that a customer-based or market-price calculation be the second part of the equation. Once applying cost-based pricing logic, consider the price the item can command. If that price is higher than that which the cost-based calculation provides, then increase the selling price.
Pricing strategy should be intertwined with product and marketing strategies to ensure maximum results. If you find yourself not working for the profit you desired, rethink your overall plan.
Do you have a one-size-fits-all product approach or are you designing product relevant to a niche audience? The latter allows for greater margins.
Do you find yourself discounting product to compete with the shop down the street or do you have confidence that the value proposition you provide separates your business and protect your profits? Once again, the latter wins.
Challenge yourself to do the work necessary to ensure your business’ profitability and success.
Josh Ellsworth is general manager for Stahls’ CAD-CUTdirect.com. For more information or to comment on this article, email Josh at firstname.lastname@example.org or visit his website at joshellsworth.com.
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