Find the true profit by going beyond a simple markup.
By K. Schipper
Even if you’re the world’s greatest fabricator, if you’re not pricing your output correctly your bottom line may not be showing the profits you’d like. And, while there’s no one single approach to pricing that’s going to work in every shop and every situation, the key is a thorough understanding of your business.
The new year is always a good time to take stock in what’s going well and what could be better, both personally and professionally. And, tax season offers an especially good incentive to look at the past year’s finances.
KNOW YOUR RATE - EVALUATE
When it comes to mistakes that shops can make when setting prices, Tony Malisani, vice president of Great Falls, Mont.-based Malisani, Inc., thinks one of the biggest is letting the competition drive your numbers.
“One guy might be charging $30 a ft², and another is getting $60 per ft², and they’re pricing their material where they feel competitive,” he says. “There are people who say, ‘The market will only bear this price; so that’s where I’m going to set my price and then try to compete.’”
Jon Lancto, president of the Artisan Group and an industry consultant with Big Fish Consulting in Charleston, S.C., is equally critical of those who base their pricing on the cost of materials.
“They’re pricing by just multiplying material costs and not looking at what the actual throughput value needs to be,” he says. “There’s definitely a square-foot metric that people need to look at. What’s the throughput per square foot, given each segment they’re serving?”
That’s not to say it’s always easy to separate the throughput from the materials. G.K. Naquin, president of Loxley, Ala.-based Stone Interiors, notes that while it’s possible to develop a good average for what it costs a shop to fabricate a square foot, materials do differ.
“You have to consider the complication of the material to produce, and secondly, the extended time to produce the material,” he says. “To cut a quartzite job takes about twice as long as it does to cut a granite job, so I can’t price my quartzite at the same price I’m pricing my granite or my marble. You need a matrix for each material.”
Nor is the throughput going to be the same for each project.
“There may be special circumstances wrapped into a job, or associated with difficulties with a particular material,” says Lancto. “The edge details and the fabrication details have to be factored in and because it’s going to take more time, there needs to be some additional compensation.”
Malisani notes that he charges more for detailed edging on quartz jobs, something that dates to when the product first hit the market.
“I noticed I was buying an unusual number of shaping bits for tooling, and I came to the conclusion that quartz is harder on the diamond tooling than natural stone is,” he says. “So, we raised the price on doing some of the more-detailed edging because we were going through more tooling.”
He adds that the need for higher pricing also holds true with the transportation of some materials. For example, in hauling a 2cm Class D marble project, Malasani incurs extra risk for him, and extra cost for his customer because of Montana’s rural – and often mountainous – terrain.
“What’s the throughput per square foot, given each segment they’re serving?”
Big Fish Consulting
“How much time are you going to have to spend managing the customer?”
Rockheads Group USA
It would be nice to think that production and installation were the only costs to consider on throughput. Nope.
Malisani’s observations about the cost of replacement tooling are a good case in point. Other concerns should be the wear-and-tear on equipment. A more-obvious one is the cost of labor.
Jon Kaplan, the Beachwood, Ohio-based managing director of the Rockheads Group USA LLC, sees direct labor costs, plus direct material costs, as the most-important metrics when setting pricing.
Those change depending on how your shop is set up and the work you do, he observes. Not only are there some economies of scale doing 500 identical vanities -- as opposed to doing individual kitchens -- but it also depends on whether you’re an automated or manual shop, and the amount of skilled versus unskilled labor you use.
In short, there’s no one-size-fits-all.
“The same holds true with your sales and customer service teams, which are a real cost of your project,” Kaplan says. “It also depends on the customer you’re dealing with. How much time are you going to have to spend managing the customer? All those things take additional work in labor, which is money.”
Stone Interiors’ Naquin utilizes a multi-tiered matrix for that aspect of the job depending on whether the customer is working through a Big-Box store, a builder, a designer or architect, or direct retail customer. Retail also requires further differentiation between customers coming to the showroom or on-site visits by a salesperson.
“The retail customer is typically the most-demanding,” Naquin says. “There’s no buffer between you and the customer, so you have to give more education to that individual homeowner. Your person is spending hours, sometimes days, going over material pricing, selection and so forth.”
That isn’t necessary a bad thing, says the Artisan Group’s Lancto. Particularly if you’re a small shop, you may be competing on exceptional service rather than volume.
“They (small shops) need to take advantage of the add-ons to justify that additional cost,” Lancto says. “If the customer isn’t simply comparing the square-foot price, you can make money charging a higher price, but you have to justify the different things you’re offering to the customer.”
Those add-ons can be anything from upgraded edges to showing seam placement on the slabs, he says.
And, of course, there are the fixed costs that anyone doing business faces – lights, heat, water, etc. However, Naquin says one that’s often overlooked by many businesses when setting up their pricing is the cost of both general liability and workers’ comp insurance.
He admits that many insurance companies don’t understand what a granite-fabrication shop is, but he says shops can definitely benefit from becoming involved in the Natural Stone Institute’s Accreditation program. Stone Interiors, for example, earns lower rates by following certain safety guidelines and getting an annual OSHA inspection.
“If I’m paying 8% for $100 of covered payroll, and my competitor down the street is paying 25% for that same coverage, that’s a huge advantage in my case and it certainly affects my pricing,” Naquin says. “Some people figure they just have to pay whatever rate they get, but if you invest in safety, that rate drops hugely and can positively affect your pricing.”
DIFFERENT PRODUCTS, DIFFERENT CHARACTERISTICS
And, then there’s the material. Even if a shop was strictly selling granite countertops, the word “granite” embraces several different products with different characteristics that sell for a wide variety of prices. A good pricing structure recognizes that variety of prices, along with other factors.
Stone Interiors’ Naquin says one of the biggest material factors is waste, and some of that depends on the shop itself and the materials on hand. In his case, the company stocks many products that it buys from distributors or imports directly.
“If you’re looking for a Sequoia Brown, we have a whole crate sitting there,” he explains. “If the customer chooses a material we identify as a ‘house material,’ that means we can sell it by the square foot because we don’t have to buy a slab ,and it maintains a waste factor we’re aware of.
“If the customer chooses a material we don’t keep in stock, then they have to pay for the whole slab because we have to buy the slab from the distributor, whether we need the whole slab or not.”
Naquin says he has numbers on the average waste factor for each of the materials his company works with, including ultra-compact products, while keeping in mind that a particular job – say one with complex miters – will likely generate more.
Even within a material, Malisani notes that some are more prone to having fissures or cracking, and that also needs to be factored into the pricing. And, then there’s the client who wants something in the high end of the price list.
“If you’re working on some super-expensive material and don’t include some compensation for the risk you’re taking, you’re making a mistake,” says the Artisan Group’s Lancto. “All you need to do is make one mistake and you’re buying another slab, only instead of being a $500 mistake, it’s a $2,000 mistake. Those kinds of things can impact your bottom line very quickly.”
And, just as some shops overlook insurance when they’re talking about fixed costs for throughput, Naquin says some fail to consider the ever-present sales tax in their material costs.
“They’ll forget the sales tax, and that might be the whole profit for a job,” he says.
“They'll forget the sales tax, and that might be the whole profit for a job.”
“Is that a realistic price? Are you able to do more than pay for the tools you’re using?"
A MATTER OF PROCESS
By now, it should be apparent that pricing isn’t just a percentage markup. Figuring out what works for you is a complex matter, and one that’s going to take some time – at least until you have a system.
“It really starts at the front end, setting up your systems properly,” says the Rockheads’ Kaplan. “Once you can start to track the data and get some understanding of where your labor costs are and how they’re being applied to the job and getting some history and data, you have to keep refining the process.”
Nor does that mean there’s agreement on what’s the most-important metric to consider when setting up those prices. While Lancto sees materials as the most-volatile part of pricing – “With the quartz tariffs, there couldn’t have been a more-disruptive thing happen to the fabricator industry,” he says – Malisani gives the nod to labor and costs connected to it.
Does that mean utilizing a pricing and production software? It might. Stone Interiors’ Naquin says his companies have used a couple different products, switching to Chicago-based Stone Profits System software when previous software being used was no longer available.
One of the key reasons for using such a system, Naquin says, is his companies have more than 30 salespeople out quoting jobs.
“You can imagine 30 different quotes going out if you don’t have a system,” he says. “And, those quotes are only as accurate as their experience. Now we can bid jobs on the phone, but it takes administrative time and ownership time to build the tables of what price structures you want to be at.”
Lancto says several industry-specific software packages are available, although a Microsoft Excel spreadsheet may also do the trick. Both he and the Rockheads’ Kaplan also say there’s a lot of value in networking with other fabricators to compare metrics.
“The main thing is building a pricing structure to teach your employees how to price,” Lancto says. “You can put in the needed items or features that your people need to charge for, but if you’re in a business that has a diverse segment base, it can get complicated to have a pre-established pricing model for each.”
And, Lancto stresses that in any case you must develop the numbers initially, and then keep reviewing them – although Kaplan, who’s also an accountant, says that work can also be outsourced.
“This part of your business is extremely important, just as much as having stone in your yard or hiring skilled labor, “ Kaplan says.
If that sounds too overwhelming – and for small shops it might – Malisani suggests just taking one area of your business and looking at what it really costs to do a job.
“Peel that back and develop some metrics,” he urges. “Say that you’re charging $200 to cut out an undermount sink and install it. Is that a realistic price? Are you able to do more than pay for the tools you’re using, or are you able to replace those tools? You have to know what you’re doing.”
“The business side of the stone business is a continuous improvement project,” concludes Kaplan. “You have to put as much value on the office side as on the artisan side and the physical labor side. Move that up the ladder of priorities.”