I just came from giving a talk on how to make money with your laser, and prior to me speaking I was told I could not mention anything about money, pricing, or what others are selling items for. I did find this frustrating because so many need guidance. A suggested starting point is needed to help one become successful and not give away their future.
Pricing is quite confusing because the work we do is so diverse. I have heard many laser distributors suggest $1 a minute for laser time as a target, and then it went to $2 a minute. Some say $60 to $150 an hour is appropriate for laser time, and that all sounds good for making a decision on buying a laser, but is it feasible?
I can tell you from experience these numbers are not only feasible but I know some laser shops are making much more than this with their products. I’m talking about laser owners who are making this amount with wholesale pricing.
There are also many successful shops making less than the targeted or suggested $1 a minute. What? Here is where I start rambling, because every situation can be somewhat different, yet the ultimate goal is, “What should I be charging to stay in business, be successful, and expand?”
Many customers sell this Victorian Doll House as an unassembled kit for $75, a 1,500% markup over material cost. When you add in the hour cut time, it is not feasible for wholesale, but still profitable at retail.
Break down the $1 a minute times 40 hours a week, 52 weeks a year. That is almost $125,000 gross income a year. With your laser investment, could you make less and still find this industry viable to buy more lasers? I would if I could keep my laser busy running products all the time.
Let me walk you through a possible sale. A customer comes in and wants to buy a laser-engraved pen. You have many styles to pick from, such as different woods and stains, and also fonts that can be used. It is not unusual for you to spend (conservatively) 30 to 45 minutes with a customer before they decide on the ultimate pen gift they want to buy. We haven’t even thrown in the story they are going to tell you about why they are buying this pen! I believe this transaction in some cases can last more than an hour. You see it as building customer relations (so true and important), but it is time spent on one order. Now you take this pen into the back room, and your laser takes 15 seconds to engrave it. What do you charge? My answer would be as much as the market will bear or the customer is willing to pay. Not much help, am I?
For this scenario, I would probably try to fit some (if not all) of the engraved cost into the pen price. Pricing gets even more difficult if the customer wants multiple lines of text or you need to use your rotary fixture. Setup takes time as well. Do you charge for that? Some do, but in this case you have to compete with other companies. Let’s say you charge the customer a $15 fee for the engraving. That is reasonable and equals $1 a second of laser time. Wow! That is impressive. At $3,600 an hour laser time, I would start shopping for that jet ranger helicopter I always wanted! I know I am being over the top on this, but my point is laser time doesn’t always equal actual time spent on a sale (or hourly profit). This helps me bring up my next point.
The more time your laser is running, the better your chances for success. (Like that was news to you.) I am a big advocate for producing your own product line. When you get a personalized order, you can make $1 a second, interrupt production, run the order and then go back to producing products.
I want your laser running eight hours a day or more. This is where the success comes in, and profit is figured on a full day’s production. My background is manufacturing, so I am always looking at material cost, production time, and overhead versus retail/wholesale price. Basically my goal is to make product patterns you can create that will sell for at least 1,000% markup over material cost. Some may think that’s an impossible amount. Actually I try to accomplish this at wholesale pricing. It is only 10 times material cost, but 1,000 percent sounds like so much more.
Can you still be profitable at a 500% markup? Absolutely, but I believe this is the bare minimum if you plan to wholesale. Let me clarify. There are exceptions to every rule, and I’m talking about manufacturing a product line. Many times the manufacturer makes only a small profit off their products because of sales/marketing costs, overhead, and supplies. So, many expenses have to be absorbed before your net profit is realized.
I could debunk my theory with certain products, but we are trying to set a general pricing target. Can a product be produced on my laser that has over a 1,000% markup on material and not be an ideal product for wholesale? Yes. Once again, let’s use one of my patterns—the Victorian Doll House. At our price of material, the cost is about $5. If you are cutting this on a 45-watt laser, it will take you about an hour to cut with all the details. Many customers sell this kit unassembled for $75, and that is a 1,500% markup over material cost. But when you add in the hour cut time, this makes the product not feasible for wholesale, but still profitable at retail.
Can we come up with faster ways to produce the product? How about buying supplies in bulk, for less? You should always look for ways to improve a product line, and that includes making it more desirable.
This laser industry is so exciting with all the possibilities. The truth is we have barely scratched the surface at what new ideas are created every day using a laser.
Is it possible to make a product that sells for 20, 30, or possibly 200 times material costs, which is a 20,000% markup? Absolutely. Come on, you’ve got to be kidding now. No. I see it all the time. We have customers who buy their wood in bulk to cut our ornament patterns. Their material costs are 3 cents and the retail is $6.
What if you printed a detailed picture on a sheet of paper, cut it with your laser, and made a product with it? A printed piece of paper costs how much? I’ve seen such products sell for as high as $85. Do you think he has a winning product? This company just got an order for 10,000 units from a well-known corporation. He started in this business last year and has already ordered his second laser. What can you create with your laser?
When he told me about this order, it gave me another idea. I know you can buy a special matte board. Could you cut their corporate logo with your laser and dip it into some scented oils to make a car freshener for that large company? What about a similar product for a fundraiser or a car club? Once you get an order, what else can you make them or who else can you make it for? One sale can snowball into many new ideas and opportunities.
The point is that inexpensive substrates can be turned into high-value products that sell for many times material costs. Some pricing should be determined by what it will sell for (what the market will pay). The normal wholesale price for retailers is 100% markup, so if the product has a retail value of $20, the wholesale price is $10. Can you still grow your business at this value for your product?
What if I take that $20 product and test market it, and customers are only willing to spend $15 (retail), which is $7.50 wholesale. Is this price still profitable to manufacture? Can you reengineer the design or possibly look at different substrates to make the product more viable? I am just trying to show how the market sometimes dictates our pricing, and we have to adjust to this. Just make sure you are not giving away your profit to make a sale. You will always have that haggler in every crowd. If your price is good, stand your ground.
Pricing is not exact science. There are general guidelines some of us follow, but we all have exceptions to our rules. Neither I nor anyone else can give you set pricing. We can suggest, but we have to be careful of anti-trust laws that prohibit price fixing. Plus, you have an overhead cost that varies among companies. Some say figure out your breakeven point and try to exceed that every week.
A printed piece of paper costs how much? I’ve seen such products sell for as high as $85.
Your breakeven point can be figured by calculating your monthly overhead, such as electricity (which will vary), phone, rent, heat, etc. I believe this only tells you how much volume you need to survive each week or month, but not how much you should be charging for each individual item. If you are producing one or two products consistently on your machine (mass production), then absolutely use this method, but that’s not the case for most laser entrepreneurs.
If you are running similar products as other shops, then you should know their pricing. I’m not saying you have to match it or be less, but if you are more you should have a sales reason for the added cost. Lowe’s lumber and Home Depot price shop each other to stay competitive. Why shouldn’t you?
I once visited a shop that thought it was losing sales because their prices were too high. So I literally picked up the phone (looked through the yellow pages) and called four of their competitors to see what their prices were on a particular item. What I found out was her prices were less than all four, but she was still not getting the orders she quoted. So we contacted one of her customers to see what they ended up buying. We found out the customer was not comparing apples to apples. The quote was for a higher-end product compared to what the customer ended up buying. I believe you have to educate many customers with quality over price. I would not sell a product unless I was proud to say it came from my shop. That decision is up to you, but the customer should be educated on the difference.
This is why I would like to see you develop your own product line. Pricing is what the market will bear. It has no boundaries on profit. If you can take a dollar’s worth of material and create a product that sells for $30, then it comes down to, how many can I produce an hour, a week, or in a month? How will that exceed my breakeven point? Will I have enough profit left over to make mama smile?”
I could show you thousands of products that can attain this level of pricing, but this article is not about product designing.
You can check out my other articles on product creation, where the market is, or many other valuable topics. There is a ton of information to help you become successful archived at the A&E website, www.a-e-mag.com. All you have to do is start reading.
Note: I have two topics for The NBM Show seminar season for 2011. The first is “Increasing Laser Sales In A Slow Economy.” We will explore who needs your services, discuss the many products that are in demand, and cover ways to market those products without cold-call selling. No source outside this country can compete with the unique details you can add to a product. One great idea can make your business a success; I will share several proven ideas that have worked well for many.
My second topic is “Ten (or More) Tips Every Laser Engraver Needs to Know.” You will learn what the pros know about finding speed and power settings for each different substrate (wood, plastics, paper, glass, metals, etc.) on your laser. Much of this class will be a demonstration on how to vector-draw a logo. If you bring a laptop, you can follow along with a download from the instructor. With practice comes perfection. Remember that one good idea could put you on the road to success. I hope you will attend! Please go to www.TheNBMShow.com to see the trade show that will be closest to your area. I look forward to meeting you!