Video transcript

Let’s talk about pricing strategies, and the important factors to consider in formulating prices for a typical retail frame shop. If your business is new, there’s no better time to establish profitable business practices, including an informed, workable pricing strategy.

If your business is well-established, or if you’re planning changes, maybe your pricing strategy needs a review to maintain profitability or to remain competitive in your market.

Pricing strategy involves a lot more than cost-markups, and varies according to the unique nature of each business. A markup that’s right for you may be wrong for another framer.

Our topics today include the purposes of developing a pricing strategy, business variables affecting pricing, different types of pricing, categories of materials, pricing methodologies, pricing for labor, common pricing mistakes, and some recommendations.

PURPOSES OF PRICING STRATEGY

The first purpose of any pricing strategy is to maximize profit. It’s essential to figure out the best mark-ups to apply to the costs for various materials, in order to achieve a fair gross profit margin, but that’s only the beginning. Pricing strategy involves all cost factors affecting net profit, such as labor and overhead costs. We’ll talk more about these things later.

As a general rule, charge the highest prices your market will bear. Customers often say “your price is too high”, because they want to pay less, and that catch-all phrase covers objections other than price. Don't be intimidated, and never feel guilty about charging the highest prices your customers will pay.  Maximizing profit will help you grow the business, keep it financially healthy, and ultimately, enable you to make it more attractive to more customers.

On the other hand, the market will not tolerate prices that really are uncompetitive, so establishing prices cannot be done in a vacuum; the strategy has to be based on informed reasoning. Determining optimal pricing is a thoughtful, ongoing task.

Successful businesses maintain a competitive edge in their local markets. Shop your competitors and compare your own prices against theirs, perhaps every few months. Family and friends can help with this. If your prices are similar to theirs, and your profit is too low, then something other than pricing needs your attention.

Marketing is an essential part of pricing strategy. Try to build a profitable niche and develop expertise to serve segments of your local market better than your competitors can.  For example, my shop specializes in preservation framing of collectibles and heirlooms, especially three dimensional objects. When you focus on framing specialties that customers want and your competitors cannot match, you set your business apart from the competition. To put it another way, compete on the basis of value rather than price. This sort of marketing philosophy has a direct benefit on your pricing strategy.

Learn all you can about the demographics of your local market and identify your target customers. Survey your past customers to ask for their honest assessment of your business and their buying experiences. You can pay outside contractors to conduct marketing surveys, including blind surveys, and they may be worth the price. This is all about knowing where you stand, and finding your best position in the market.

Variables

There are lots of variables in business and nothing stays the same for very long.  Moulding and matboard suppliers add and delete line items all the time, and change their prices several times a year, so how often do we need to update? This is a key question in pricing strategy. The right answer is to update as often as you can, and a good pricing strategy accommodates that process.

Material cost varies according to our buying habits. Sometimes we can buy more and earn quantity discounts, but probably not all the time. We have some control over this, but quantity discounts are still a significant variable.

And then we have to deal with waste from off-cuts, flaws, and damage during production. All of these factors represent variable costs.

The charges we pay for shipping or delivery are always variable and may be uncontrollable. The time we spend to prepare and enter purchase orders, and to shop around for new sources, and to receive and handle incoming materials is indirect labor, also known as acquisition cost. And then we have to pay the invoices and keep the records. Minimum order requirements or small order fees boost our cost, but may be offset by earning discounts for prompt payment, often called “cash discounts”. All of these are variable cost factors associated with acquisition of materials.

Labor often represents about one third or more of the cost total for a small retail picture framing business, and it may be the largest variable cost in any business. Everything we do involves labor, and sometimes it isn’t obvious.  For example, in retail custom framing, the largest single component of cost in a framing order could be the time spent with an indecisive customer at the design table, before the order is placed.

The cost of labor is more than wage dollars per hour. It also includes whatever benefits may be provided, such as sick days and vacation time, plus all of the payroll taxes and fees imposed by the school district and municipal, state, county, and Federal governments.  Accounting practices may separate these costs, but they’re still costs associated with labor, and they’re variable, and they affect pricing strategy. 

Overhead is generally the cost of everything other than materials and labor, and it might represent about one third of all costs to a small retail picture framing business.  Monthly rent and insurance premiums may be fixed for a period of time, but might also include provisions for special add-on amounts, such as repaving the parking lot, or special insurance coverage for customer's property of very high value. Anyway, most overhead costs are variable, and all of them play into developing a pricing strategy.

Discounting is bad for profitability. But it’s expected in retail businesses like picture framing, and it can be a successful marketing tactic when the pricing strategy takes it into account.  Trouble is, the ratio of cost-to-benefit for discounting is difficult to determine.  For some guidance, you can focus your discount offers on framing materials, and for each order you care to analyze, you can compare the discount with the cost of the materials on a per-order basis. By comparing the ratio of discounts and cost-of-goods-sold, you can compensate for discounting by boosting retail prices enough to cover the discounts. 

Let’s say that, over a certain period of time, you plan to earn a total of €100,000 in order revenue. If your average cost-of-goods-sold is 20%, then your sales during that period would involve about €20,000 worth of materials.

If you expect to give a total of €3,000 in discounts to customers during the same period, that would amount to 15% of your material cost – that is, your cost-of-goods-sold. So, you could protect your profitability by raising your retail prices about 15%; because €3000 is 15% of €20,000.  

If this seems like a zero-gain exercise, consider that not all orders will be discounted. Also, offering the retail discounts should bring in more orders, and some customers may spend more for their framing if it’s discounted. 

You might find a million ways to compensate for discounting, but the key here is to realize what discounting actually costs in terms of profit – especially net profit – and account for that in your pricing strategy.

UNITS OF MEASURE FOR PRICING

Various framing materials come in sheets, lengths, and pieces.  Here are the typical units of measure for pricing framing materials, and pricing strategy needs to accommodate the differences.

Mouldings are linear; priced per foot. Pricing structure varies according to how the moulding is purchased, but the retail pricing for a certain frame should be about the same, whether you buy the moulding in lengths, chopped, or joined. If you usually buy length moulding in the footage you need, base your prices on the footage you typically buy. When you occasionally buy full boxes, the quantity discounts do not need to be reflected in your retail pricing. My suggestion is that when you can earn those discounts, consider the savings to be “administrative profit” that goes straight to the bottom line, net profit.

Pricing starts with a markup from cost. There are no absolute rules about this, but the markup might range from 5-times to 12-times for the lowest-cost mouldings.  For the most expensive mouldings, markups might be as small as 1-1/2 times to 2-1/2 times their cost. Markups are affected by the cost per foot, but also by the method of purchase. We’ll get to that in a moment.

Markups account for the labor to work with the mouldings, and waste. It's normal for about 20% of moulding length to be lost in miter-cuts and flaws, and the pricing strategy needs to cover these costs. For any given profile, buying length has the lowest cost per-foot, but labor to cut and join must be added, and the waste could be significant if the lengths have warps, twists, or other flaws. So, the markup for buying length needs to be greater than the markup for buying chops of the same moulding, since there’s no waste with chops, and labor is needed only to join the miters. 

Buying a joined frame of that same moulding would have the lowest markup and the highest cost-per-foot, because we’re paying our suppliers to cut and join our frames for us. If eliminating the waste, and the need for cutting and joining labor, and the tools, seems like a good idea, remember that suppliers’ labor probably costs more than our own, so our cost is at their mercy, and we have to rely on their quality control.

Here are markup calculation examples for a particular moulding purchased in length, chopped, and joined. Once the fair and profitable retail pricing level is determined by any one of these purchasing methods, markups can be easily calculated to result in similar retail prices for that frame regardless of how it's purchased.

Here are three pricing examples using different markups for the same moulding chops. Notice the drastic differences in gross margin dollars. In addition to the per-foot price, many framers add a “set price” per work order, to cover the consistently-similar costs of taking the material from storage, set-up, and clean-up. The set-price could be higher for length mouldings, to cover the need for more set-up and clean-up, and handling the off-cuts. In any case, the set-price could be the same for all chops, and the same for all length mouldings, regardless of the markup or footage.  You might also want to establish a minimum charge, to avoid losing money on small frames – but that’s not the same as a set-price.

Sheet goods, such as matboard, foam board, and glazing are normally priced by united inches. A typical retail custom framing business should use the per-sheet cost for markups, rather than the lower, carton-quantity cost, and when buying full cartons, take the savings as administrative profit.

Again, a separate set-price can be added per-order or per-mat to cover the nearly-consistent cost of set-up, clean-up, and off-cut handling. And, as with linear materials, waste is a factor.

Some framers have the same markups across a whole product line of sheet materials, but they should vary according to cost, just as moulding markups do. This strategy could result in more orders for the premium materials and, while gross margin would go down, gross margin dollars go up. As shown in this example, the markup for the most expensive anti-reflection glass can be somewhat lower than the markup for UV-filtering glass, and much lower than the markup for plain glass. So, when you sell anti-reflection glass, you can earn 3x more gross margin dollars than selling UV filtering glass of the same size. The labor is about the same, regardless of which glass is sold. Likewise, the markups for expensive matboards can be lower than the markups for low-cost mats. 

Most of the hardware and consumable materials found in a frame shop are not sold outright, but are only used in production of the framing, and the small cost-per-frame does not warrant separate pricing. It's most practical to include these items in “lot” prices, and account for their price in some grouping by united inches.

For example, the retail price for fitting & finishing could include filler boards, metal hardware (screws, turnbuttons, offsets, fitting points), adhesives, dustcover paper, Bump-Ons, and hanging wire.  Moulding price (or the set-price) could include saw blades, sharpening, glues, v-nails, and nail-hole filler.  The price of a mat could include the associated adhesives and blades.  Since various hanging systems may have a wide range of prices, they might also be priced as separate framing components.

Popular consumer items, such as specialty hanging systems, rolls of tape, bottles of glue, and glass cleaner can also be priced as individual items for retail sale.

Specially-purchased framing parts, such as acrylic boxes, oval frames, closed-corner frames, etc. are generally priced according to their unit cost plus a fair markup of 100% or perhaps less. You decide. Since labor applied is usually minimal, a set-price may not be appropriate, but don’t forget to account for extraordinary acquisition cost (if any) and shipping charges.

Here’s an example of pricing for a purchased acrylic box, including the cost from the fabricator, plus a fair markup. The acquisition cost and transportation charges are covered, as well, but I prefer to charge for applied labor separately – in this case, the fitting process. And of course, this would not be the total price for the project. The total retail price has to include all of the other framing components involved, as well.
 
PRICING METHODOLOGIES

There are several pricing methodologies that may be used in custom framing. It's important to be familiar with these, whether you do your pricing manually or use a professional point-of-sale software program.

Detailed pricing is the most primitive method, adding up separate pricing factors, as shown in this example. For instance, the price for dry mounting would consist of a price for the heat-activated adhesive, another price for the board substrate, and yet another price for the labor to complete the mount. This method allows very accurate, adaptable pricing, but it requires on-the-spot calculations.

Because detailed pricing is time-consuming, this method is generally not practical for everyday pricing of framing designs. Rather, it is most useful as a method of determining the pricing factors that need to be combined for various framing components, such as those used in a price matrix, for example. 

Once the detailed pricing factors have been determined for the various types of framing components, those factors can be grouped together and converted into united-inch factors for more convenient use with customers at the design table. Consolidated pricing is the next step toward simplifying the pricing task, combining prices for multiple material and labor components. 

Consolidated pricing can be used in a matrix, or as a simple list of framing components with pricing per-united-inch, requiring simple calculation. 

For example, the price for standard fitting & finishing, or the price for preservation-hinge mounting, could be converted into a straight price-per-united-inch. Most other framing components also could be calculated using appropriate per-united-inch factors, multiplied according to united-inch size.

Consolidated pricing can be used in a matrix, such as Method #1, or perhaps in a straight markup, such as in Method #2. 

Matrix pricing is probably the most popular method of manual pricing, involving a chart of columns and rows with the item codes, sizes, and prices. You can compose your own pricing matrices and update them on your own, but since revising a pricing matrix takes days or maybe weeks of work, they tend to be out-of-date most of the time. Matrix pricing may be considered the final step after detailed and consolidated pricing calculations.

Calculate the matrix prices according to the unit of measure and the united-inch frame size. For mouldings, use prices per foot. That is, if a 36 UI frame requires 7 feet of moulding priced at €10 per foot, then the retail price for that moulding in that frame would be €70.  For sheet materials, use prices per united-inch. Once detailed pricing has been developed and consolidated, it's easy to convert those pricing factors for use in a matrix.

Some suppliers provide a recommended pricing matrix for their products, but supplier-provided pricing cannot accommodate the unique features of an individual framing business. The same applies to pricing that comes with point-of-sale software programs. Do not assume their pre-pricing is right for your business, but review and revise all of those prices to fit the needs of your particular business as soon as possible.

Here is an example of matrix pricing for some framing components. This matrix uses united-inch sizes to represent the frame sizes, listed across the top row, and the pricing “codes” are listed down the left-hand column. Mat corner samples, moulding corner samples, ready-made frames, and other items could be marked with the appropriate code, and pricing would be found at the intersection of united-inch size and price code.

You may need multiple matrices to cover all sorts of united-inch pricing factors, such as canvas stretching, mounting, mats, glass, spacers, frame extenders, and mat decorations - V-grooves, French lines, and fabric coverings, for example. Frame prices can be calculated from per-foot prices, grouped into price codes and selected by united-inch sizes. Matrices work well for package pricing, too.

Pricing labor - the Shop Labor Rate

The “Shop Labor Rate” refers to the retail price charged for labor. This price generally is calculated by averaging the total of all non-material costs for the business during a certain period of time – the longer the better – and adding a profit factor.  For example, add up all costs of doing business, other than framing materials, for a three month period.  Include the total of hourly wages, salaries, bonuses and benefits; payroll taxes & fees; rent; utilities; internet cost; office supplies; trash collection – everything. It might be simpler just to start with the grand total of your business expenditures for that period, and deduct what you’ve paid to your suppliers for framing materials.

Then, divide that total amount by the number of hours the business was open during those three months, and add in the retail profit rate you want to apply to labor. In my frame shop, this comes out to be about €65 per hour, or about €1.10 per minute, but maybe your Shop Labor Rate should be higher or lower.

All costs of doing business change over time, so it’s a good idea to recalculate your Shop labor Rate at least once or twice every year.

Whatever Shop Labor Rate you determine, use that per-minute labor rate to calculate retail labor pricing for all framing tasks. If your Shop Labor Rate is €1.00 per minute, and cutting and joining a frame takes 10 minutes, then your €10 price for building that frame should be included in your mark-up for that moulding, plus the set-price if you use one. The Shop Labor Rate can be used for all labor calculations, which is particularly handy when estimating the price of, say, mounting three-dimensional objects. If you estimate that the task will take 20 minutes at €1 per minute, then charge at least €20 for that task.

PRICING MISTAKES

It’s easy to make mistakes in pricing strategy, so be careful, because this is important work.  If your prices are too high, you lose business. If your prices are too low, or if you fail to review and revise your prices periodically, you lose profit.  The best way to know where you stand is to carefully monitor your company’s net profit on the bottom line of the monthly Income Statements.

It may be tempting to inflate retail pricing to compensate for other problems in the business. If you know your prices are correct for your local market, but your net profit is lacking, look for causes other than pricing. For example, maybe you could renegotiate better wholesale prices from your vendors. Could you work more efficiently in the shop?  Could you speed up the framing-design process with customers? Is your advertising producing enough profit to exceed its cost? Are you spending too much for internet service, or credit card processing fees, or trash collection? Always look for ways to work more efficiently and spend less.

As you can see, pricing strategy involves considerably more than markups, and optimal pricing is a moving target. Here are some suggestions to help your pricing strategy:

Use professional point of sale software. There are several good programs available for framing, and all of them provide everything you need to revise prices easily, precisely, and timely. In almost every full-time framing operation, point of sale software saves more than it costs, and the payback comes quickly. Also, nearly all suppliers of mats and mouldings now provide barcodes on their samples. A wireless barcode scanner can cost less than €50, and it’s a big help in making the most of your time with customers.

Monitor your prices and costs all the time. Watch the net profit numbers on your monthly income statements. Shop your competitors periodically and keep up with what’s going on in your local market.

Avoid missing important financial and tax information by working with your banker and a professional accountant. Quarterly professional reviews may save your business more than they cost.

And above all, remember that producing net profit is the essential purpose of every business.