If You Have to Ask...

You can't afford it. We've all heard that one before. But really, in today's economic turmoil, who wouldn't ask? And when they do ask, what will you tell them?

Of course, I'm talking about the price of a sign. If you, like me, have chosen to pursue hand-lettering as a career then you have to have some sort of semblance as to what to charge for your product. Suddenly things like overhead, labor rate, mark-up and profit will take on new meaning. Often you hear terms like the “going rate”, meaning the standard price of an item that has already been set by your competitors. Fear of “pricing themselves out of the market”, a phrase that means your prices have well exceeded the “going rate”, have caused some to price items lower than what is needed to make a profit.

So what is a person to do? How can you determine the right price to charge for your services?

While I am certainly no expert in financial matters, I would still like to offer some help gained from my 30 years in business making many mistakes, along with the helpful advice I gleaned from the many articles read on the subject.

Let's start with figuring your overhead. Obviously I cannot know the circumstances of every individual reading this article. Therefor the best I can do is offer some simple guidelines that can be applied to most situations. Your overhead refers to the things needed just to be in business. It might be as simple as a cargo van, insurance on the cargo van, gas and oil for the cargo van along with the legal requirements of business license, personal property taxes, etc. You should add to this the cost of anything else needed associated with your business. Lettering brushes, invoice and receipt pads, work clothes, etc could all be considered part of your overhead. People have to be able to contact you some kind of way so we'll add business cards and a cell phone. I've described a pretty lean situation with a minimum of overhead. Have I left out anything? Yes. I left out the most important factor of all, payroll. How much will you pay yourself? How much do you need to make to cover all household and personal expenses and how much would you like to make. You may want to start off with what you need with a little added in as a buffer. Think in terms of a year. This will help with the next phase. Before we go further though, lets propose a different situation for later comparison.

Tired of working out of a cramped van you take the plunge and rent a 20' x 50' storefront location with an office and bathroom. Now your overhead would include rent, electric, water and sanitation. Your insurance cost will increase. Now you have an office with computer, printer, copier and scanner. Unless you want to work sitting on the floor you will need office furniture. And you now need copier paper because you do your invoicing through a program like Quick-books. The bathroom needs toilet paper and cleaning supplies and you still use the same cargo van with all the associated expenses you had before. Do you get the point? No two people have the same overhead and one's overhead can change overnight.

This is important because your overhead will be the basis for determining your hourly rate and your hourly rate will be the basis used in determining what to charge. The overhead figures should be figured for a year. Some things like rent and insurance will be pretty constant. Other things like vehicle maintenance costs and the cost of work apparel might need to be an educated guess. After getting a total of business expenses for the year, divide that number by the days you will work in that year. Don't forget vacation time. So there are 52 weeks in a year, but you plan to take 3 weeks off for vacation. 52 – 3 = 49 weeks. You only plan to work 5 days a week so you multiply the 5 days by the 49 weeks (5 x 49 = 245) to arrive at 245 working days in the year. The number of working days should be divided into your overhead to determine how much you should make each day to reach your financial goals and will be the figure used to determine your hourly rate.

Using the first scenario, we arrived at $10,000.00 to cover business expenses and we needed to make $25,000.00 for ourselves. $10,000.00 + $25,000.00 = $35,000.00 needed for the year. If we divide $35,000.00 by the 245 working days we end up with $142.85 per day. How many hours will you work each day. We want the actual billable hours, not the time we spend running around to pick up supplies unless we bill the customer for that time. Suppose we figure that in an 8 hour day we have 6 billable hours spent plying our trade. Divide the 6 into the $142.85 and we have an hourly rate of $23.80. We would probably round that figure up to $25 per hour. Because some operations could have a greater perceived value than others we would do well to charge accordingly. We may decide to charge $75.00 an hour to design logos and $100.00 an hour to airbrush or pinstripe. You can charge more but don't charge less than the hourly rate your circumstances dictated was the right one for you.

The other figure we need is the cost of materials. On some jobs all we may use is a little paint in a paper cup with some paint thinner added. Whatever your material costs are, you would do yourself a favor to mark them up. I mark up materials by 40%. This little extra helps when I missed something in the bidding process or an operation took longer than expected. I don't just multiply my material cost by 40% either. I figure it a different way. I had noticed that most of my wholesale suppliers gave me a 40% discount, but when I marked-up my actual cost by 40% it was less than the original non-wholesale price. In other words, plastic letters might be listed for $100.00. This is the figure you show customers in the catalog to get the order. But the manufacturer gives a 40% discount to sign companies. ($100.00 x 40% = $40.00) So I only pay $60.00 for the plastic letters. But if I mark up the $60.00 by 40% ($60.00 x 40% = $24.00) I only make $24.00 instead of $40.00. Therefor when I figure my 40% mark-up, I do so by dividing by 60%. ($60.00 divided by 60% = $100.00)

Lets throw in another variable mentioned at the outset; “the going rate”. What if the going rate for a 4' x 8' single sided MDO sign in your area is $450.00, but with your relatively low overhead, you can do it for $275.00? Should you? Who benefits? It seems like the only one benefiting is the customer. You missed out on $175.00 just to easily get a job. What will happen two years later when you move into that storefront and your overhead increases and you have to charge $450.00 like everyone else? Will your customers understand the price increase? And what sort of reputation will you have among both customers and your competitors? Will customers go to you expecting you to be dirt cheap and might your competitors see you as an incompetent bidder hurting their chances to make a decent living?

Now lets look at it from another angle. Suppose the going rate for a pair of magnetic door signs is $75.00, but because you hand letter them you need to get $150.00. Should you do them for $75.00 figuring that you're only loosing time; the materials used are negligible? If you did that, how would you ever make what is needed in a year's time to stay in business? Remember, you can charge more than your hourly rate but should never charge less.

The final area of the job bidding process I wish to discuss is “job tracking”. Recently, I started tracking the time it takes to do every job that comes through my shop. I used to do this quite often, but after being in business so long I got away from it, charging instead from a price list I had compiled both from previous job tracking on some items and the “going rate” on others. However, with my venture back into hand-lettering I didn't really know what the going rate was and my only way to price jobs was to guess. So I guessed, bid the job, and then when doing the job tracked my time to see how I did. A few weeks ago I made a 28” x 28” double-sided MDO sign to hang from an existing sign post. I bid the job based on a similar recent job, but still underbid it. I know this because I tracked the time it took to carry out every operation involved in making the sign. I was surprised to find that it took me over 2.5 hours just to cut the MDO to shape, and prime and paint it. I had probably allowed about an hour in the bid for this operation. Admittedly, I had to fill the voids in the edges with wood putty and re-sand before priming but I always have to do that. Based on my hourly rate of $60.00 an hour and figuring in the cost of materials (MDO, primer, finish coat, and two paint rollers with mark-up) I needed to charge $217.00 just for the white painted sign blank. Boy was I off. But at least I know I was off and can avoid the same mistake in the future.

There are only a very few pricing guides out there that include sign painting; most are designed for computer vinyl. Years ago when I used them, the suggested prices were always much higher than the market could bear where I live. That is why it is better to know the three constants in bidding any job, material costs, labor rate, and the time it takes to do the job. It is a trial and error method at first, but if you track all jobs and learn from your mistakes then you should be able to bid with confidence.

I know I have oversimplified the bidding process. I didn't discuss the paying of taxes, figuring in profit or planning for retirement. There are probably many other things that I will remember later that I wish I had mentioned. So view this as just a starting point. Hopefully, we can discuss these other concerns in a future blog. You might find a system that works much better than the one I use. But whatever you do, just keep paint'n!