Where did we go wrong?

You can't start pricing your product the right way until you know what you are doing wrong, can you? So how do you currently price the goods you sell? Even though you probably made up your own system, it's unlikely that you created something completely unique. Roughly 70%* of entrepreneurs in this industry use a system that works similar to this:

1. Start with the cost of the garment.
2. Apply some sort of markup.
3. Add a charge for the embellishment.

Does that sound familiar? If you were pricing 24 shirts that cost you five dollars each, applying a 100% Markup (doubling the price, also known as a "Keystone" markup) and then charging two dollars for printing a single color or embroidering 4,000 stitches (.50 per 1,000) your pricing computations might look like this:
 

Mathematically:	Graphically:
Shirt Cost: $5.00 Markup of the Shirt: $5.00 Charge for Embellishment: $2.00 Charge to Customer $12.00

Depending on your market, twelve dollars per shirt may or may not be a good price to charge. Your computations probably differ as to final price, but the method of determining the price was probably the same. But what happens when your customer decides to buy a more expensive shirt costing ten dollars? Twenty dollars? More? Most garment decorators realize that as the cost of the garment goes up, they need to reduce the markup of the garment to stay competitive. Perhaps you only markup the shirt by 50% when the cost of the garment goes above ten dollars. The new computations look like this:
 

Mathematically:	Graphically:
Shirt Cost: $10.00 Markup of the Shirt: $5.00 Charge for Embellishment: $2.00 Charge to Customer $17.00

While you probably decrease your markup when goods get more expensive, what should you do when the customer orders white Tee shirts that only cost you a dollar? What if the customer orders handkerchiefs that cost about thirty cents? You won't make much money if the markup only amounts to pennies, so you should probably increase your markup at that point. But how much? 200%? 300%? What if the customer supplies the goods, and you have nothing to markup? You feel pretty certain that you won't make money if you just charge two dollars for the embellishment. You need to change your markups because you're pretty sure there is a certain amount you need to charge above the cost of the shirt. Graphically, your desire works out something like this:

This will seem totally off topic, so bear with me for a moment... Thousands of years ago, people looked up into the night sky, and noticed that over the course of time, the heavens seemed to rotate around them. Early man saw this, confidently placed himself at the center, and declared that God's universe revolved around him. But astronomers of the day noticed some irregularities. For example, certain lights seemed to wander about in different paths. They were not "fixed" in the celestial heavens. They called these lights "Planets" from the Greek word for "wanderer." Other anomalies presented themselves as well. But instead of considering the possibility that the Earth might not be the center of the universe, early astronomers created a number of exceptions to the ancient rules of physics to account for these contradictions.

What does this have to do with the price of screen printing or embroidery in your shop? Click here to continue

*The 70% figure used above comes from SMR sales staff tracking. It represents a percentage expressed by people who offer information about their current pricing system during sales calls. This information has been informally gathered since 1990, and numerous factors could affect it's accuracy.

© copyright 2010 Scott M. Ritter, all rights reserved