Pricing To Realize Your Long-Term Goals
As part of the Tru Vue® Retail Makeover, Ken reviewed the financial side of Mark Rengers’ business, Sewickley Gallery, in Sewickley, PA. This is part of ‘Matching Your Passions with Profits,’ a series of articles with advice on how to improve profitability and create a sustainable business that enables custom framers to keep doing what they love.
Most custom framers enter this industry because they love framing and art. That’s really important because people excel at things they have a passion for doing. However, as time goes on, every business person begins to realize that just working at something you like is not enough. Long-term fulfillment in a career also means financial stability and fair compensation. Everyone realizes eventually that the money side of running a business is part of the key to success and long-term satisfaction.
For custom framers, it’s even harder to achieve financial success because pricing a customized product is tough to do. It involves many materials and most importantly the labor to assemble those materials. Because it’s difficult to do, many custom framers are not confident in their pricing and when you lack confidence in something, the tendency is to second guess and discount or use cheap materials.
What Has Been Covered In This Series?
We’ve covered a lot of what goes into creating a proper pricing strategy in this series. We’ve learned that a good strategy doesn’t come from matching competitors pricing and from discounting when a customer looks unsure. We have shared the knowledge that pricing must be based on your own company’s expenses- raw materials, fixed expenses and variable expenses. We’ve seen that we must sell projects at a high enough markup to allow us to afford to pay for all of these expenditures. Without an overall strategy like this, we could be the most popular frame shop in the area but still not be successful.
Why Do Frame Shops Discount?
This series showed us that the average frame shop discounts every project 18%. We’ve looked at the math behind what this does to profits and concluded that profits are diminished significantly. These shops offer discounts for one primary reason. They have no real belief in their pricing strategy. If they were confident that the prices inputted in their computers would give them a profitable business, they would be much more likely to sell with confidence. Knowing what you need gives you the power and conviction to ask for fair compensation.
Three Fictitious Shop Examples:
Throughout this series, we talked about three general types of frame shop owners. Shop A was owned by someone who entered the industry because they love art and framing, but they have no interest in the financial side of the business. Because of this, they do not know their expenses well enough to understand if their pricing is covering them. They trust the default pricing that came with their computer and as a result, the owner often has to skip paying himself on payday. He also hasn’t given himself a raise for many years.
Remember Shop B? This owner has lots of low-priced competition and prices his projects based on what others charge. His entire business focus is on price and trying to make sure he can match what others are quoting. Because of this, discounts are given whenever a customer hesitates and average ticket is very low.
Finally, we talked about the Shop C owner who has the personal belief that custom framing is just too expensive. This owner doesn’t see the value of custom framing and although they enjoy building frames, they would never buy custom framing if they were not in the business. This owner is constantly searching for lower priced materials and inexpensive ways to design. Because of this, the company lacks a brand which brings any real benefit to customers.
Here’s A Real Life “Shop A” Example
Here is a true story of one of my long time customers. His name is Mark Rengers and he owns Sewickley Gallery in Pennsylvania. Mark is the typical shop A owner. He loves designing framing, supports many local art organizations and builds great relationships with his clients. People in the area love framing with Mark and he’s an excellent designer. But Mark was losing money and unable to pay himself properly. He worked long hours and was becoming frustrated with the return.
We began our work together by looking at his expenses. There we found that Mark was paying for a lot of labor- more than he could afford. We had to either cut his staff or raise his income on the projects he was selling. We did both, starting with a price increase which centered on moulding.
An Additional $32,000 to Cash Flow
We increased the markups on his moulding by 8% and that improved his cash flow by $14,000 over the next twelve months. Other tweaks to matting and glazing contributed another $8,500. Next, Mark agreed to stop discounting and trust his pricing. He had been giving discounts in excess of $15,000 each year. He successfully cut those discounts to under $5,000 per year. The new pricing strategy added over $32,000 to his cash flow over the next twelve months.
Did Increased Pricing = Missed opportunities? No.
Mark agreed to record any missed sales opportunities for the next year so we could monitor resistance to his price increases. He still converted over 90% of all his opportunities. This happened because Mark now believed in his pricing and because his average sale only increased about $27. Small changes produced big results.
Mark’s A Believer:
With a better cash flow in place, we then started concentrating on improving the inefficiencies of his production team and Mark found that he could create projects with less help. This reduction in labor also improved cash flow. Mark now believes that a proper pricing strategy is just as important to his business as his design skills.
“If I did not change my prices I would have been out of business a year ago. This change not only proved to be profitable, but it also built our confidence for presenting the prices to our clients.”
Let’s Recap The Highlights Of This Series:
- Your pricing strategy must be unique to your particular business. No other business has the same expenses (rent, payroll, loans) as you do.
- Discounting will almost never improve profits. Attracting enough customers to offset the loss of profit is very difficult to do with a custom product.
- Build sales by building Price is not value. Design and service are what will grow your company profitably.
- Design-driven companies are the most profitable because they concentrate on selling framing which “wows” their customers.
- The most important single statistic in improving profitability is your average ticket. You must measure it every day to grow it.
- Slight improvements in average ticket make huge differences in annual profits.
Finally, many in our industry are reaching the age of retirement and are exploring the possibilities of selling their companies. A business without a positive cash flow or adequate gross margins will not attract buyers. If our shops cannot be sold, our industry will continue to shrink. It’s not only important to your personal financial goals to have an effective pricing strategy in place, but it’s also vital to the future of our industry. I just want to thank Tru Vue for investing in our industry through the retail makeover projects. Meg and I have learned many things from our involvement in this program and without it, we wouldn’t have the platform to share the things we have learned.