Alright, welcome to today’s session. Today we are going to talk about pricing for profits, version three. I’m your host, Donna Bordeaux with PYOPaccounting.com.
We specialize in working with ceramic arts studios all across the United States to help make sure that they are doing well as an industry and that their pocket books are lined well because they’re growing and very profitable.
For additional read: What is a PYOP Studio?
We’ve had some prior conversations and webinars about pricing, and we actually had the old way here, and this is how we recommended that you price or use as a guide for pricing products in the past. This was primarily based on your rent.
So as you can see on the left hand side, if your rent was between 16 and $20 per square foot, you should be using a pricing multiplier of about seven times. That means if you bought an item that costs $3, a piece of bisk that costs $3, your shelf price should be selling to the consumer for about $21.
Now, those were based on some historical guidelines that we set up and navigated for the industry back—probably about eight years ago.
Well, some things have changed and can you guess what those things are?
Our labor markets have drastically changed after the pandemic (and during) where labor is very difficult to find. You must pay more based on competitive wages, and you also find that the states have minimum wages that are higher than the federal rate now, in many states.
You have to check your local state to find out what your minimum wage is. However, when we look at the variables, the federal standard minimum wage is $7.35 cents per hour. It’s been that way for quite some time.
Individual states have hopped in and set up their own minimum wages now.
For example, in the state of Washington, the minimum wage is now $15.74 cents. So more than double what the federal minimum wage is.
This poses some concerns because traditionally we’ve used a percentage of about 20% of labor of your gross revenues coming in the door.
When we have to meet much higher wage standards and the wages start to tip into 25 to 30%, we have to do something and that something is to raise prices.
There’s no getting around it. You’re gonna have to raise prices and accommodate the labor rate into your calculations.
If we have higher labor rates, if labor has increased from 20% to 30% as a new norm, what effects does that have on our other KPIs?
Well, traditionally we looked at the cost of goods sold, and we wanted that to be about 15, 16%. Well, now that our costs are, even though those costs maintain about the same rate, we have to look at the fact that labor has increased and will take more of our profits to keep that labor in place.
Well, I’ve struggled and looked at this for quite some time now and tried to think of what new way should we look at pricing to provide new guidance for studio owners to make sure that they don’t just take that profit out of their bottom line and spend it all on labor?
Traditionally, we looked at profitability trying to be in the neighborhood of 20 to 25%.
If our labor costs are 10% higher and we had 25%, that means we just lost 10% on labor, so our maximum profitability would’ve gone down to 15%. We need to accomplish the increase in labor heading into our pricing so that we get those ratios back in line.
So we have a new way we want to look at how we deal with pricing and giving you some guidance. So…
Let’s take a look at the new way to help you guide on prices. We now have a new chart. That new chart is going to have two things in a matrix.
So going down the left hand side, you’ll look at your state’s minimum wage. Now, if in fact your minimum wage is $7.35, but you have to pay $10 per hour, you can use the $10 an hour number in the left hand side.
That should actually be what your store minimum wage is. Where would you start a base employee and work from there. Across the top line, you’re gonna look at your rent per month.
Now, we’ve looked at, we used to use this per square foot price. We are actually changing that up a little bit, trying to make this a little more simplified for you, and we’re calculating it based on the rent now.
Let’s say that your minimum wage is $10 per hour and your rent is $3,000 per month. That means that your multiplier needs to be here at 9%, or I’m sorry, not 9%, nine times.
So if you bought that same product we talked about in the earlier example for $3, now your selling price must be $27 for that product. So that will help you get a little better handle on making sure that your profitability is in line and based on your wage situation and your rent situation.
We also had a lot of changes in rent. If you had to renegotiate your contracts for your lease, or if your lease was coming due or maybe you moved, you’ll want to use your monthly rent number as well to look at your modifier.
So with that multiplier, what happens if my rent is $2,800?
Well, I would suggest that you use the higher rank, but if you would like to get an exact number and you are on our call today, you can go out to our website and go to Pricing Profile and plug in your information, and we will send you a customized multiplier report with a recommendation for you and your specifics to help you price correctly.
Make sure that you have profitability figured into your equation. It is not enough in business just to be open. You must be profitable so that you can help maintain the jobs that you provide for others and make sure that you have a healthy number coming into your bottom line so that you can stay open too.
So I hope this has shed some light and some new knowledge on what you’ll need to do to continue to be profitable, and we will do some information to get this out to you.
If you have any questions or concerns, please hit me up on the CCA chatter, CCSA chatter board, or you can go to the our Facebook page for PYOPP Accounting, or of course, our website PYOPaccounting.com.
If you’d like to take a look at some other ways that we may be able to help you get your profitability in line, organize your finances, and make sure that you’ve got the rockstar side going on your financials, please don’t hesitate to reach out through the Contact us forum on our website, and we’ll set up a time to meet with you and show you how we can help have a good effect on your bottom line.
Thank you very much for joining us today. Again, I’m Donna Bordeaux, your host with PYOPaccounting.com.
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Donna Bordeaux, CPA with PYOPAccounting.com
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.