Metal fabrication and laser cutting job shop owners have all asked themselves at one point, “how should I set my prices?”.
It’s a delicate balance. Set your prices too high and customers may walk away to the competition, but set your prices too low, and you may be working too hard for little or no profitable return.
Setting a baseline
“The first thing to do is understand all of the costs that are associated with running your laser machine. Once you have a complete overview, best practice is to apply a full absorption costing method to your business,” advises Bruce Thomas, Product Executive at Tempus Tools. Bruce has decades of experience in the laser cutting industry. His experience is complemented by the Tempus Tools team, which are highly knowledgeable in the laser cutting industry, with practical, hands-on experience on the shop floor, through to management.
“Full absorption costing means that you’re absorbing overhead costs into the hourly rate. In laser cutting job shops, this could be direct costs, like labour, as well as indirect costs like rent, insurance, power, and maintenance. But each case is different, so we can provide guidance on how to perform this type of calculation,” he says.
Bruce explains that once you have calculated all the costs within a job shop and created an annual figure, you can set an accurate yearly revenue target, which can be broken down into monthly and daily objectives. This breakdown is an effective way to focus on revenue goals for the job shop.
“This data should give you an idea of what prices need to be set in order to be profitable, but you won’t know if they are exactly right until you get market feedback, so be prepared to adjust these initial prices,” says Bruce.
A word on assumptions
Full absorption costing is a great starting point, but Bruce points out that this calculation does require some assumptions, such as the number of hours the shop will be operational for, and the percentage of those hours the machine will be cutting (known as the utilisation rate).
“Varying the utilisation rate can have a big impact on how costs are distributed. If your machine isn’t running for as many hours per day as you predicted (actual cutting time), then you find yourself in a situation where you’ve priced your cutting service too low,” he says.
“In other situations, you might increase the number of shifts per day, or add shifts on weekends, which can increase efficiency without changing fixed overheads, resulting in a more competitive hourly rate.
Getting ahead and staying competitive
“Of course, once you’ve come up with a price, it’s crucial to see if it’s competitive with the market, and one of the best ways to do this is to use software to monitor your win/loss ratio,” he says.
“A typical win/loss ratio is about 30-40%. This means, for every 100 jobs you quote for, you win 30-40 of them. Lower than 30 means the pricing is too expensive and you’re losing work to competitors, and above 40 means the pricing is too cheap, meaning you are doing a lot of work for a lower profit margin.”
“It’s important to monitor pricing over time, and see how it changes in reaction to trends, too. For example, material price fluctuations or changes in demand from different industries will have an impact on pricing.”
“Similarly, technology changes will have an impact. Cheaper and more powerful machines, and more automation will allow more advanced laser cutting tasks to be done with lower costs.”
“It’s important to know your customer, but it’s equally important to know your competitor and what they are offering, and for how much.”
Hourly rates only go so far
Much of the metal fabrication and laser cutting industry uses hourly rates to calculate a price, which is then quoted to customers, but this only works up to a point, says Bruce.
“To remain competitive, you need to keep monitoring prices. Each quote – regardless of who prepares it – needs to be consistent and accurate. One of the best ways to do this is to use laser cutting quoting software, so that any changes are implemented within the software, rather than on a per-quote basis,” he explains.
There are a range of factors that can affect a quote, and it can often mean one job shop will quote at a different rate to another. Bruce explains that this can be for reasons such as:
- The speed and size of the machine. A 6kW laser cutting machine can vary from approximately $180,000 to $1,200,000, which is a huge difference. Each machine will perform at different speeds, and allow different levels of sophistication.
- Whether the machine is paid off or not. If it’s still not paid off, this might have to be factored into the hourly rates.
- Cutting thickness, with thicker cuts demanding higher costs.
- Cut quality – all machines will be able to produce an acceptable quality, but some customers may demand an additional level of precision and finish, and if this takes additional time, it will need to be considered in the costs.
“With all that being said, your customer is buying on a per-part basis. They are comparing your part priced at $10 with the competitor’s part priced at $8. So, you need to adjust for this difference using software and data, rather than relying solely on a ‘gut feeling’. Knowing your bottom line gives you the confidence to accept or reject the work,” he says.
Added value wins more jobs
Once you’ve figured out a price, to really stand out from the competition, it’s all about the added value you can deliver, says Bruce.
“Consider your delivery times, customer service, expectations management, and understanding a customer’s unique needs. Do they need all their parts individually packed and labelled, for example? If you can meet their needs, you’re more likely to win the job,” he says.
“Adding value is always better than discounting price. In a race to the bottom on price, nobody wins.”
ToolBox helps win more jobs
To help deliver added value, monitor win/loss ratios, and provide faster, more accurate, and more consistent quotes, Tempus Tools created ToolBox. ToolBox is multi-functional laser cutting quoting software that is calculation-based and runs on a Software as a Service (SaaS) model. It can be set up with information on material price, cutting time, labour, and other relevant information, to generate quotes quickly and accurately.
“ToolBox can give job shop owners more accurate estimates of time, which leads to greater consistency,” says Bruce.
“Additionally, ToolBox can generate printable part labels, and produce work orders with times listed on each task. ToolBox provides consistent and accurate data on folding, cutting, and secondary processes, so that quotes to customers are exactly right.”
“We’ve helped a huge variety of different job shops with full absorption costing, win/loss ratios, setting up pricing, and then generating fast and accurate quotes – so if you’re looking to optimise your job shop’s operations, we’re here to help,” he concludes.
