Best Practices, Feature, Operations, V5I5

Material Pricing Strategies

(Photo courtesy of Fernando Mengoni/

You’ve been working at improving your shop processes and employee morale, and things are going smooth. Sheds are flowing out the door and materials are flying off the racks. 

You pick up the phone to order some more OSB and get the bad news: “A hurricane is headed toward the southern coast and prices are skyrocketing. OSB is up to $12.48 a sheet and going up daily. How many units do you want to get to lock in the price?”

How many units do you want? None, at that price! Why, just 30 days ago you were paying under $10 a sheet and if you shopped a bit, you could get it for $8.95. This is almost a 50 percent increase in material costs.

What do you do? You can’t risk running out of material—too many customer’s orders are waiting in the queue. Yet you sold those sheds based on pricing of lower material costs—how do you make up the difference? Do you change prices monthly? Weekly? That seems like a nightmare, but you can’t be sending sheds out the door and losing money on them.

How do you know what to price a shed for and whether you are making money on each shed?

In simple terms, while material and labor costs have a bearing on your shed pricing, you should also be looking at what the market can sustain. In his book The Confessions of the Pricing Man: How Price Affects Everything, Hermann Simon talks about how price is the place where value and money meet. 

By not knowing what your market can sustain and simply pricing your product based on competitors pricing or what you think you can sell a shed for, you are most likely leaving money on the table.

However, material costs do have a bearing on your profitability, and I want to look at that here.

How much margin you need as a company will depend on the size of company that you run. Notice I said need—that doesn’t mean there isn’t more margin available, it’s simply how much you need to keep the lights on. As a company grows, typically more management is added, workers become more specialized and costs go up for larger facilities, more raw material is required to be kept on hand and so forth. 

But why wait until you are “big” or losing money to raise your prices? Go ahead and price your shed competitively now and start reaping the benefits and put the profits into growth.

Knowing your material costs can help you determine if your margins are set up properly. The same is true for labor costs, overhead costs, delivery costs, and so on. The focus of this article is on material costs, so we’ll stick there.

As a general rule, I like to see material costs at or below 45 percent. This means, if your 10 by 16 shed sells for $3,500, then your material costs should not exceed 45 percent or $1,575. 

But how do you know what your material costs are? Unfortunately, there are not a lot of good software options out there for small shed companies to use to calculate their costs. 

You can speak with your accountant and ask their advice and they should be able to tell you what your COGS (cost of goods sold) is, based on your monthly, quarterly, and annual numbers. Typically, COGS will include production labor and you will notice variations, especially if you are not doing regular inventory counts and adjustments.

For a small company, I recommend using a spreadsheet. You can use Google Sheets or Excel, for example. 

Take your three top selling sizes in each style and create a full list of every piece of material you put into the shed. Ask your builders and shop managers to go over the list—don’t fudge or leave small things out—details matter. 

I like to create the list with the first column for the material type (e.g., 7/16 OSB), the second column be quantity for this size of shed (e.g., 3.75), and then have the third column be the price per piece. The fourth column will be a formula to multiply quantity x cost, giving you the total costs for that material item for this size of shed.

Once you have the price and quantity for each item, you can add the totals together for your total material cost. Divide that number by your sales price to get the percentage that your material costs are of your current price.

If you want to know what you should price the shed at, based on 45 percent material costs, divide the grand total of materials by 45 percent, or .45, and the number shown will be the suggested sales price. Remember, 45 percent is the highest I would recommend; the closer I can get to 40 percent, the happier I am.

Once you do three sizes in each style, you can start to get a feel for where you are pricewise. You can do every size in every style, but it may not be worth it—you will need to decide this.

Now that you know the pricing based from today’s material costs, how does that help you when material costs fluctuate?

For one thing, that is why I like to be closer to 40 percent material costs. Material costs can fluctuate, but if I stay under 45 percent, I know I am okay. I like to keep the spreadsheet handy and update material prices as I get new materials. This can show you if the price is trending up or down and when you cross the cost threshold you set up.

If you know your margins are safe at 45 percent material costs, but you’ve been selling for the last six months at 40 percent material costs, and now material prices spike, taking your material costs to 47 percent, do you need to react immediately? No, you don’t. 

You have the margin built into your business from selling at 40 percent the last six months and so you can take a few months of lower margins before it becomes alarming. If you sell 30 sheds at 40 percent material cost and 30 sheds at 50 percent material costs during a six-month period, what is your average material cost during that time? 45 percent. 

Now, you may not want to wait that long before adjusting pricing, but hopefully you can see how this is one way to set your pricing to create margin, so you are not reacting at every change in the market.

Remember, knowing your material costs is just to verify your pricing is not too low. How high your price should be is determined by the market conditions in your area. One suggestion I heard is to raise your prices until you lose 20 percent of the deals you quote because of price. Once you are losing deals because of price (make sure this is the true reason), then you know your price is approaching market cap.

The costing methodology should be used when pricing upgrades and add-ons as well. I have seen companies with mindset of, “I am already making money on the shed, I can add a door for just a little over cost,” which is faulty. You are leaving money on the table if this is your mindset. 

Every option or add-on that is added to a shed without the margins being the same or better than the shed price is lowering the overall margin of the sale. It may not seem like much, but if you add a 9-lite door for $225 that cost you $175 to buy to your 10 by 16 that sells for $3,500, that takes your material costs up 2 percent. This can eat into your margins quickly.

Knowing your costs and margins will help you run a better business. Don’t think that’s just something for the bean-counters to take care of—you need to know your numbers. Take the suggestions I have in this article and structure it to work for your business. No two businesses are alike, so please remember that these are broad suggestions and examples.

Setting your own path of value and price will create the best experience for your customers and your business. Knowing what your market values and the price they are willing to pay for that value, will put you in a position to be more profitable. 

If you’re copying the competition, then of course your price has to be lower—you haven’t shown the market your value and the compelling reason they should buy from you.


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