Claremont Designs

Pricing an Edison Lamp on a Cost Plus Basis

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I built my first Edison Lamp nearly 2 years ago.  I’m not sure yet if I’ve perfected how to price them.  In fact I’ve made some slight changes in pricing based on writing this post.  There are numerous approaches that I could take to determining the right price for a lamp…  Price based on a cost plus model, based on what the market dictates, based on a reaction to competition, or any number of other approaches.  So far I’ve priced based primarily on a cost plus basis.  I know that what I’m doing still isn’t optimal, but I’m working on it.

To put pricing in perspective, it’s important to consider that I’m still building Edison lamps for the enjoyment of the work; it’s still fun for me.  Although the “fun factor” shouldn’t enter into pricing decisions, it’s impossible not to happen when you are operating at a small scale.  In the cost plus model, the fun factor means that my labor is free.  If this ever turns into a job and not fun, my hourly cost would make the lamps only available to the oft-spoken of 1%.  So for now, we can avoid that aspect of the pricing equation…

So if labor is free in my cost plus model, from there I need to factor in all of the costs associated with building a lamp.  The materials costs can add up quickly.  I have the lumber, glue, light sockets, dimmer switch, wiring, wiring nuts, lamp cord, and the finish itself.  In all cases these materials are purchased in bulk – bulk for convenience reasons rather than the volume discounts that I would love to get.  Unfortunately, I don’t order in large enough quantities to get a volume discount.   

The costs that are known and don’t tend to vary much are the dimmer switch, the sockets, and the lamp cord.  I’ve ordered the sockets and switch from the same provider for the last 12+ months.  My “standard” order is 20 light sockets and 5 dimmer switches.  Home Depot has become my de facto provider of lamp cords.  The lamp cord is one area where I should be able to find a lower cost provider.  While there is only 1 switch and 1 cord per lamp, obviously the number of sockets varies directly with the number of bulbs in the lamp.  The table below shows standard costs that I incur for a 1-, 3-, and 5-bulb lamp build.

lamp_materials_cost

The costs associated with the glue, the finish and the wiring supplies is tiny.  It’s so small that I’m not even sure what it is.  There might be ~$1 in cost per light bulb in the lamp, but even that is a guess.  That’s not going to make or break the lamp cost, so I choose to ignore it.

Ultimately, the lumber is the hardest raw material cost to factor in – prices differ significantly based on species, supplier and quality.  Additionally, there is a significant scrap material factor.  Lumber is sold by the board foot and priced according to the quality and the species.  I’ve used some lumber that cost as little as $4 per board foot, and some lamps might cost as much as $40 per board foot.  Obviously, I try to avoid building the $40 per board foot versions, but sometimes that’s what the customer requires.  I price the standard versions of my lamps based on a $9 per board foot average cost.  Additionally, I need to factor in at least a 35% scrap factor – this basically means that if the lamp requires 2 feet of material, I need to expect to use 2.70 feet of material.  20% scrap is an industry standard, but 35% seems to be more realistic.  The table below shows how this prices out for a standard lamp (walnut or cherry).

lumber_materials_cost

I’ve now basically figured out my Cost of Goods Sold (COGS) for 3 types of lamps.  At the low end, a single bulb lamp is running me $24.80 and a 5 bulb lamp is coming in at $59.51.  Compared to my selling prices, I have pretty decent gross margin (~69%) on the lamps themselves.  I can’t think of anyone in the manufacturing world that wouldn’t love to have margins like that. 

lamp_gross_profit

My challenge of course is that I don’t produce (or sell) lamps in quantities that even remotely approach those of a full time shop.  This volume of output factor really hits my profitability when it comes to considering my allocated costs.  I have shop rent, insurance, utilities, equipment and equipment maintenance.  The first 2 are basically fixed costs for me; fixed in the sense that I know what they are each month and that they don’t vary based on volume output.  Utilities should vary with output, but it hasn’t significantly for me.

There are a lot of pieces of equipment required to build a lamp.  The list (in order of use) is: miter saw, jointer, table saw, band saw, planer, dovetail jig, router, router tale, clamps, drill press, and sander.  I would ballpark the cost of all of that equipment combined at ~$6,000 (that’s probably underestimating it).  From an accounting perspective, most of my equipment is old enough that it is now fully depreciated and doesn’t really have a cost for me.  Thankfully maintenance is pretty limited as well – small enough that I don’t need to factor it into my costs.  Basically, this means that I’m completely ignoring my equipment related costs in the pricing decision.  This isn’t the right way to think about it, but this goes back to the “fun factor” which allows me to make illogical business decisions.  The fun factor would almost prefer to see equipment fail, so that I could buy all new shiny shop tools.  Illogical – yes, but this is the difference between a hobby business and a true for profit enterprise.

So if I isolate just the shop rent, insurance, and utilities, I incur a monthly charge of ~$585.  The question then becomes what volume of lamps I would need to sell to cover these allocated charges.  There are a number of ways to get to the $585 figure, but the most direct path would require selling 7 lamps (in one month) – 3 single bulb lamps, and 2 each of the 3- and 5-bulb varieties.  7 lamps per month would be 84 lamps in a year – last year I sold 25.  So the question is if the $585 figure is appropriate…

$585 pays for a month in my shop.  On a perfect month, I might get to make 9 trips to the shop (this is a fun side way to make money, not my career).  So one logical approach might be to take a normal work month of ~20 days and say that I’m able to effectively use 45% (9 divided by 20) of the shop workdays.  Under this math, I would only need to sell enough lamps to cover $263.  I can cover that with just 3 lamps a month (1 of each variety).  Another way to view it is to view my effective usage of the shop at 30% (9 divided by 30) of the average month.  Under this scenario, I’d need to cover $175 each month.  There are numerous ways I can get to that number, but as few as 2 lamps would need to be sold to cover costs.

The only other costs come from my channel partner.  I’ve chosen Etsy for all of my sales needs (at this point).  The fees are fairly reasonable.  In total they charge about 7% of the net sale amount (not including shipping).  These fees are split between the listing, transaction cost, and credit card processing costs.  Ideally that cost should be closer to 5% – 6%, but given the small volume I do with Etsy, I can’t complain.

So where does this leave me in this cost plus world?  Under my current pricing model, I need to sell about 24-36 lamps a year (depending on the mix) to cover 30% – 50% of my shop costs.  That’s not bad, but it’s not where a full functioning business should be operating.  Maybe I have a cost issue, maybe it’s price, maybe it’s awareness of my offering…  There are any number of factors that can be influencing my ability to turn a profit.  I’ll run some tests throughout 2014 to see what kind of impact I can have on my little hobby business.  I’ll have to do an update post later in the year to show what the results are.

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