Those that build clubs as a hobby often do so because they like working with their hands and helping others who enjoy the game as much as them. In most cases they do this without regards to making any money. If they really put pen to paper, they may find out their hobby is not making them money. But after all, a hobby is for the mere enjoyment and interest not necessarily for financial gain.
However, many seek to take the next step and generate a little extra income as a part time venture or as a full blown retail shop. At this point it becomes crucial that the clubmaker understands the economics of running a business thoroughly as they understand how to build, fit or repair a golf club.
Having taught clubmaking classes for over a decade, I discovered where most hobbyists needed help. Many of those that came to learn the craft often possessed excellent hand-on skills and could quickly complete a particular task with precision and care. But when it came to understanding the business side, many were lost. Understanding the basics of pricing goes a long way towards making money in clubmaking.
What is the right pricing strategy for my clubmaking business?
There is a delicate balance that a clubmaker has regarding pricing in their shop. First, one needs to price the products / services high enough to cover all costs, but at the same time does not want to price them out of the market before they ever get started. Unlike many OEM clubs which are regulated by Minimum Advertised Pricing policies the clubmaker has complete freedom to price as he/she pleases. Of course, with so many choices, it’s easy to make the wrong ones. The clubmaker needs to completely understand their demographics, their competition and be honest with themselves of their ability and the quality of product they can produce. There are a number of ways to establish pricing in your clubmaking shop. Remember, it is better to err on the high side as it is easier to lower prices than to raise them when starting out.
- Below Competition Pricing – Selling at a lower price than your competitors to gain market share and often rely on high volume to offset low margins
- Parity Pricing – Compare pricing of the competition in your area and set the price the same
- Market Pricing – Conducting research on what the potential customers in your area are willing to spend on your products or services
- Above Competition Pricing – Offer a slightly higher price than your competitors to perceive that your product, skills and knowledge is more valuable
- Prestige Pricing – Selling your products or services well above the competitors in your area to present your product as a perceived higher quality compared to your competition, but be aware that your customers may be leery and question the value if it is priced too high without some brand awareness
It should be a goal of any business to show a profit rather than just break even. Net profit is a term for the amount of money a company attains after all of the costs, expenses and taxes has been paid. Net profit margin is the measure of profitability of the business and calculated by dividing net earnings by total revenues. (If you setting a realistic goal, corporate America for the past 25 years averages about 8% net profit)
Here are a few tips on how to properly price of your products and services in order to succeed.
- Your prices must cover all of your costs and potential profits
- Establish a price (or pricing formula) you can adhere to before any potential sale occurs
- Evaluate your pricing frequently to reflect demand, competition and your costs
- If you want to lower your prices to your customer you either need to lower your costs or increase your volume
- Most importantly, know the actual costs of operating your clubmaking business
The last point can be a daunting challenge for anyone that starts a clubmaking business from scratch. It may help to speak with another clubmaker that might not be in direct competition with you for advice. There are two types of costs associated with a business: fixed and variable. In nearly every clubmaking shop will have a peak season and there will not be a steady stream of cash flow, yet there are certain costs that are fixed throughout the year. Examples of fixed costs are rent, financing charges, insurance, utilities, labor and even profit. Variable costs include the inventory of heads, shafts and grips, supplies and shipping.
Leave some pricing room for the unexpected. Consider that sanding belts wear down and cut-off wheels break. Rest assured certain wear and tear on tools will need to be replaced on an on-going basis. Small items such as ferrules, epoxy, tape and other supplies will run out and have to be re-ordered. Also, what happens if a head or shaft was to break and you need to fix it for the customer? There will be additional time involved for the clubmaker to call the manufacturer, make sure it is under warranty, remove the defective part, ship to back to the supplier and then re-build it. Golf club parts will break from time to time through no fault of the golfer, so warranties are part of the business. Even consider that theft can occur or the unlikely misfortune that you tip trim a shaft incorrectly or accidental damage occurs to a demo club that you simply have to replace.
What is your pricing sweet-spot?
The proper price you choose should maximize your sales and profits, while providing enough profit to cover all your overhead and cost of goods. Let’s use a driver as an example to illustrate the point. The cost of a head is $60, shaft $25, grip $3.75, clubmaking supplies $1.25 and shipping $10. The cost of goods is $100.00. Below is an example of a forecast of how many you might sell at each price.
First, you could theoretically sell each club at $1 over your cost. This will require the clubmaker to do an awful lot of work to build enough clubs and equally will need to attract high traffic volume to make any significant amount of gross profits. One might think that by selling at such a low mark up that customers will be busting down their doors. Remember your customers may have no idea of what your costs are and could be suspicious of the quality at the lower price. Be realistic of how just how many customers will walk through your shop or visit your website. Without significant advertising (which will take away from your bottom line) chances are unlikely you will attract any more customers than your present traffic.
On the other end of the spectrum, you can set a high price for the driver or one that is the equivalent of what the average OEM driver sells for on the market ($299). Remember that the OEMs spend millions of dollars in advertising to create demand for their product. While you may like the gross profit selling this driver for $300, you may find at this price you sell very few.
So the goal is to find the sweet-spot, the point at which you can maximize your profits, given all that you know about your particular market. In this example, maximum gross profits are derived by selling that driver at $175, even though it did not result in the greatest amount of revenue. In retail terms, there is a term called “keystone pricing” which is doubling the cost of goods. This may be a good staring point in which you can work backwards in finding the sweet-spot price point for your market
Additional tips to help your clubmaking shop make more money
A clubmaker can also elect to have wholesale accounts such as local golf courses and driving ranges that you may do work for. Often time the clubmaker will offer a lower margin or mark up for these accounts to get the business. In turn, the wholesale account may provide the clubmaker with extra volume and income, while the wholesale account can add services and make money at the same time.
Clubmakers who have federal tax ID # or reseller # or even for those who do enough volume with a company often receive trade pricing. This is one of the ways mentioned previously in which to lower their costs to either lower their pricing to the consumer or generate high gross profit margins. Trade pricing is almost always kept confidential so the public does not what the clubmaker is paying for the components.
For those individuals considering clubmaking for profit, they should spend as much time advancing their business skills and fine-tuning the business strategy as much as they do the actual honing their selling, fitting and assembly techniques. No matter how well laid out the shop appears, the amount of sophisticated tools and measurement devises exist, or knowledgeable the clubmaker is on clubhead design, fitting, etc. many clubmaking shops fail for the long term without a solid business plan.
In closing, I would like to add one small tidbit for running a clubmaking shop; do not sell on price alone. If your business does not rely on the internet for the majority of your sales, you are going to draw customers from your local market. In addition to offering a fair price for your product, also rely on the intangibles such as the personal service, knowledge and convenience only you can provide.