Your Step-by-Step Guide to Profitable Pricing
Pricing is probably the toughest decision you’ll make in your manufacturing business.
Price too high and you lose work to competitors. Price too low and you’re working hard but not making any money. I’ve seen both scenarios play out more times than I care to count.
The thing is, most manufacturers I work with are brilliant at what they do. They usually know their craft inside out (PS: I’ve seen so many didn’t know inside out), they deliver quality work, and their customers love them.
Product Costing Accountant – Skynet Accounting – Accountants For Manufacturing & Engineering
But when it comes to pricing? That’s where things get uncomfortable and owners or other directors they leave it with sales director.
Let me show you how to price your manufacturing jobs and products properly with a solid approach that ensures you’re actually making money on every job you take on.
Why Most Manufacturers Get Pricing Wrong
Before we get into the how, let’s talk about why pricing goes wrong in the first place.
The biggest mistake I see is underestimating costs. You know what your materials cost, you’ve got a rough idea of labour, but what about machine time? Equipment depreciation? Factory overheads? Energy costs? When you miss these, your price is wrong from the start.
Then there’s the “race to the bottom” mentality. Someone asks for a quote, you panic about losing the work, so you shave a bit off your margin. Do that enough times and suddenly you’re working flat out but barely covering your costs.
Some manufacturers price based purely on what competitors charge. That might seem sensible, but you don’t know their cost structure. They might have newer equipment, different wage rates, or better supplier deals. Their price might be completely wrong for your business.
And finally, there’s the emotional attachment to winning work. It feels good to say yes and land a new job. But if that job loses you money, you’d have been better off saying no.
The Foundation: Know Your True Costs
You cannot price properly without knowing your costs.
Start with your direct material costs. This is everything that goes into the product such as raw materials, components, packaging. Don’t forget waste and scrap. If you typically lose 5% of material to offcuts or rejects, that needs to be in your calculation.
Next, direct labour costs. How long will the job take? Who’ll be working on it? What’s their hourly rate including National Insurance and pension contributions?
Be realistic here. If a job usually takes 8 hours, don’t price it at 6 because you’re hoping to work faster.
Then comes manufacturing overhead. This is everything else needed to run your factory like rent, utilities, equipment depreciation, supervision, maintenance, insurance. Work out your overhead rate (we covered this in detail in my previous article) and apply it to each job based on labour hours or machine hours.
Don’t forget consumables and tooling. Cutting tools wear out. Lubricants get used. Electricity gets consumed. These costs are real, even if they’re small per job.
Here’s a simple example. You’re quoting for a batch of 100 metal brackets:
- Direct materials: £450
- Direct labour (12 hours at £25/hour): £300
- Manufacturing overhead (12 hours at £18/hour): £216
- Consumables and tooling: £50
Total Cost = £1,016 or £10.16 per bracket
That’s your cost. We’ll get to pricing in a moment.
Adding Your Profit Margin
Once you know your costs, you need to add profit.
Profit pays for business growth, equipment upgrades, cashflow buffers, and your own income beyond just wages.
But here’s where people get confused between markup and margin.
Markup is what you add to your costs. If your costs are £100 and you add a 25% markup, you’re adding £25, making your price £125.
Margin is what you keep from the sale. If you sell for £125 and your costs were £100, your margin is £25, which is 20% of the sale price (£25 ÷ £125).
Same numbers, different percentages.
Most manufacturers think in terms of markup, but margin is more useful for understanding profitability.
For our bracket example at £10.16 cost per unit, let’s add a 30% markup:
£10.16 × 1.30 = £13.21 per bracket, or £1,321 for the batch.
Your profit margin would be (£321 ÷ £1,321) = 24.3%.
Choosing the Right Profit Margin
So what margin should you aim for? Gross profit margin targets vary enormously across manufacturing.
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High-volume automated production can achieve healthy margins, while small batch custom work has different economics. What matters is understanding YOUR costs thoroughly and ensuring your margin covers overheads, provides working capital, and delivers a proper return on your investment.
Think about your market position too. If you’re competing purely on price for commodity products, margins will be tighter. If you’re offering specialist skills, quality, or fast turnaround, you can justify higher margins.
Also consider the job characteristics. Rush jobs should carry a premium. Difficult customers who change specifications or pay slowly should pay more. Simple, straightforward repeat orders from good customers can work on slightly lower margins.
The key is knowing your numbers well enough to make informed decisions about what margin you need, rather than guessing or simply copying what you think competitors
Factor in Your Overheads Properly
This is crucial and where many manufacturers slip up. Your overhead rate needs to reflect reality.
If your factory costs £15,000 a month to run and you work 800 productive hours, that’s £18.75 per hour in overhead. But if you’ve calculated based on 800 hours and you’re only actually billing 600 hours, your overhead per productive hour is really £25.
This is why tracking your capacity utilisation matters. If you’re only running at 70% capacity, you either need to win more work or adjust your overhead rate upwards to reflect the reality of your fixed costs being spread across fewer productive hours.
Pricing for Different Types of Work
Different work requires different pricing approaches.
One-off custom jobs need careful costing. You can’t rely on historical data, so build up costs from scratch. Add contingency % for unknowns.
Repeat production runs are easier. You know exactly what they cost from previous runs. But check your figures each time. Material costs change, wage rates increase, equipment efficiency varies.
Long-term contracts need particular care. Lock in material prices where possible or include price variation clauses. What looks profitable today might not be in six months if material prices jump 20%.
Subcontract work where you’re working for another manufacturer often operates on tighter margins, but it should still be profitable. Don’t fall into the trap of taking low-margin subcontract work just to keep busy.
When to Walk Away
Here’s something important: not every job is worth winning.
If you’ve costed a job properly and the customer won’t pay a fair price, walk away. It’s better to have spare capacity than to fill it with work that loses money.
Sometimes customers want you to match a competitor’s price. Unless you’re confident that competitor has underpriced, don’t do it. Price based on your costs and required margin, not someone else’s possibly flawed pricing.
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Watch out for “foot in the door” pricing too. Some buyers will ask for a low price on a trial order with promises of bigger orders later. Get the first order priced properly. If they like your work, they’ll be back regardless.
Common Pricing Pitfalls to Avoid
Not including setup time. If it takes 3 hours to set up your machine for a 2-hour production run, that’s 5 hours you need to charge for, not 2.
Forgetting about rework and rejects. Even with good processes, some jobs need rework. Factor this into your pricing.
Ignoring your time for quoting and admin. That time spent measuring up, preparing quotes, and chasing payment is real. It’s part of your overhead that needs covering.
Discounting too easily. Every discount comes straight off your profit. A 10% discount on a 25% margin job cuts your profit by 40%. Think hard before you discount.
Not reviewing your prices regularly. Costs change. Review your pricing at least annually, and update your standard rates when costs increase significantly.
Tracking Profitability After the Job
Pricing doesn’t end when you win the work. Track actual costs against what you estimated.
Did the job take longer than expected?
Did materials cost more?
Was there more waste than anticipated?
This information is gold dust for pricing future jobs more accurately.
Keep records of which jobs made good money and which didn’t. Look for patterns. Maybe certain types of work are consistently less profitable, or perhaps specific customers always have extra requirements that eat into margins.
Building Confidence in Your Pricing
The hardest part of pricing is having the confidence to quote what you’re actually worth.
Remember, you’re not just selling materials and labour. You’re selling expertise, quality, reliability, and problem-solving. Customers don’t just want cheap; they want good work, delivered on time, without hassle.
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Know Your Product Cost and Price for Profit
Getting your pricing right transforms your business. It’s the difference between working yourself into the ground for modest returns and running a profitable, sustainable manufacturing operation.
Yes, you’ll lose some quotes to cheaper competitors. But you’ll win the work that values what you offer, and you’ll make proper money on the jobs you do take on.
A manufacturing accountant can help you understand your true production costs through proper product costing analysis. With accurate cost data and realistic budgets, you’ll have the solid foundation you need to make informed pricing decisions.
Not sure what your products actually cost to make?
Concerned your pricing might be based on outdated or incomplete cost information?
Let’s have a conversation about your production costs and how accurate product costing can give you the confidence to price properly.
Get in touch today for practical help with costing and budgeting that supports better business decisions.
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About the Author
Written by Yesim Tilley Founder of Skynet Accounting is a chartered accountant with over 20 years of experience supporting manufacturing and engineering businesses across the UK. Specialising in cost analysis, product costing, and financial strategy, she helps industrial businesses understand their numbers and make more profitable decisions. Skynet Accounting provides tailored finance, compliance, and taxation support designed specifically for the manufacturing and engineering sector.