Finishing the tabulations for the annual Pricing Sur- vey (published elsewhere in this issue) always makes my head spin. While a lot of the numbers are closer together this year, there are still cases where the
high bid is double, triple, even five times or more what the
low bid is. How can this be? After more than two decades of
charting these numbers, I think I finally have the answer: It’s
Ponzi business math.
Charles Ponzi became famous in the 1920s for an investment scheme in which he pocketed investors’ money while
paying off early investors with the money from new investors. As long as the flow of new investors could keep up with
payments and his take, he was fine. But the whole scheme
spectacularly unraveled when investors found there were no
assets to back up their investments. So, how does that apply to
I think too many woodworking businesses doing custom
work really don’t know their costs or their profit margins.
They take on new work, guessing at costs and they are resigned to a reality that “things never come out the way you
plan anyway.” As long as new work keeps coming in with new
deposits and new production challenges, they are too busy to
stop and analyze how much they are really making (or losing)
on each particular job.
With marginal profitability, this can go on for decades.
Oh, sure, the owner might pause from time to time to wonder
why he’s not really getting ahead of the game, but without
serious analysis, budgeting, and planning, he never gets the
full picture. This could last to the end of the business, when
the final analysis comes with the sound of an auctioneer’s
gavel slamming down on the last piece of machinery leaving
This kind of thinking affects way more than just profitabil-
ity on individual jobs. I frequently hear of shops that make a
decision to buy new equipment based on a single new project
they won. Their thinking is the
profits on this great job, acceler-
ated by the new equipment, will
surely pay for the new equipment.
Sometimes it even works, but
there is no serious calculation of
return on investment. There was
no budget set aside for new equip-
ment. There was no business plan
in place to put the equipment
investment in the context of the
larger business future.
The lack of attention to real
numbers also applies to attitudes toward how much time a
project will take. Everywhere I go to talk about pricing, I ask
people, “Have you ever estimated a job would take 20 hours
and it actually took 40?” Of course, every hand in the room
goes up, including mine own, I might add. The miscalcula-
tions (or non-calculations) of labor hours are plainly evident
in the survey results. One of the most fascinating examples is
a high bidder this year who is a CNC shop and estimates their
production hours as way more than the original bidder who is
a non-CNC shop and actually did the job. If we are to believe
what we’re told about automation, the CNC shops should
leave the non-CNC shops in the dust on cutting labor hours.
But the problem isn’t CNC or no CNC. It’s not the impos-
sibility of planning for every possible outcome. It’s guessing
instead of counting. It’s putting a finger in the wind instead
of sitting down to do the calculations. It’s not keeping good
records of past projects and analyzing where they went right
Some people view the Pricing Survey as if it were a test of
math skills for estimators, but it’s not that at all. It’s really a
reality check on whether you are running your business with
real numbers instead of relying on wishful thinking or just
hopes, dreams, and luck. ✚
by William Sampson
Are you running your business
like a Ponzi scheme?
✚ Follow Will