This is a article I found a number of years ago that looked at pricing of a job. We used this at a seminar we did that was looking at how to price a job. The important point about htis article is I show ou that you need to take into a lot of costs other than just the raw materials that you use.
CPE Pricing Seminar
Are you operating a viable business? What is your Business worth if you decide to sell it tomorrow? Are you charging enough money for the product you are selling? These are all questions that we have probably all asked our selves at various times, not only in this business but in other businesses that we have been involved with.
One of the most common questions we get asked not just by new dealers but also by established dealers is what price should I charge for my goods. This has got to be one of the hardest questions I could ever answer. Why? Our answer to these people is usually “what is your time worth” or “what do you expect from this business”. I can’t easily answer this question because it depends on what each individual wants to get out of the business.
And let me tell you we have had some very intensive discussions on this subject with dealers.
We can’t tell you what to charge people for your goods; all we can tell you is that you must make money. If you do not make money doing what you do, then you should be doing something else.
One item that we do stress to dealers is that not only do you need to make a decent mark up on the actual product but you must also make a markup on the time you spend. For example when you sell a plaque you take all the component prices add them together and markup the component price. Secondly if the plaque is engraved you will add on a price for engraving. Lets say the plaque is a 9 by 12 walnut plaque with 10 lines of engraving and a logo placed on a 7 by 9 black brass plate. Now lets say for this example (and this is all it is) lets charge $60.00 retail for this plaque. Now lets figure out how much we made.
Plaque is $6.00
Black Brass plate is (.03 times 63 sq inches) $1.89
Engraving 15 minutes cost is ($50.00/hr / .25) = $12.50
Packaging and miscellaneous $1.00
Total cost is $21.39
Now did we make money? Well when we look at the above figures profit ended up being
– $60.00 – $21.39 = $38.61
That is almost a 300 percent mark-up. Not bad? Maybe – maybe not. Did we account for all the costs? No, we forgot the labour cost. Well lets see by the time we take into account the 15 minutes it took to tape the plate, stick it down, clean the plaque and package it and take into account the 20 minutes it took to set up the plate on the engraver we have a total of 35 minutes. What is our labour charge? $60.00 or $100 per hour? That is up to you. Lets say it is $60.00 per hour.
Therefore the cost of labour is $35.00. Now what does our profit look like:
$38.61 – $35.00 = $3.61 Hmm.
Now we have a profit of $3.61. But we covered our labour costs, or did we? We forgot this was a picky customer and we spent a hour with them at the front desk showing them samples etc, and we had to write up the order.
Hmm now we have
$60.00 (wage hourly rate) – $3.61 = $- 56.39 total cost.
So we now have a loss of $56.39.
Is that all? We forgot that we made a mistake and had to re do the brass plate. So our cost is
$1.89 + $12.50 = $14.39.
So now our loss is
$56.39 + $14.39 = $70.78
Is that all – Nope? We also gave this customer net 30 days because they were a previous customer and guess what – they took 90 days to pay. We had to make 3 phone calls to them for a total of 15 minutes and they were also long distance so this cost a further $10.00. Thus a further cost of time is
$60.00(labour) / .25 = $15.00 + $10.00 = $25.00.
Our loss is now at
$70.78 + $25.00 = $95.78.
Is that all?
Well we didn’t account for cost of inventory because our reputation is on fast delivery so we need to keep a good inventory, fixed costs, etc. You get what I’m talking about.
Although the above example is only an example, it was done to make a point – calculate all your costs first and learn from your mistakes.
It is so important to always look at all your costs in your business. If someone takes up 1 hour of your time and you do not get paid for it then you have 1 less hour in a day to make your daily earnings.
We hope this little example helps you. Playing this example back in my mind every so often helps me. Sometimes it is better to turn business away then to take business where you know the margins are not adequate. I remember the first time I told a customer to “go to my competitor” “or that was my best price because you want me to service you and I need this margin to be able to do that” It was hard – but I was also surprised on how many times people accepted this and gave me the order.
The following example is from an article that was passed. The New Zealand Sign Association put it out. It repeats what we have said. It is a good article. We suggest you cut it out and place it by the cash register.
You should operate your business as though you were building it up for sale. What is your business worth? If you were to sell it, what should someone pay for it? Think about this, and write down your answer before continuing. You may be right – or you may be catastrophically wrong!
The answer is between 2.5 and 3.0 times your net profit before tax, and after charging a reasonable sum for the effort and skill level involved in managing your business.
So, if you own the business now, are you getting a 33 – 40% return per year on;
1. The money you have tied up in stock
2. The money you have tied up in equipment (its current value)
3. The amount of working capital you are using in the business minus Creditors plus Monthly Expenses
If not, here is what you could do
1. Increase prices
2. Increase sales
3. Decrease costs.
Many people in the industry believe that the general level of prices in the industry is not in line with the level of skill, service or quality provided. The following advice from Mark Hind, Business Broker, was included in the ‘Business Essentials’ tape issued in June 1997 by the Commonwealth Bank to its small business customers.
“When clients express disappointment at the price they can expect for their business he tells them to raise their prices. Over 30% take his advice. There have been no disasters with over 100 businesses that have followed this advice and raised prices over the last 2 – 3 years. In Mark’s opinion, the person who has the most resistance to raising the prices is the business owner – not the customers. “
What is the effect of raising prices
1. If you increase prices by 10%, you could double or triple your profit before tax if you lose no business.
2. Even if you lose some business, you are likely to end up making more profit before tax.
It is relevant to note that, if your existing customers only buy from you because of your lower prices, you may not be making them aware of what you do for them – or perhaps it is time to look for some new customers!
What’s a reasonable price to charge for labour and material mark-up?
The future value of your business is dependant upon you achieving fair and reasonable profits for your work, and that profit is significantly affected by what you charge for your work.
Remember that a job is made up of approximately 80% labour and 20% (the old 80 20 rule) materials for computer work, and is more likely to be 90% labour and 10% materials for traditional sign-writing or engraving or trophies.
Also you must consider yourself and your workers as skilled labour. Let us recognize that and charge accordingly.
Bill Walsh suggested the following:
Labour at $65 per hour (See ‘Labour Costs’ for details). Material marked up at 50%. Sub-contract marked up at 40%.
Conclusion – If you’re not charging $65 per hour for the work your company does, you’re not making money.
Here’s an analysis based on the weekly pay of a skilled fabricator. You can use this formula for any worker by changing the dollar values as appropriate.
Average weekly wages – $550/week i.e. $14.50/hour for a 38 hour week.
On-costs on wages
Super-annuation + 6%
Insurance + 4%
Payroll Tax + 3%
Training + 1%
Total = 14%
Total weekly cost of labour is $550 + 14% = $627 ($16.50/hour)
You are paying for 38 hours per week. But how many of those hours are actually spent in producing an income for the business? To find out you first need to calculate the unproductive hours as follows:
Unproductive Time Days / Year – Hours /Year
Recreation Leave 20 152
Sick Leave 5 38
Public Holidays 10 7
Percentage Unproductive Normal Time
(15% = 5.7 hr/38 hr wk for 45 weeks / year)
Total Unproductive Time 522
522 divided by 52 = 10 hours per week Productive Time = 28 hours per week
To break even, the cost to your business is $627 divided by 28 = $22.50/hour.
As well as this basic cost, you need to make provision for the following:
1. Overhead costs on labour
2. Direct supervision
3. Plus workplace costs – Tools
– Work space cost
– Heat, light, power
Other business overheads
– Marketing, selling, estimating
Plus all associated workplace costs
Conclusion – To adequately recover all costs, a figure of $65 per hour is reasonable.
The value of our time
“Principles of Costing” from SAA Member No 611, Network Signs. On display for customers, and for staff training.
In our business we sell our time, our expertise, and some materials. Because our time and expertise are valuable, our charges cover five areas.
We have years of experience in promoting all types of business with custom made signs. We can therefore recommend different styles of signage, sign combinations, styles and colours to maximize their efficiency in creating an effect or attracting more customers. We are prepared to visit your premises to discuss your requirements. However, please understand that our time is not free and that someone has to pay for it.
Usually the cost is built into our quotation for the anticipated sign job. However, if you then have your signs made elsewhere, we will charge you for our time, ideas and designs.
Our consultancy rate is $60 per hour.
Computer design work
How much time do you want us to spend on your design etc? If you can give us a sketch of your requirements, then our charges will be less than if we have to submit two or more versions for you to choose from.
For normal sign making jobs, we prepare the first layout free of charge. However, there will be additional costs for time-consuming rearrangements, or for re-creating “something different” for you to look at.
Our charges are $65 per hour because we use equipment and software costing over $15,000 – but you can always save money by doing some of the thinking and showing us sketches of what you require.
Scanning and editing time
The average charge for this work is $50 per image – which includes the cleaning up’ of a scanned image. Although scanning by itself is a fairly simple matter, some images need hours of cleaning up work by highly-trained people before they can be cut.
We charge $65 per hour for this work.
Sign making time
This involves computer cutting, weeding taping, marking out and the application of the lettering or graphics to the surface. Experienced staff are needed for this work.
Our charges are $65 per hour plus sales tax.
This may or may not require ladders, power tools, electrical work, equipment hire, paint, special fasteners, travel, etc. Usually the installation work is not as simple as it first appears, and may need more than one person.