When we last left Alice, she was finally on a road that would take her somewhere she wanted to be – the land of profits and clamoring buyers.

 

Now that you know your desired profit and what that means for sales it’s time to determine how to price your services and products.

 

Hourly Billing Rates

Think about what we already know. We know the technician is part of our Cost of Goods Sold. Our Gross Profit margin is 55%. This means, we must also make 55% on our technicians/labor.

We pay the technician $25 per hour for his gross pay. Let’s assume a 30% burden rate to cover taxes, benefits, insurance and other employee costs. That means our $25 per hour employee costs the company $32.50 per hour. At 40 hours per week, the employee costs the company $67,600 per year. We need to make a 55% profit on this employee. $67,600 x 1.55 = $104,780. This is our projected profit on the employee during the year. Let’s assume the employee is billable on the average of 35 hours per week – 87.5% billable. So, our goal is to make $104,780 in gross profit from the employee billing 35 hours per week.

Our gross profit margin is 55%, we need to “gross up” our profit to revenue.

$104,780 / .45 = $232,844

35 billable hours per week x 52 weeks = 1,820 billable hours per year

$232,844 / 1820 hours = $128 per hour

Your technician billing rate must be $128 per hour to meet your goals.

 

Service Rates

Now that you know how to calculate sales goals and billing rates, service rates should be simple.

Take the cost of your service, whatever the service is and “gross up” to meet your gross profit margin. If anti-virus costs $1 per month per license, and our COGS are 45 cents per dollar sold. Take the $1 and divide by .45 for a total sale price of $2.22. You need to sell that anti-virus license for at least $2.22 to meet your gross profit margin.

 

Summary

As you can see, the formulas are very basic, but you need accurate information in order to calculate them. Look at each item in your P&L reports. Ask yourself if this number changes because you have 2 customers or 200 customers. If it changes based on volume, it is a variable. If it is the same regardless of how many customers, it is a fixed expense. Get to know these numbers and understand what is going on in your business. The more you know, the more you can control.

 

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Come along with us and learn how to price your services for profit.

One question I hear over and over is, “What is the price I should charge for _______ services?” Insert your favorite service on the blank or even labor. My response is generally something like, “Well, that depends. How much money do you want to make?”

 

Before you can set pricing, you need to know your desired end result. As the Cheshire Cat alludes, “If you don’t know where you are going, any road will get you there.” So, make sure you are going somewhere and not just anywhere.

cheshirecat

To determine the pricing for your services, you need to know a few things about your business.

1. Cost of Sales/Goods Sold – these are your variable expenses. They change in direct proportion to your sales and provide you with a Gross Profit Margin.

2. Gross Profit Margin – you need a clear understanding of the costs of the services you offer to customers. If this number is not correct, all of your calculations will be incorrect, too.

3. Fixed Expenses – these are the expenses that do not change much from month to month. This is your base cost to keep the lights on and the doors open in your business.

4. Desired Net Profit Margin – this is the percentage of income you want to take home after covering all costs, both variable and fixed.

5. Technician gross hourly wage.

 

Every business is different. Some will have product gross profits and service gross profits that have differing percentages and this is completely normal. For simplicity in demonstration, I am going to use one overall Gross Profit Margin.

 

Company Figures

Cost of Sales/Cost of Goods Sold 45% of Gross Revenue

Fixed Expenses $25,000 per month

Desired Net Profit $10,000 per month

Technician wages $25 per hour

With these four very vague figures, we can build a profit and pricing structure. We know what our fixed costs are. We know how much we have to put 45 cents on every dollar of sales.

 

Breakeven

How many dollars in sales do we need each month before we start making a profit?

For every dollar we sell, it costs us 45 cents. So, for every dollar we sell, we have 55 cents left over to pay expenses. That translates into a 55% gross profit margin. Divide $25,000 by .55 to equal the gross sales needed to cover expenses.

Gross Sales $45,455

Cost of Goods Sold (45%) (20,455)

Gross Profit $25,000

Fixed Expenses (25,000)

Net Profit $ -0-

You have now broken even. Every dollar you make above $45,455 in a month is 55 cents in profit. Your base expenses are already covered.

 

Desired Net Profit

Now that we know what our breakeven point is, we can easily calculate our desired net profit. We want to make $10,000 per month to take home. We still have to pay 45 cents on every dollar that we sell. Take our fixed expenses of $25,000 and add in the $10,000 net profit to arrive at a desired Gross Profit of $35,000.

Gross Sales $63,636 100%

Cost of Goods Sold (45%) (28,636) 45%

Gross Profit $35,000 55%

Fixed Expenses (25,000)

Net Profit $10,000 15.7%

 

Now you know two very important things. You know your break even point and how much you have to bill in order to break even. Our next blog post will show you how to calculate how much you’ll need to charge per hour and per dollar of product so you can meet your profit goals.

 

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In Part One of my blog series – Preparing your MSP for Sale, I mention the importance of showing profits for at least three years prior to selling. It is very difficult to sell a business without profits. Business buyers are interested in businesses that will make them money, not a fixer-upper like a real estate short sale. If they do buy a fixer-upper, they will expect to pay a short sale price.

To maximize your sale price, you want to present the already remodeled business. The first place to start is to increase your profits. Easier said than done, right? It might not be as hard as you think. Perhaps your pricing is off. Perhaps your debt is too high or your expenses. Maybe your lack of customer service is costing you customers and referrals. Take each piece of your business and analyze it. Is it as great as it could be? If not, why not and how do you fix it? Let’s look.

If every aspect of your business is broken, then you must find a way to mend it. Trying to change everything all at once is a sure way to implode. Be systematic and stick with it. If you keep your eye on the prize and work toward it a little each day or week, you will reach your goal before you know it.

Separate your business into various categories and look at each piece individually and the entire business as a whole. It might look something like this:

Service Department

– Customer Service

– Response Time

– Pricing

– Bundled services

– Break/fix

Sales Department

– Marketing

– Networking

– One-to-One meetings

– Follow up

– Closing

Administrative Department

– Internal Processes

– Workflow

– Invoicing

– Collections

– Accounting

– Reporting

 

glamorous-christmasThere are many other facets of a MSP business, but let’s start with these three. They all interact with each other. Think of it as a string of Christmas lights. If one is broken, the whole string goes out. The Sales Department sells the services in the Service Department and relies on Administration to support it. The Service Department relies on Sales for the work and Admin to run the show. The Administrative Department supports both Sales and Service. Without Sales and Service, Admin has nothing to do. One cannot operate optimally without the others.

Now we have three separate areas to analyze. In each area, there are multiple steps to building the perfect department. Broken down, the task doesn’t seem as daunting and changing the whole company. We cannot change the whole company in one day, but we can improve one piece per day or week. With each minor change, you will see a dramatic improvement in your bottom line.

 

 

 

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We recently had a great conversation with Lane. He recently sold his business and had some words of wisdom to share with you. What you are about to listen to is not a pre-planned recording in a studio. It’s a hallway conversation and if you’ve been to a IT conference then you know the hallway is where the best conversations happen. Consider yourself a fly on the wall and have a listen.

 

 

“One of our best moves was hiring someone to clean up the books”

“We built in re-occurring revenue into all new projects”

“Don’t let the buyer tie your payout to future business because you don’t have control anymore”

We recently had a great conversation with MJ. He recently sold his business and had some words of wisdom to share with you. What you are about to listen to is not a pre-planned recording in a studio. It’s a hallway conversation and if you’ve been to a IT conference then you know the hallway is where the best conversations happen. Consider yourself a fly on the wall and have a listen.

Some of his words of wisdom include:

“Keep your contacts alive because you never know when they’ll bare fruit”

“You can’t predict how your staff is going to react”

“We got management out in front of all of the clients”

 

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