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.
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.
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.
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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